Transition dynamics and developing countries: A two-part essay on the informal sector, and rural-urban migration in the process of economic growth

This dissertation studies the transition dynamics to long-run, sustainable growth in developing countries, given some of their identifying characteristics such as existence of a large informal sector, asset and income inequalities among individuals, uneven regional economic growth and rural-urban migration. The dissertation consists of two essays. The underlying analytical framework used in the dissertation is a dynamic general equilibrium, multi-sector Ramsey-type growth model. Both models are calibrated to Turkish National data for 1997.; The first essay elaborates on the relationship between the degree of asset and income inequality, and evolution of the informal sector vis-a-vis the evolution of agricultural and formal sectors in a stylized developing country economy in process of growth. The analytical contribution of this essay extends the Ramsey theory of growth into a framework that includes an informal sector, asset and income inequalities among households, and household preferences that display Engel effects in agricultural and in informally produced goods. We find that as the economy transitions into the long-run equilibrium, the initial importance of agricultural and informal sectors diminish, and that of the formal sector increases, given any degree of asset and income inequality among the households. On the other hand, given higher degrees of asset and income inequality, the economy would have higher levels of informal sector output and smaller levels of formal output in the long-run.; The second essay extends the standard Ramsey-type growth model to include a capital market failure and households' endogenous residency decisions in a regional, multi-sectoral environment. In this environment, households decide to migrate, or not, from rural to urban region depending not only on the income differences across regions, but also on the cost-of-living differentials per unit of expenditure per household in each region. Income differentials arise due to the segmentation in labor and capital markets across regions, allowing for different rates of return on these factors of production, and cost-of-living differentials stem from the existence of non-tradable goods in each region. We find that segmentation in rural and urban capital markets may help to explain the uneven growth across regions and the rapid rates of migration in developing countries.