Trade-Induced Urbanization and the Making of Modern Agriculture

Manufacturing growth can benefit the agricultural sector if the outflow of labor from agriculture improves land allocation efficiency and facilitates capital adoption. Using destination prefectures’ trade shocks in the manufacturing sector driven by China’s accession to the World Trade Organization (WTO) and the origin village’s initial internal migration network, we con- struct the exposure to manufacturing trade shocks for a panel of 295 villages from 2001 to 2010. We find that villages with larger increases in trade exposure had larger increases in the share of non-agricultural laborers, more fluid local land markets, and faster modernization of production through the adoption of agricultural machinery. Village-level agricultural productivity improved through the allocation of land towards more productive farmers within a village. During the era we study, transaction costs declined in the agricultural land market. We use a quantitative model to show that the growth in non-agricultural productivity had a larger impact on urbanization and agricultural modernization than reductions in transaction costs.