On Positive Feedbacks in Argentina: A Test of Increasing Returns Based on Migration Evidence

Abstract

This paper explores the role of increasing returns as a source of regional urban concentration and economic divergence with a special emphasis on the case of Argentina's provinces. The renewed focus of economic thought on increasing returns covers a wide variety of economic issues: learning and scale effects on knowledge accumulation, positive externalities and strategic complementarities, market size effects, positive feedbacks, demand externalities, and agglomeration economies. This paper introduces a theoretical framework in which the role of increasing returns is revealed through the pattern of migration. The idea is far from complex. If positive feedbacks are important, then the most populated regions would show better prospects of economic development,encouraging people (and therefore, economic activity) to migrate from less populated to more populated regions. Under positive feedbacks, this migration process will widen the development gap, encouraging more people to move. This leads to a virtuous circle in which migration is made positively and increasingly dependent on population (market size) over time. On the other hand, if negative feedbacks prevail, migration would become independent or eventually negatively dependent on population. A test of the relevance of increasing returns is carried out, evaluating the performance of the migration process across Argentina's regions since 1869 to date. Evidence of increasing returns is found since migration is positively and significantly associated with initial population. Results suggest that market size effects are one of the main forces driving regional concentration and development.

JEL Classification: J61, O18