Remodelling Structural Change

Abstract

This chapter examines how structural change can be formally modelled in the New Structural Economics (NSE) proposed by Justin Yifu Lin. According to NSE, the aggregate production function is no longer considered exogenous and time-invariant. Instead, it is derived from the compositions of underlying industries which are in turn determined by the endowment structure. The central economic idea of NSE is that endowment structure determines optimal industrial structures and that capital accumulation (improvement of endowment structure) drives changes in industrial structures. After a brief overview of the current dominant framework for macro-development analysis, the chapter explains why structures are important in understanding economic development. It then introduces a benchmark model of NSE and discusses several theoretical extensions to it. It argues that structural changes should be remodelled to emphasize the key roles of endowment structure and firm viability.