Structural transformation without industrialization? Evidence from Tanzanian consumers

Abstract

Export-oriented industrialization was central to many Asian countries' structural transformation processes, but many African countries are bypassing industrialization, and the prospects for competing in global manufacturing markets are poor. Alternative structural transformation pathways all rely on domestic markets, and thus understanding their trajectories requires uncovering consumer preferences. Using detailed household expenditures data from a nationally representative panel survey in Tanzania, I estimate a flexible, stylized consumer demand system. I recover estimates of expenditure elasticities of demand for goods, services, and food in the aggregate, along with price elasticities of demand, identified using within-household variation in prices and expenditures. I find that, across the expenditures distribution and in both rural and urban areas, consumer preferences are service facing. In particular, I show that (1) consumers sharply increase spending on services relative to goods and food as incomes increase; (2) demand for services in the aggregate is somewhat sensitive to changes in service prices; and (3) food, goods, and services are substitutes for each other. On one hand, a high propensity to consume the types of services that generate large local economic growth multipliers is consistent with driving growth in service sector employment. However, sustained growth in the long run may be limited because these services are low productivity and nontradable, and domestic markets are size constrained.