Structural Transformation around the World: Patterns and Drivers

Abstract

The conventional view of structural transformation is informed by three stylized facts of economic development: (i) all economies exhibit declining employment in agriculture, (ii) all economies exhibit a hump-shaped share of employment in industry, and (iii) all economies exhibit an increasing share of employment in services. In this paper, I show that this presumed path of structural transformation may no longer be the route to economic development in low-income economies. Classifying economies as either structurally developed, structurally developing, or structurally underdeveloped, I observe a different path of structural transformation in structurally underdeveloped economies in which workers are moving directly from agriculture to nonbusiness services, which as a sector does not have the same productivity gains as manufacturing. I also show that the mainstream approach is unable to explain the patterns of structural transformation observed in low-income developing economies. This suggests the need to rethink the theoretical premises behind much of the mainstream approach to structural transformation and to identify alternate causal mechanisms to explain the different types of structural transformation underway in the developing world.