Structural Transformation and Growth

This chapter illustrates how structural transformation and outcomes resembling balanced growth at the aggregate level can be generated simultaneously using a growth model. It begins with a discussion of the three key economic mechanisms that drive structural transformation: the first emphasizes income effects while the other two both emphasize relative price effects. These mechanisms are then incorporated into a standard version of the growth model to test whether it is possible to obtain balanced growth and structural transformation at the same time. By extending the model to include multiple consumption sectors, a new model that generates balanced growth and structural transformation is achieved. The chapter also explains how three basic mechanisms described can drive sectoral reallocation of labour in the face of development associated with increases in productivity and capital.