Mini Symposium on Perspectives on Structural Change

Abstract

[...]the process of structural change is increasingly thought to have impacts beyond productivity, potentially impacting upon the environment, inequality, and labor markets. [...]countries should think seriously about imposing protectionist policies to try to counteract the negative impacts of structural change. [...]the papers by Foster-McGregor and by Hasan and Molato highlight that structural change is an important driver of labor market outcomes, an area in which there are significant opportunities for future research.

The traditional view of structural change involves a movement of resources out of agriculture, with the industry shares in total employment and gross domestic product (GDP) initially rising before eventually declining, and the share of services rising. Recently, the analysis of structural change has been augmented by considering reallocations across firms, tasks, and occupations. These forms of structural change are influenced by a myriad of factors, with international trade and global value chains (GVCs) considered important drivers. Moreover, the process of structural change is increasingly thought to have impacts beyond productivity, potentially impacting upon the environment, inequality, and labor markets. This mini symposium includes five papers addressing structural change from a variety of perspectives and focuses on three main themes: (i) whether the traditional path of moving from agriculture to industry and eventually services still holds (papers by Sen and by Anderson and Ponnusamy), (ii) the impact of globalization on structural change (Athukorala and Veeramani), and (iii) the effect of structural change on labor markets (papers by Foster-McGregor and by Hasan and Molato).

Sen argues that the traditional pattern of structural change may no longer hold, with structurally underdeveloped countries witnessing shifts from agriculture directly to services, particularly nonbusiness services, bypassing the movement to manufacturing. With productivity in nonbusiness services being lower than in manufacturing, these developments imply lower growth potential in these countries. These observations lead Sen to argue that traditional approaches to structural change are less relevant in understanding contemporary structural change in many countries. Sen simulates a neoclassical model of structural change and shows that it does a poor job at predicting sectoral shares in structurally underdeveloped countries. Sen argues that this is because relative productivity differences are not a key determinant of labor reallocation in poor countries. As such, there is a need to rethink the mainstream approach to structural change, with new approaches putting less emphasis on productivity.

Anderson and Ponnusamy also begin from the traditional view of structural change but argue that this ignores the sectoral composition of exports, which is more varied than those of employment and output. Anderson and Ponnusamy identify the roles of per capita income, factor endowments, and sectoral productivity growth as drivers of sectoral GDP, employment, and export shares. The relationships between per capita income and both GDP and employment shares are largely in line with the existing literature. Results when considering sectoral export shares display much greater heterogeneity, however, with a number of developing countries achieving export specialization in services at relatively low levels of per capita income. Similarly, there are a small number of high-income countries that have been able to develop, despite specializing in a relatively small number of primary products. Anderson and Ponnusamy conclude that countries can pass directly from the production and export of primary products to services, and that this alternative path need not constrain development opportunities.

Athukorala and Veeramani consider the role of globalization as a driver of structural change in the Indian automobile industry, a sector which has successfully entered production networks. After being heavily protected for much of India's post-independence period, the liberalization of the automotive sector began in the 1990s, becoming stronger in the 2000s. Joint ventures in India increased significantly after 1990, with the reforms of the 2000s further increasing inward foreign direct investment, including entry of wholly owned subsidiaries. The entry of parts suppliers also intensified in the 2000s when local content requirements were dropped. In response, the production of passenger cars increased rapidly in the 2000s. Athukorala and Veeramani suggest that learning and capacity development, through foreign market participation and the entry of parts producers, has been the key factor behind India's emergence as a production base. Likewise, marketconforming policies, which constituted a notable departure from the protectionist past, have played a key role in transforming the Indian automobile industry.

Foster-McGregor decomposes employment into demand from domestic and foreign sources, with foreign demand further split into demand for final and intermediate goods. Applying this decomposition to six Asian countries, Foster-McGregor finds that domestic demand remains the dominant source of demand, albeit with trade being relatively large in some small countries. The relative importance of final and intermediate exports in generating employment varies by country, with some countries relying to a relatively large extent on intermediate exports, reflecting their importance as suppliers in GVCs; and others relying to a greater extent on final exports, reflecting their role as assemblers in GVCs. Foster-McGregor reports a declining role for trade as a source of employment in most countries in recent years, possibly due to the general plateauing of GVC participation and to the efforts of some countries to raise the domestic value-added content of their production.

Hasan and Molato focus on the labor market impacts of structural change in India, examining how wages and employment evolved during the process of structural change not only across production sectors, but also across occupational groups, rural and urban areas, and small and large firms. They note that recent employment developments have largely followed the traditional path of structural change, with workers moving out of agriculture and toward manufacturing and service sectors, and from rural to urban areas, and large cities within urban areas. Such movements have further involved a shift toward more productive activities. These structural changes are also found to be important drivers of increasing wages, accounting for up to a quarter of the total change in average wages.

The papers in this mini symposium approach structural change from different perspectives, providing some important implications. First, the papers by Sen and by Anderson and Ponnusamy argue that there is a need to rethink the traditional models of structural change. The evidence indicates that many developing countries today are not following the traditional path of structural change, in the sense that they are bypassing manufacturing. However, it is not clear that this route will deliver the same benefits as the traditional one. This is because of the well-known benefits of manufacturing and the fact that labor is moving into service activities with lower productivity than manufacturing. Second, Athukorala and Veeramani underscore that globalization has been an important driver of structural change, with GVCs, foreign direct investment, and services trade considered relevant. As a result, countries should think seriously about imposing protectionist policies to try to counteract the negative impacts of structural change. Some of these effects may be painful (especially on labor), yet these policies may be ultimately fruitless if they limit the learning capacity needed to move toward more productive activities. Finally, the papers by Foster-McGregor and by Hasan and Molato highlight that structural change is an important driver of labor market outcomes, an area in which there are significant opportunities for future research.

Jesus Felipe

Managing Editor

Asian Development Review

Neil Foster-McGregor

Guest Editor

UNU-MERIT