Degree Name

Master of Arts (MA)

Semester of Degree Completion

2017

Thesis Director

Mukti P. Upadhyay

Abstract

The dual-economy model predicts that holding productivity constant, labor reallocation from less to more productive sectors, also known as 'structural change' results in improvement in economy-wide productivity. The objective of this thesis is to test the empirical predictions of this model using sectoral-level data from twenty-eight developing countries. Using the shift-share growth decomposition approach, we find regional growth-enhancing effects of structural change in Asia, Latin America and North Africa from, 1980 to 2000 and growth-reducing effects in Sub-Saharan Africa over the same period. However, as intersectoral productivity gaps disappeared after 2000, technological progress led the growth process in much of Asia and North Africa, while Sub-Saharan Africa and Latin America benefited immensely from structural change over the same period. At the country level, however, structural change has been growth-reducing in many countries as labor moved in the wrong direction.

We then proceeded to investigate the determinants of the contribution of structural change to the growth process at the country level. Contrary to the literature, we find evidence that rigidity in the labor market enhances the contribution of structural change to growth as it slows the wrong labor reallocation process. Beginning the estimation period with high agricultural employment shares as well as investment are also found to have significant and positive impact on the structural change contribution to growth. This study provides useful insight into the experiences of developing countries. The lesson learnt is simple; productivity-returns to structural change is not a default outcome of just any labor reallocation process. For countries to benefit from labor reallocation, the market must be conditioned to direct labor from less productive to more productive sectors.

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