Guest post by Uma Lele
How quickly and how well are developing countries transforming their economies and with what effects on inter-sectorial growth and distribution? A group of us studied structural transformation looking at evidence from 109 countries over 30 years covering a 1980 to 2009 period with a particular focus on China, India, Indonesia and Brazil. We later followed up on the five members of the East African community.
Economists following Kuznets, Chennery and Syrquin, Johnston, Mellor and Timmer have described structural transformation (ST) as consisting of: (1) declining share of agriculture in Gross domestic product (GDP), (2) declining share of agriculture in employment, (3) rural-urban migration, (4) growth of the service and manufacturing sectors and (5) a demographic transition with reduction in the population growth rates and have noted that India’s transformation is stalled.
The turning point is reached when the share of employment in agriculture declines at a faster rate than the share of agriculture in GDP. Differences in labor productivity between the agricultural and non-agricultural sectors disappear in the final stages of structural transformation. Before labor productivities among sectors converge a huge and often even a widening gap occurs between labor productivities in the agricultural and non-agricultural sectors. Those differences explain inter-sectoral income inequalities and concentration of poverty in the agricultural sector.
Timmer and Akkus, noted in their earlier analysis of 86 countries that turning point for today’s developing Asian countries is taking longer and occuring at a higher income than was the case for the industrial countries because of the sheer sizes of the Asian labor forces in agriculture. Kuznets had explained the narrowing of income inequality at the later stages of industrial development in advanced countries in terms of their gradually increasing progressive policies, increased saving and investment in the new enpreneurial class and technological change which uses skilled labor. All these factors today explain the growing income inequalities in developed countries. We developed some new insights.
- In Asia value added per worker has been increasing both in agriculture and non-agriculture. The growth in labor productivity in both sectors is spectacular in China, less so in Indonesia and the least in India. It is clearly a result of more liberal policies, increased savings and investments including foreign direct investment and outsourcing to Asia. .Income distribution measured by Gini coefficients has worsened in all three countries in the same rank order as changes in labor productivities.
- In sharp contrast, per capita value added in the non-agricultural .sector has been declining in the rest of the developing world.
- In Latin America, value added per worker in agriculture has increased substantially and the continent has emerged as a major agricultural exporter and yet agriculture has been shedding labor fast. In the non-agricultural sector value added per worker shows a secular decline. Lowered Gini coefficients in Latin America are often seen as a sign of progress. But if they are the result of declining value added per worker in the non- agricultural sector, they may be less a cause for celebration.
- In Africa neither value added per worker in agriculture nor in the non-agricultural sector has increased much. This should be a cause of concern for both growth and poverty reduction.
- In short all is not well with the growth story in emerging countries.
- In Asia internal terms of trade have moved in favor of agriculture relative to non-agriculture. In the rest of the developing world they have shown a deterioration against agriculture perhaps because incomes outside agriculture are not increasing much and not creating as much demand for food as in Asia.
Ratio of Value added per worker in Non-Agriculture relative to Agriculture, in the World 1980-2009
Terms of Trade (Deflator for Agriculture/Deflator for Non-Agriculture [Industry + Service])(in US$) by Region (1980-2009)
Based on a paper by Uma Lele, Manmohan Agarwal, Peter Timmer, and Sambuddha Goswami. Uma Lele is a Former Senior Advisor, the World Bank.