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What is Structural Transformation?
In economics, structural transformation refers to the reallocation of economic activity across sectors over the economic development process.
The sectors are often broadly categorized into agriculture, manufacturing (or industry), and services.
In general, over the course of the development process, agriculture tends to decrease, manufacturing tends to increase initially and then decrease, and the service sector tends to increase (Herrendorf et al., 2014; García-Santana et al., 2021).
GDP per capita and the World Bank Income Classification
As structural transformation depends on the stage of the economic development process, it is important to see where each country is first.
If the period from 1991 to 2019 is considered, using GDP, we can loosely categorize Southeast Asian countries into 3 groups as follows:
High-income: Singapore and Brunei
Started as lower-middle-income and proceeded to become upper-middle-income or stayed lower-middle-income: Malaysia, Thailand, Indonesia, and Phillippines
Started as low-income and proceeded to become lower-middle-income: Vietnam, Myanmar, Laos, and Cambodia (CLMV)
Note: In this background note, Timor-Leste is excluded because it is a relatively new country (recognized as independent by the UN in 2002. Brunei is excluded from trend lines as it is an oil-rich country, and thus, often behaves differently.)
Data source: Figure 1 - Penn World Table, Figure 2 - The World Development Indicators by the World Bank
Sectoral Shares vs. GDP
In order to see how the sectoral shares change as the economy develops, the sectoral share data of all Southeast Asian countries are plotted against the log of GDP per capita
The sectoral shares are measured using value-added, household consumption, and total demand
The fitted trend lines are created by regressing the sectoral share on a low-level polynomial of log(GDP per capita) (up to the 3rd degree)
Brunei is excluded from the trend lines
Based on all three measures i.e. value-added, household consumption, and total demand,
Agriculture decreased, industry increased initially, and services increased
Sectoral Shares - Employment
[in progress]
Labor Productivity
Productivity plays an important role in structural transformation, especially relative productivity between sectors.
(In this background information, productivity is defined as value-added per worker.)
Based on Figure X, productivity grows exponentially as an economy develops.
The exponential growth trend applies to all sectors, including agriculture, industry, and services
Productivity of the industry sector grows the most, followed by services and then agriculture.
Productivity Growth Decomposition
Figure X visualizes the decomposition of labor productivity growth into three components i.e. Within Sector (WS), Static Structural Reallocation Effect (SSRE), and Dynamic Structural Reallocation Effect (DSRE).
Productivity is defined as the ratio of value-added over employment
Productivity change is defined as productivity growth divided by the number of years in the period
Within Sector (WS) – Changes productivity, but keeps sectoral shares fixed
Static Structural Reallocation Effect (SSRE) – Keeps productivity fixed, but changes sectoral shares
Dynamic Structural Reallocation Effect (DSRE) – Changes both productivity and sectoral shares
By simple inspection,
GDP growth is positively correlated with labor productivity growth.
In Southeast Asia, WS is the most important driver of productivity growth. SSRE is somewhat important. DSRE is of minimal importance.
Figures X to X, decomposes the productivity growth decomposition into the three main sectors i.e. agriculture, industry, and services.
Figures X and X show the two important components of the decomposition i.e. the change in employment share and the change in productivity respectively.
Agriculture
WS is almost always positive (except Singapore in 1991-2000 and 2001-10 and Brunei in 2010-19)
Smallest among the three sectors
Large in low-income countries (e.g. the CLMV countries)
From large employment share and not productivity growth
SSRE is almost always negative (except Brunei in 2010-19)
This is due to the fact that the agriculture sector shrinks (the employment share decreases) as the economy develops.
Industry
As aforementioned, both value-added and employment share of the industry sector are hump-shaped
WS is almost always positive
Largest among the three sectors
Larger in higher-income countries (Singapore and Malaysia had the highest change in industry productivity in all periods)
For Singapore and Malaysia, WS gets smaller as these economies develop because the industry employment share gets smaller
SSRE can be either positive or negative
This depends on whether the employment share is positive or negative (i.e. the industry sector is growing or shrinking).
Negative in higher-income countries because their industries sectors are shrinking
Services
WS is almost always positive
Smaller than industry but larger than agriculture
SSRE is almost always positive
Employment share grows in most countries
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