Structural Transformation and Southeast Asian Experiences

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