India's Atypical Structural Transformation

Manisha Goel, Paulina Restrepo-Echavarria
2015 Economic Synopses  
A s countries develop, they undergo a structural transformation. Structural transformation is the reallocation of economic activity across the broad sectors of agriculture, manufacturing, and services that accompanies the process of modern economic growth. Long-term evidence from developed countries indicates two stages of structural transformation: labor moves (i) out of agriculture into manufacturing and services and then (ii) out of both agriculture and manufacturing into services. Figure 1
more » ... hows the behavior of labor shares during the U.S. structural transformation over 1869 to 2008. The break from the first stage to the second stage occurred around 1970. This behavior is accompanied by changes in the shares of GDP: The agricul ture share steadily declined over the period. The manufacturing and services shares stayed relatively constant until the 1960s, but then manufacturing began to decline, while services continued to increase. India is a developing country currently undergoing a structural transformation. However, its path is somewhat different from that of a benchmark developed country. Figure 2 shows the GDP shares of the three sectors over the past four decades for India. The services share has increased dramatically and currently stands at 53 percent. In comparison, the manufacturing share has remained stagnant, growing only from 19 percent in 1970 to 23 percent in 2012. These changing shares of GDP suggest India might now be going through the second stage of its structural transformation. As shown in Figure 3 , however, the manufacturing labor share has increased faster than the services labor share, which is unexpected. These findings imply that productivity in the services sector is remarkably higher than in the manufacturing sector and has sharply increased over the years.
doi:10.20955/es.2015.23 fatcat:lptqodobr5ge3iuljf5a6agxsq