Author: Margaret S. McMillan, Dani Rodrik:

Abstract: Large gaps inlabor productivity between the traditional and modern parts of the economy area fundamental reality of developing societies. In this paper, we document thesegaps, and emphasize that labor flows from low-productivity activities tohigh-productivity activities are a key driver of development. Our results showthat since 1990 structural change has been growth reducing in both Africa andLatin America, with the most striking changes taking place in Latin America.The bulk of the difference between these countries’ productivity performanceand that of Asia is accounted for by differences in the pattern of structuralchange – with labor moving from low- to high-productivity sectors in Asia, butin the opposite direction in Latin America and Africa. In our empirical work,we identify three factors that help determine whether (and the extent to which)structural change contributes to overall productivity growth. In countries witha relatively large share of natural resources in exports, structural change hastypically been growth reducing. Even though these “enclave” sectors usuallyoperate at very high productivity, they cannot absorb the surplus labor fromagriculture. By contrast, competitive or undervalued exchange rates and labormarket flexibility have contributed to growth enhancing structural change.

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