Structural Change and Economic Growth: Worldwide Trends in the Downward Manufacturing Era

Abstract

The structural change literature has documented that all countries experience important sectoral reallocations during their development process, namely a fall in agriculture, a hump shape in manufacturing and a large increase in services. Since the latter is the sector with the lowest productivity growth, this paper aims at studying if the worldwide economic growth rate will decrease in the years to come due to the structural change effect. To this end, it is first documented that more than 90% of the countries are in falling region of the manufacturing sector and that the worldwide share of manufactories is falling since the mid-1970s. At the same time, it is also showed that countries with larger manufacturing sector tend to exhibit faster GDP growth, especially the developed ones. However, taking the world as a unique economy it is also found that the fastest growing subsectors in services and manufacturing experience higher productivity growth than the service and manufacturing sectors as a whole, so this can offset for the loses in aggregate productivity growth due to structural change. This finding reinforces the balanced growth path result present in general theoretical models. Finally, when examining the worldwide pattern of falling of manufactures, it is founded that the drop occurs abruptly and exclusively during periods of economic crises, which may be seen as a challenge to the existing explanations for estructural change and leaves the door open for new mechanisms.