(a) Groningen Growth and Development Center, Groningen (b) Hitotsubashi University, Tokyo. PEGNet Conference Hamburg, September 7-9, 2011

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1 Gaaitzen J. de Vries a, Abdul A. Erumban a, Marcel P. Timmer a, Ilya Voskoboynikov a, Harry X. Wu b (a) Groningen Growth and Development Center, Groningen (b) Hitotsubashi University, Tokyo PEGNet Conference Hamburg, September 7-9, 2011

2 Structural change, narrowly defined as the reallocation of labor across sectors, featured prominently in the early analysis of economic growth (e.g. by Kuznets, 1966) The best documented pattern of structural change is the shift of labor and capital from production of primary goods to manufacturing and services Growth rate of productivity is different across sectors, reflecting differences in the nature of the production function, in investment opportunities and in the rate of technical change (Syrquin 1984; Crafts 1984) These differences in the potential for structural change featured prominently in explanations of differential growth within European countries in the post- WW-II period (Dennison 1967; Maddison 1987; Timmer et al. 2010) New structural economics view reinvigorates the argument that economic structures should be the starting point for economic analysis and the design of appropriate policies (Lin, 2010; McMillan and Rodrik,2011) However, little is known about the development pattern that underlies aggregate progress in the BRIC countries

3 % 5% 10% 15% 20% 25% 30% share in World GDP Brazil Russia India China Note: GDP expressed in 2005 EKS PPPs. Source: Total Economy Database (GGDC and the Conference Board)

4 1. A harmonized time-series database of value added and persons engaged by sector with a common industry classification (ISIC revision 3) Based on a critical assessment of the reliability, consistency, as well as the concepts and definitions used in various primary data sources Builds upon data-driven efforts for understanding growth (Bosworth and Collins, 2008; Timmer and de Vries, 2009; McMillan and Rodrik, 2011) 2. A novel method to deconstruct aggregate growth into the contribution of particular sectors In the traditional method, all expanding sectors contribute positively to aggregate productivity growth, even when they have below-average productivity levels 3. For Brazil and India we are able to split sectoral GDP and employment into formal and informal sectors Disclaimer: definitions of the informal sector differ between Brazil and India, and the data quality regarding informal sector development patterns is subject to larger uncertainty

5 Annually, for 35 industries from early 1980s to 2008: Value added in current and constant prices Employment (including self-employed) Agriculture, ±15 manufacturing sectors, ± 15 services sectors Important data issues: Periodic revisions in GDP and employment Consistent employment data for China and India Concordance issues The adoption of the UN SNA in China and Russia The informal sector Help and cooperation with: Teams from: Latin America KLEMS, Russia KLEMS, India KLEMS, and China KLEMS. Overall leadership of World KLEMS by Dale Jorgenson, Bart van Ark, and Marcel Timmer

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8 Traditional method by Fabricant (1942) p the vector of labor productivity by industry s the vector of sectoral employment shares lp a scalar of average total economy labor productivity lp t lp 0 = (p t p 0 ) s av + (s t s 0 ) p av First term: within-sector productivity growth Second term: between-sector or reallocation effect Important shortcoming: all expanding sectors contribute positively to aggregate productivity growth, even when they have below-average productivity levels. Example: employment moves from formal manufacturing to informal services. How much did informal services contribute to economic growth?

9 We adjust the between-effect of an expanding sector to take into account its relative productivity level To this end, we divide sectors into expanding and shrinking and calculate the between-effect relative to the average productivity level of the shrinking sectors: lp t lp 0 = (p t p 0 ) s AV + (s t s 0 ) (p AV p * ) with average labor productivity in shrinking sectors defined as: p * = ((s t s 0 ) p AV ) / e (s t s 0 ), if s t i s 0 i < 0 The employment share expansion of sectors with above-average productivity levels contributes positively to aggregate productivity growth The expansion of sectors with below-average productivity levels contributes negatively to aggregate productivity growth

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13 In developing countries, the informal sector accounts for the majority of employment and a substantial share of value added (Schneider, 2000) We explore the role of employment reallocation between formal and informal sectors for growth in Brazil and India Definitions of the informal sector vary: India: based on an employment size threshold, where the organized sector consists of firms employing 10 or more workers using power, and 20 or more workers without using power Information on NDP from national account statistics, employment from NSSO surveys Brazil: informal employment defined according to contract status. Also, autonomous workers, comprising own-account workers and employers of unregistered firms are considered part of the informal sector. Information on employment from national account statistics, GDP estimates based on value added per worker ratios from PNAD for wages of informal employees and ECINF for profits of autonomous workers

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15 Distinguishing formal and informal sectors suggests growth-enhancing structural change This finding contrasts with IADB 2010, McMillan and Rodrik 2011

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17 The distinction of formal and informal sectors in decomposing growth matters less for understanding growth in India Productivity growth is important within formal manufacturing and formal and informal market-services sectors

18 A deconstruction of the BRICs suggests their production structures have little in common Natural resource sectors important for growth in Brazil and Russia Labor movement from agriculture towards services is important for growth in India In China labor movement towards manufacturing is main contributor Structural transformation facilitates economic growth in China and India. But distinguishing formal and informal sectors, we find employment reallocation towards formal activities is also an important contributor to growth in Brazil since 2000 Thank You Gaaitzen de Vries University of Groningen