Structural Change and Economic Growth in Emerging Markets: A Cross-Country Analysis Dr. Muhamed Zulkhibri Dr. Ismaeel Naiya Dr. Reza Ghazal DISCLAIMERS: All findings, interpretations, and conclusions are solely of the authors opinion and do not necessarily represent the views of the Islamic Research and Training Institutions (IRTI). This paper was partly written while the author was affiliated with Economic and Research Department, Islamic Development Bank
Presentation outline 1 Overview 5 2 3 4 Evidence from the Literature Overview of Structural Change Methodology and Findings Conclusion 4/28/2015 2
The motivation Structural change is a complex, intertwined phenomenon the notion of structures has evolved over the decades to cover both macro and micro issues the process of structural transformation can have far-reaching consequences on growth, development, poverty reduction Structural-change theory focuses on the process of structural transformation seminal works by Kuznets, Chenery, and Syrquin shifting resources from low to high productivity sectors Many countries achieved sustained economic growth and development through structural transformation differences in the nature of the growth process between developed and developing countries i.e. East Asian Miracles 4/28/2015 3
The objectives The objective is to re-examining the relationship between structural change and economic growth specifically addresses to what extent structural change has influenced the behavior of aggregate economic performance In order to understand the behaviour take case study of four developing countries namely Indonesia, Malaysia, Nigeria and Turkey construct the index of structural change for these four economies employ panel cointegration approach over the period 1960-2010 4/28/2015 4
Evidence from the Literature 4/28/2015 5
In the past, structural change has not been a mainstream research topic Structural change has old history in economics, but many initial research on structural change was limited to highincome countries The most popular literature are the two schools of growth theory which contradict each other: balanced growth school structural change school Structural change analysis received a major boost in the 1990s (Silva and Teixiera, 2008) explain the process of technological change and its effects on the economy. no general theory but a variety of theoretical approaches explaining structural shift between sectors 4/28/2015 6
Two important research observations: Kuznet (1973) and Baumol et al. (1989) demand-side explanations for non-balanced growth supply-side explanation for non-balanced growth systematic change in the relative importance of various sectors (agriculture, manufacturing and services) developed countries all followed the same process of structural transformation and shift of employment and expenditures toward stagnant services great diversity of productivity developments across industries and sectors structural change, not only in economic but also in institutions and social beliefs productivity growth is particularly relevant in the long-run, hence structural change 4/28/2015 7
Empirical studies have left many questions unanswered 1 Dietrich (2009) provide the empirical evidence that demand side is the driving force for the direction of structural change in some OECD countries 2 3 4 5 McMillan and Rodrik (2011) - countries with more flexible labour markets, competitive currency experience larger growth-enhancing structural change, whereas countries with larger share of natural resources in exports and economies with comparative advantage in primary products experience smaller growth-enhancing structural change Singh and Cortuk (2011) - there is a one-way causality from structural change to growth in 1988 2007, but no linkage pre-1988. Hartwig (2012) - no evidence was found in support of the conjecture that the shift toward stagnant services raises economic growth. Peneder (2003) - structural change (specific types of industry) is a significant determinant of aggregate income levels and growth.
Overview of Structural Change and Economic Growth
Sustained episodes of growth are underpinned by fundamental structural change GDP Per Capita (Constant 2000 US$) 12000 10000 Korea 8000 6000 Malaysia Turkey Botswana Brazil 1 4000 2000 0 Thailand China Indonesia Nigeria 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 Number of Years Number of years taken by economies for development. Some countries have enjoyed sustained high growth rates for at least three decades. The sustainable income growth is a result of continuous technological innovation as well as structural change 2
As countries developed, manufacturing has risen and agriculture has declined 1960 1960 1963 1963 1966 1966 1969 1969 1972 1972 1975 1975 1978 1978 1981 1981 1984 1984 1987 1987 1990 1990 1993 1993 1996 1996 1999 1999 2002 2002 2005 2005 2008 2008 1960 1960 1963 1963 1966 1966 1969 1969 1972 1972 1975 1975 1978 1978 1981 1981 1984 1984 1987 1987 1990 1990 1993 1993 1996 1996 1999 1999 2002 2002 2005 2005 2008 2008 60 50 40 30 20 10 0 Indonesia 1400 1200 1000 800 600 400 200 0 50 45 40 35 30 25 20 15 10 5 0 Malaysia 6000 5000 4000 3000 2000 1000 0 Agriculture Manufacturing Services GDPPC Agriculture Manufacturing Services GDPPC 70 Nigeria 600 70 Turkey 6000 60 50 40 30 20 10 500 400 300 200 100 60 50 40 30 20 10 5000 4000 3000 2000 1000 0 0 0 0 Agriculture Manufacturing Services GDPPC Agriculture Manufacturing Services GDPPC
Methodology and Findings
Data Calculation of the structural change indices value added (constant 2000 US$) for the three main sectors, agriculture, industry and services data are obtained from the WDI via the World Bank database and central banks Variables used in the panel estimation LGDP is real GDP per capita (constant 2000 US$) LOPEN is the sum of export and import values to GDP ratio (at current prices in %) LINVEST is the investment share of PPP converted GDP per capita at 2005 constant prices LLABOR is proxy by persons employed (in thousands of persons)
A structural change index Norm of Absolute Values (NAV), following Dietrich (2009) and Singh and Cortuk (2011): NAV 0.5 n i 1 x it x is Modified Lilien Index (MLI) based on Lilien (1982): MLI ln NAV and MLI are bounded between zero and 100. x zero representing no structural change 100 indicate a reversal of structure change x it is x x it is 2 4/28/2015 14
Malaysia and Turkey experienced continuous structural changes 4/28/2015 15
Model of panel cointegration (Pedroni, 2004) The seven of Pedroni s tests are based on the estimated residuals from the following long run model: y it t x The parameters it and allow for: it country-specific effects and deterministic trend effects Panel OLS and panel DOLS estimation is given by the following equation: y it x i i it i i q 2 j q it c 1 ij x it it j it 4/28/2015 16
Findings 4/28/2015 17
Findings 4/28/2015 18
Findings 4/28/2015 19
Key takeaways 1 The panel cointegration test results demonstrate that structural change and economic growth are cointegrated for these countries. Structural change and economic growth has a positive but the impact of GDP on structural change is slightly higher than the impact of structural change on GDP. 2 The larger impact of income on the structural change may implies that higher economic growth tends to accelerate the process of structural change The structure of demand for products in different sectors has significant impact with increasing income i.e. Turkey, Malaysia, Indonesia 3 4 No one size fits all - economic growth in developing countries is about both changing the structure of production and raising productive economic activities Countries at different levels of development have different optimal industrial structures, therefore, many institutions and policies should be different (i) structural change generates positive as well as negative contributions to aggregate growth; (ii) countries should have a good understanding and carry-out diagnostic study of what is blocking structural transformation; (iii) pursuing policies that aim at raising productivity of the productive factors is very essential for structural transformation 4/28/2015 20
Thank You Contact: Dr. Muhamed Zulkhibri Islamic Research and Training Institute Tel : +996 02 646 6533 E-mail: mzulkhibri@isdb.org Web: www.irti.org 4/28/2015 21