The decomposition of labor productivity (see Rodrik and McMillan, 2011 and M.P. Timmer, G.J de Vries and K. de Vries, 2014) as a tool to understand the Structural Change in Latin American countries can give us an erroneous vision of the real process. This methodology decomposes labor productivity growth in two components, within (the growth within each sector, i.e., the growth in labor productivity is a result of increasing productivity in each sector through capital accumulation, technological change, etc.) and Structural Change (the growth is a result of a shift of labor share towards more productive sectors)1.
Figure 1 shows the cases of Chile and Venezuela (these countries were chosen because of the importance of the mining sector for their economies and because the results seems to be particularly problematic when using the aforementioned methodology). First, notice that for Chile the period from 1950 to 1975 the Structural Change term appears as negative, even though this period is characterized by reduction in the importance of agriculture. In 1950, the share of agriculture in total employment was of 31%, while in 1975 this share was about 24%.
For Venezuela the case is even more impressive. In 1950, the share of agriculture in total employment was 44% and in 1975 was about 16%. However, figure 3 shows a strong negative Structural Change, even though the shares of manufacture, finance and transports have increased. It is obvious that the simple decrease in agriculture’s share does not necessarily imply in a Structural Change, but these results seem peculiar, since there is a clear movement towards sectors with higher productivity. Additionally, for both countries there is positive Structural Change between 1990 and 2011, even though this is a period in which the structure kept unchanged.
1) Used the updated and extended Groningen Growth and Development Centre (GGDC) 10-Sector database, which includes annual time series of value added and persons employed for ten broad sectors of the economy from 1950 to 2011.
In resume, the use of this methodology can give us misleading results. Transform the production structure, i.e., generate more productive and better jobs, is not necessarily a shift between sectors with different productivities. In order to alter the course of an economy, the Structural Change must be towards sectors more dynamic in terms of technological progress and external dynamics (the latter understood as a higher elasticity of exports). Diversify the exports structure is an essential part of this transformation, as well as reduce the technological gap.
- Rodrik, D., & McMillan, M. (2011). Globalization, structural change, and productivity growth
- (NBER working paper 17143). Cambridge: NBER.
- M.P. Timmer, G.J de Vries, & K. de Vries (2014). Patterns of Structural Change in Developing Countries. GGDC research memorandum 149