Sectoral shift, income distribution, and development

Abstract

There are two notable phenomena widely observed when an economy departs from an underdeveloped state and starts rapid economic growth. One is the shift of production, employment, and consumption from the agriculture and unskilled-intensive service sectors to the manufacturing and skilled-intensive service sectors, and the other is a large increase in educational levels of its population. The question is why some economies have succeeded in such 'structural change', but others do not. In order to examine the question, we construct an overlapping generations model that explicitly takes into account the sectoral change and human capital accumulation as sources of growth. It is shown that a relatively equal initial wealth distribution, or to be more accurate, a sufficient size of 'middle-class' is a necessary condition for a successful sectoral shift. Once the economy initiates the 'take-off', the sectoral shift and human capital growth continue until it reaches the high-income steady state. However, when agricultural productivity is low, the economy does not succeed in the sectoral shift irrespective of the initial distribution. Thus sufficient agricultural productivity is a prerequisite for the success.