In Search of a Better Understanding of Sectoral Transformation: Theory and measurement

Many economists have stressed that Improvement in agricultural productivity primarily determines the rate of sectoral transformation. But a comparative look at the cross country experiences suggest that the rise in nonagricultural productivity should also be an important factor in the process of sectoral transformation. This paper provides a theoretical model to explain sectoral transformation and attempts to assess the relative Importance of each view by measuring the contribution of productivity increases in both sectors to the rate of sectoral transformation. First, preference parameters are fitted using the income and price elasticities of demand for the agricultural goods, and then the rates of sectoral transformation with respect to agricultural productivity, nonagricultural productivity, and a third factor. the capital stock increase, are calibrated based on the formula derived from the model. Finally, the rate of sectoral transformation is decomposed into those three basic factors. Preliminary empirical results show that more than 30% of the rate of sectoral transformation can be explained by the nonagricultural productivity increase, which is at least as Important as that of the agricultural sector even in the closed economy.