76 71 Structural Transformation and Economic Development Caselli 2005 and

76 71 structural transformation and economic

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7.1 Structural Transformation and Economic Development Caselli (2005) and Restuccia et al. (2008) argue that the proximate cause of much of the large di ff erences in living standards across countries is attributable to two simple facts: (1) develop- ing countries are much less productive in agriculture relative to developed countries, and (2) developing countries devote much more of their labor to agriculture than do developed coun- tries. These two facts suggest that in order to understand why developing countries are so poor it is of first–order importance to understand the forces that shape the allocation of resources be- tween agriculture and the other sectors. A version of the growth model extended to incorporate structural transformation is the natural framework to be used in this context. Work by Gollin, Parente, and Rogerson (2002, 2007) illustrates how low agricultural pro- ductivity can be the source of large cross–country di ff erences in aggregate productivity. For ease of exposition we focus on the simpler presentation in the 2002 paper, which uses a two– sector version of our benchmark model, with the two sectors being agriculture and non–agricult- ure. They assume that the population is constant and normalize it to one. Preferences are such that there is a subsistence level ¯ c a of agricultural consumption at which individuals are also satiated. The non–agricultural production function is essentially a Cobb–Douglas production function in capital and labor. In contrast, there are two agricultural production functions: a tra- ditional and a modern one. 44 Both agricultural production functions are linear in labor, though the analysis would be una ff ected by assuming a fixed quantity of land and decreasing returns to scale in labor. The traditional production is assumed to be the same across countries and to be su ffi ciently productive to exactly meet subsistence agricultural needs when all labor is allocated to it. The modern production function has a country–specific TFP parameter and it is the only production function that is subject to technological progress. In this model, only the agricultural technology with the larger productivity will be used in equilibrium. Initially this is the traditional technology. Since the modern technology is sub- ject to technological progress, at some point the modern technology will replace the traditional technology as the only technology that will be used. The somewhat extreme structure of the model then yields a very simple solution method for determining the equilibrium. Total food 44 Hansen and Prescott (2002) use a similar assumption but at the aggregate level. 77
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production must be ¯ c a . As long as the traditional technology is used, this means that all labor will be in agriculture. When the modern technology starts to dominate the traditional tech- nology, labor will start to flow from agriculture to non–agriculture. With the time series for labor allocations determined, the remainder of the model becomes a standard growth model with an exogenously given process for labor. The growth rate of labor in the non–agricultural
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