Economic transformation

In economics, economic transformation refers to the continuous process of (1) moving labour and other resources from lower- to higher-productivity sectors (structural change or structural transformation[1]) and (2) raising within-sector productivity growth.[2] As such, economic transformation emphasises the movement from low- to high-productivity activities within and across all sectors (which can be tasks or activities that are combinations of agriculture, manufacturing and services). This movement of resources from lower productivity to higher-productivity activities is a key driver of economic development.[3]

Within-sector productivity growth entails the adoption of new technologies and management practices that increase the efficiency of production. It can come about as a result of the increased efficiency of existing firms or as a result of the reallocation of resources away from the least productive firms towards more productive firms.

Measures of economic transformation

Economic transformation can be measured through production/value-added measures and trade-based measures. Production-based measures include: (1) sector value added and employment data, to show productivity gaps between sectors; and (2) firm-level productivity measures, to examine average productivity levels of firms within one sector.[4]

Trade-based measures include: (1) measures of revealed comparative advantage to show the levels of specialisation of a country in certain exports; and (2) export diversification measures such as those produced by the International Monetary Fund.[5][6]

References
  1. Herrendorf, Berthold; Rogerson, Richard; Valentinyi, Ákos (April 2013). "Growth and Structural Transformation". NBER Working Paper No. 18996. doi:10.3386/w18996.
  2. McMillan, M., J. Page, D. Booth and D.W. te Velde (2017). Supporting Economic Transformation: An approach paper.
  3. McMillan, M.; Rodrik, D. (June 2011). "Globalization, Structural Change and Productivity Growth". NBER Working Paper No. 17143. doi:10.3386/w17143.
  4. McMillan, M., J. Page, D. Booth and D.W. te Velde (2017). Supporting Economic Transformation: An approach paper.
  5. International Monetary Fund Diversification Toolkit, available here: https://www.imf.org/external/np/res/dfidimf/diversification.htm
  6. Kennan, J. and te Velde, D. (2015). Sources and methods of data for economic transformation.

Further reading

Worral, L. K. Vrolijk, C. Mason and N. Balchin (2015). Baseline on economic transformation: Review of the international, regional and domestic literature on economic transformation.
McMillan, M., J. Page, D. Booth and D.W. te Velde (2017). Supporting Economic Transformation: An approach paper.

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