Structural Change, Accumulation and Growth in Developing Economies

Historically, episodes of rapid growth are accompanied by significant structural change. In this paper we therefore aim to quantify the extent to which factor accumulation induces structural change and productivity growth in industrializing economies. We present an extension of a standard growth model that incorporates two sectors, traditional and modern, and an endogenous wage gap, due to efficiency wages. We quantify the model using a panel of 78 countries over the post war era. The results show that these labour reallocation effects are significant and can increase the effective return to physical capital by around 30% in many countries.