Structural change in Asia, the real effective exchange rate, and agricultural productivity

It is argued in this paper that agriculture plays a here-to-for unrecognized role in the process of structural change. In very poor countries agriculture is the key sector in the economy and agricultural prices greatly influence the overall price level in such an economy. It is hypothesized that if agricultural productivity grows faster than manufacturing productivity this will, under certain conditions, cause the price of the former to fall relative to the latter which in turn implies that the overall price level in the economy should fall, ceteris paribus. This results in a fall in the real effective exchange rate, ceteris paribus. This decline increases the competitiveness of producing tradable goods, in particular manufactured goods. Thus the process of structural change (shifting employment and resources out of agriculture) becomes easier. These hypotheses are empirically analyzed utilizing a data set for twelve Asian countries for an extended time period.