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Structural Change and Cross-Country Growth Empirics

  • Markus Eberhardt
  • Francis Teal

One of the most striking features of economic growth is the process of structural change whereby the share of agriculture in GDP decreases as countries develop. The cross-country growth literature typically estimates an aggregate homogeneous production function or convergence regression model that abstracts from the process of structural change. In this paper, we investigate the extent to which assumptions about aggregation and homogeneity matter for inferences regarding the nature of technology differences across countries. Using a unique World Bank dataset, we estimate production functions for agriculture and manufacturing in a panel of 40 developing and developed countries for the period from 1963 to 1992. We empirically model dimensions of heterogeneity across countries, allowing for different choices of technology within both sectors. We argue that heterogeneity is important within sectors across countries implying that an analysis of aggregate data will not produce useful measures of the nature of the technology or productivity. We show that many of the puzzling elements in aggregate cross-country empirics can be explained by inappropriate aggregation across heterogeneous sectors. Copyright 2013, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/wber/lhs020
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Article provided by World Bank Group in its journal The World Bank Economic Review.

Volume (Year): 27 (2013)
Issue (Month): 2 ()
Pages: 229-271

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Handle: RePEc:oup:wbecrv:v:27:y:2013:i:2:p:229-271
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  1. Pesaran, M.H., 2004. "‘General Diagnostic Tests for Cross Section Dependence in Panels’," Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
  2. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  3. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  4. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
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