When Manufacturing Matters Most: Structural Transformation and Productivity Growth Trajectories in Developing and Emerging Economies

Structural transformation is a central driver of economic development, yet recent challenges such as premature deindustrialization have raised critical questions about whether low-income economies can still follow traditional growth paths that rely on manufacturing expansion to drive productivity gains. Building on a theoretical model that incorporates learning-by-doing mechanisms, sectoral employment reallocation, and factor accumulation, we examine labor productivity growth trajectories using a panel of 31 developing and emerging economies over 1960–2019, detecting a data-driven structural break in 1982 that fundamentally altered productivity growth dynamics. To account for the potential heterogeneity in how structural transformation affects different types of economies, we employ quantile-based techniques to examine effects across different segments of the productivity growth distribution, moving beyond conventional approaches that focus on average effects and may obscure important distributional patterns. The unconditional quantile regression results identify manufacturing expansion as a key driver of productivity growth, with employment reallocation in this sector delivering twice the productivity benefits for slower-growing economies compared to high performers. The quantile decomposition further shows that observable characteristics and unobservable factors became increasingly important determinants of productivity performance following the structural break, with substantial heterogeneity across the distribution. Moreover, we construct counterfactual scenarios to investigate what outcomes low-performing economies could have attained had they adopted the characteristics, returns to factors, and unobservable capabilities of top performers. These scenarios unveil substantial untapped growth potential, with bottom-quartile economies potentially achieving average productivity growth improvements of up to 2.7 percentage points