Structural modernization and development traps : an empirical approach

In this paper we analyse economic development through the lenses of a newly developed index the structural modernization index. This index combines two dimensions that have been widely invoked as prime drivers of economic development namely, structural change and technological catch up. For each country, the index calculates the productivity gap with respect to the world frontier in activities that typically represent the modern part of the economy, and weighs this relative productivity by the employment share of those activities in the total labour force. In doing so, it combines a technological dimension relative productivity and a structural dimension the size of the modern sector thus providing a concise measure of the degree of modernity of an economy. The index is calculated for a large sample of countries over a long time span. Significant efforts have been made to put together a dataset with international comparable data on value added and employment disaggregated by sectors for 100 countries covering the period 1950-2009. The estimates are used to explore the relationship between structural modernization and the so-called poverty and middle-income traps. In analysing this relationship, the interactive nature of structural change and technological catch up is stressed. Important insights are obtained regarding the nature of low and middle-income development traps. Finally, the usefulness of this new index is illustrated when studying the diverse structural trajectories of a set of countries that can be taken as examples of success and failure in the process of economic development.