Job Market Paper
Productivity Driven Services Led Growth
Of forty-two countries identified by the World Bank as being low income in 1980, eleven have witnessed annual average growth rates of GDP per capita in excess of 2 percent during the period 1980-2004. Of these fast growing, low income countries, five of them have experienced GDP growth that is dominated by growth of value added in the service sector, rather than by growth in the industrial sector as typifies historical evidence on structural transformation from industrialized countries. This paper accounts for the rapid growth of the service sector in one of these countries, India. A sectoral growth accounting exercise for the period 1980- 2003 shows that changes in total factor productivity (TFP) were significant in accounting for the service sector value added growth in India. Measured service sector TFP growth is much higher than measured TFP growth in agriculture or industry, and increased substantially following the institution of market based liberalization policies from 1991. A three sector, neoclassical growth model is carefully calibrated to Indian data, in which average rates of TFP growth by sector are the primary inputs. This model performs well in accounting for the evolution of value added shares and the growth rates of these shares of the three major sectors of economic activity over the period 1980-2003. The performance of the model improves significantly when the post-1991 increase in ser-vice sector TFP growth is accounted for. It is argued that liberalization policies adopted by India from 1991, and especially the deregulation and privatization of business and communications services, explain the improvement in service sector TFP, and hence the dominance of service sector activity in India’s recent GDP growth.
Research Papers
Service Sector Revolution in India (under review)
Following the initiation of economic liberalization in 1991, the Indian economy witnessed a high growth rate of service sector output while that of industry was relatively muted. As a result, the share of GDP accounted for by services in India resembles that of a rich country while the aggregate per capita income still remains that of a poor country. In this paper, I identify the service sector to be important in two respects: it witnesses unusually high TFP growth, as compared to the other sectors, and also experiences rapid expansion in its exports and imports, especially after liberalization. Using a similar framework as in Stokey (2001), I develop a three sector, open economy, growth model with two important inputs: productivity growth in each sector and trade in the industrial and services sectors. I focus on two steady state years, 1980 and 2003, and assume trade to be balanced in these two years. The model is calibrated to Indian data and can account well for the levels and the change in the composition of domestic output across the sectors for the two steady states. A counterfactual experiment indicates that growth in productivity has a relatively more important role than growth in trade in accounting for the growth in the share of services’ output in aggregate GDP.
Trade Reform and Structural Transformation: Evidence from Six Great Liberalizations (work in progress, joint work)
We investigate the relationship between trade liberalization and structural transformation for a sample of six countries. We document the key policies adopted during the large trade liberalizations which took place in Chile, China, India, Indonesia, Mexico and Turkey during the sample period 1965 through 2005. We quantify the impact of the trade liberalizations for the allocation of employment and output by sector, and for the composition of exports, imports, and total trade. We find that trade liberalization is associated with substantial de-agriculturalization, growth in the employment, value added, and trade and export shares of industry and services, and in most cases with a significant increase in the rate of economic growth as measured by increases in the growth rate of GDP per capita. We develop a two-country, three sector general equilibrium model to assess whether the patterns of structural transformation observed in the data can be accounted for by trade liberalization. Specifically, we carefully calibrate the model to data from each of our six countries and ask the question: would the observed patterns of structural transformation in these countries have occurred in the absence of the reduction in trade costs implied by the growth of trade post-liberalization?