Working Paper: NBER ID: w28551
Authors: Tianyu Fan; Michael Peters; Fabrizio Zilibotti
Abstract: Structural transformation in most currently developing countries takes the form of a rapid rise in services but limited industrialization. In this paper, we propose a new methodology to structurally estimate productivity growth in service industries that circumvents the notorious difficulties in measuring quality improvements. In our theory, the expansion of the service sector is both a consequence—due to income effects—and a cause— due to productivity growth—of the development process. We estimate the model using Indian household data. We find that productivity growth in non-tradable consumer services such as retail, restaurants, or residential real estate, was an important driver of structural transformation and rising living standards between 1987 and 2011. However, the welfare gains were heavily skewed toward high-income urban dwellers.
Keywords: Service Sector; Economic Growth; Welfare Effects; India; Structural Transformation
JEL Codes: O1; O18; O4; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity growth in nontradable consumer services (O49) | living standards (I31) |
| living standards (I31) | productivity growth in nontradable consumer services (O49) |
| productivity growth in consumer services (O49) | structural transformation (L16) |
| decline in agricultural employment share (J43) | productivity growth in consumer services (O49) |
| income effects (H31) | productivity growth in consumer services (O49) |
| productivity growth in consumer services (O49) | welfare gains (D69) |