A model of unbalanced sectorial growth with application to transition economies

Abstract

This paper studies the implications of a dynamic general equilibrium model with three production sectors, which are agriculture, industry and services. Due to the assumption of increasing returns in industry and services, our model has multiple equilibria. Two equilibria are stable: one, in which a country produces only agricultural goods and converges to a steady state, and the other, in which a country operates all three sectors and has positive unbalanced long-run growth by contracting agriculture and expanding industry and services. These predictions agree well with the real-world development experiences of rich and poor countries. In the context of our model, we also investigate the evolution of the sectorial composition in the transition countries and find that such countries move to the rich rather than to the poor world.JEL Classification: F10, F12, O13, O30, O41

Capital-Skill Complementarity and Balanced Growth

“…Developing models with non‐balanced growth would restore the importance of the Krusell et al (2000) capital–skill complementarity mechanism for the long‐run behaviour of the economy. This direction is worth exploring, as recent work calls into question the assumption of balanced growth; see, for example, Ramey and Francis (2006) for evidence on a temporal rise in leisure, and Mulligan (2002) and Hornstein (2004) for evidence on changes in the capital–output ratio, as well as Ngai and Pissarides (2007), Kylymnyuk et al (2007a, b) and Acemoglu and Guerrieri (2008) for evidence on and theoretical explanations of non‐balanced systematic changes in the relative importance of different production sectors.…”