Structural Change: Pace, Patterns and Determinants ECA Structural Change: Pace, Patterns and Determinants Pedro Martins Economic Commission for Africa 5 December 2017

ECA Overview Research undertaken in two stages: Main contributions: Assess pace and sectoral pattern of structural change in the world’s regions and sub-regions. Investigate the determinants of structural change. Main contributions: Comprehensive dataset (169 countries), representative regional estimates and novel sub-regional perspective. Original empirical exercise on structural change (accelerations), insights on how to enhance it.

ECA Background Context Definition of structural change Strong economic growth since early 2000s, but concerns about its inclusiveness and sustainability. Renewed interest in the study of structural change (as driver of sustainable growth). Definition of structural change “Labour productivity gains accrued by relocating labour from lower-productivity to higher-productivity sectors.” This paper also assesses impact of demographic change and employment rates on economic performance.

Part I: Pace and Pattern

Demographic structure Methodology ECA Shapley decompositions Output per capita Δ(Y/N) Output per worker Δ(Y/E) Within-sector effects Role of each sector Between-sector effects Employment rate Δ(E/A) Demographic structure Δ(A/N)

Demographic structure Methodology ECA Shapley decompositions Output per capita Δ(Y/N) Output per worker Δ(Y/E) Within-sector effects Role of each sector Between-sector effects Employment rate Δ(E/A) Demographic structure Δ(A/N)

Demographic structure Methodology ECA Shapley decompositions Output per capita Δ(Y/N) Output per worker Δ(Y/E) Within-sector effects Role of each sector Between-sector effects Employment rate Δ(E/A) Demographic structure Δ(A/N)

Demographic structure Methodology ECA Shapley decompositions Output per capita Δ(Y/N) Output per worker Δ(Y/E) Within-sector effects Role of each sector Between-sector effects Employment rate Δ(E/A) Demographic structure Δ(A/N)

ECA Data Data compilation Consolidated dataset Employment (ILO): 174 countries, 14 sectors. Gross value added (UNSD): 212 countries, 7 sectors. Population (UNPD): 233 countries & territories. Consolidated dataset 169 countries (99.9% output, 98.7% population). 4 world regions and 13 sub-regions. 7 sectors of economic activity (ISIC). 2 sub-periods (1991-2002 and 2002-2013).

Economic structure ECA Structure of output & employment

ECA Economic structure Changes in employment & labour productivity gaps

Results ECA Decomposition of GVA per capita growth (regions)

Results ECA Decomposition of GVA per capita growth (sub-regions)

Part II: Determinants

ECA Methodology Econometric estimation Regression specification Panel fixed-effects to account for time-invariant country characteristics. Principal component analysis to isolate common elements. Robustness tests to assess sensitivity of results. Regression specification Structural change = f (initial conditions, macro stability, trade & exchange rate, financial capital, human capital, physical capital, governance)

Data ECA Dimension Variable

ECA Data Dimension Variable Dependent variable Between-sector effect (% contribution)

ECA Data Dimension Variable Dependent variable Between-sector effect (% contribution) Initial conditions Employment in agriculture (% total) Mining & utilities (% GVA)

ECA Data Dimension Variable Dependent variable Between-sector effect (% contribution) Initial conditions Employment in agriculture (% total) Mining & utilities (% GVA) Macroeconomic stability Current account balance (% GDP) General government gross debt (% GDP) General government net lending/borrowing (% GDP) Inflation, consumer prices (% change)

ECA Data Dimension Variable Dependent variable Between-sector effect (% contribution) Initial conditions Employment in agriculture (% total) Mining & utilities (% GVA) Macroeconomic stability Current account balance (% GDP) General government gross debt (% GDP) General government net lending/borrowing (% GDP) Inflation, consumer prices (% change) Trade & exchange rate Net barter terms of trade (index) Trade (% GDP) Real effective exchange rate (index)

ECA Data Dimension Variable Dependent variable Between-sector effect (% contribution) Initial conditions Employment in agriculture (% total) Mining & utilities (% GVA) Macroeconomic stability Current account balance (% GDP) General government gross debt (% GDP) General government net lending/borrowing (% GDP) Inflation, consumer prices (% change) Trade & exchange rate Net barter terms of trade (index) Trade (% GDP) Real effective exchange rate (index) Financial capital Domestic credit to private sector (% GDP) Real interest rate (%)

ECA Data Dimension Variable Dependent variable Between-sector effect (% contribution) Initial conditions Employment in agriculture (% total) Mining & utilities (% GVA) Macroeconomic stability Current account balance (% GDP) General government gross debt (% GDP) General government net lending/borrowing (% GDP) Inflation, consumer prices (% change) Trade & exchange rate Net barter terms of trade (index) Trade (% GDP) Real effective exchange rate (index) Financial capital Domestic credit to private sector (% GDP) Real interest rate (%) Human capital Gross enrolment ratio in secondary (%) Gross enrolment ratio in tertiary (%) Life expectancy at birth Mean years of schooling

ECA Data (cont.) Dimension Variable Physical capital Assess to electricity (% population) Assess to improved sanitation facilities (% population) Assess to improved water source (% population) Internet users (per 100 people) Generation capacity (MW per capita) Road density (km per sq. km)

ECA Data (cont.) Dimension Variable Physical capital Assess to electricity (% population) Assess to improved sanitation facilities (% population) Assess to improved water source (% population) Internet users (per 100 people) Generation capacity (MW per capita) Road density (km per sq. km) Governance Political regime (polity2) Political rights & Civil liberties (average score) Voice & accountability Political stability & Absence from violence/terrorism Government effectiveness Regulatory quality Rule of law Control of corruption

Results ECA Principal component analysis Proxy variable Variables

ECA Results Principal component analysis Proxy variable Variables Human capital (pc) Secondary education Tertiary education Life expectancy Years of schooling

ECA Results Principal component analysis Proxy variable Variables Human capital (pc) Secondary education Tertiary education Life expectancy Years of schooling Physical capital (pc) Access to electricity Access to sanitation Access to water

ECA Results Principal component analysis Proxy variable Variables Human capital (pc) Secondary education Tertiary education Life expectancy Years of schooling Physical capital (pc) Access to electricity Access to sanitation Access to water Governance (pc) Voice & accountability Political stability Government effectiveness Regulatory quality Rule of law Control of corruption

Results ECA Panel fixed-effects (full sample)   Countries R-squared

ECA Results Panel fixed-effects (full sample) FE Employment in agric. 0.09   (0.01)*** Physical capital (pc) 0.86 (0.16)*** Countries 158 R-squared 0.24

ECA Results Panel fixed-effects (full sample) FE Employment in agric. 0.09 0.10   (0.01)*** Physical capital (pc) 0.86 0.46 (0.16)*** (0.17)*** Human capital (pc) 0.42 (0.10)*** Countries 158 R-squared 0.24 0.31

ECA Results Panel fixed-effects (full sample) FE Employment in agric. 0.09 0.10   (0.01)*** Physical capital (pc) 0.86 0.46 0.60 (0.16)*** (0.17)*** Human capital (pc) 0.42 (0.10)*** Years of schooling 0.25 (0.07)*** Countries 158 R-squared 0.24 0.31 0.30

ECA Results Panel fixed-effects (full sample) FE Employment in agric. 0.09 0.10   (0.01)*** Physical capital (pc) 0.86 0.46 0.60 0.75 (0.16)*** (0.17)*** (0.15)*** Human capital (pc) 0.42 (0.10)*** Years of schooling 0.25 (0.07)*** Tertiary education 0.02 (0.00)*** Countries 158 R-squared 0.24 0.31 0.30

ECA Results Panel fixed-effects (full sample) FE Employment in agric. 0.09 0.10   (0.01)*** Physical capital (pc) 0.86 0.46 0.60 0.75 (0.16)*** (0.17)*** (0.15)*** Human capital (pc) 0.42 (0.10)*** Years of schooling 0.25 (0.07)*** Tertiary education 0.02 (0.00)*** Access to water (0.01)** Countries 158 R-squared 0.24 0.31 0.30

ECA Results Panel fixed-effects (full sample) FE Employment in agric. 0.09 0.10 0.07   (0.01)*** Physical capital (pc) 0.86 0.46 0.60 0.75 (0.16)*** (0.17)*** (0.15)*** (0.13)*** Human capital (pc) 0.42 0.19 (0.10)*** (0.08)** Years of schooling 0.25 (0.07)*** Tertiary education 0.02 (0.00)*** Access to water (0.01)** Countries 158 86 R-squared 0.24 0.31 0.30 0.29

ECA Results Panel fixed-effects (full sample) FE RR Employment in agric. 0.09 0.10 0.07 0.11   (0.01)*** Physical capital (pc) 0.86 0.46 0.60 0.75 (0.16)*** (0.17)*** (0.15)*** (0.13)*** Human capital (pc) 0.42 0.19 0.29 (0.10)*** (0.08)** Years of schooling 0.25 (0.07)*** Tertiary education 0.02 (0.00)*** Access to water (0.01)** Countries 158 86 R-squared 0.24 0.31 0.30 0.48

ECA Results Panel fixed-effects (full sample) FE RR QR Employment in agric. 0.09 0.10 0.07 0.11   (0.01)*** Physical capital (pc) 0.86 0.46 0.60 0.75 0.38 (0.16)*** (0.17)*** (0.15)*** (0.13)*** (0.14)*** Human capital (pc) 0.42 0.19 0.29 0.30 (0.10)*** (0.08)** (0.05)*** Years of schooling 0.25 (0.07)*** Tertiary education 0.02 (0.00)*** Access to water (0.01)** Countries 158 86 R-squared 0.24 0.31 0.48

Results ECA Panel fixed-effects (by region)   Countries R-squared

ECA Results Panel fixed-effects (by region) Africa   Africa Employment in agriculture 0.10 (0.03)*** Mining & utilities VA -0.07 (0.02)*** Physical capital (pc) 0.78 (0.25)*** Countries 47 R-squared 0.34

ECA Results Panel fixed-effects (by region) Africa   Africa Employment in agriculture 0.10 (0.03)*** Mining & utilities VA -0.07 (0.02)*** Physical capital (pc) 0.78 (0.25)*** Secondary education 0.03 (0.01)** Countries 47 R-squared 0.34 0.33

ECA Results Panel fixed-effects (by region) Africa   Africa Employment in agriculture 0.10 (0.03)*** Mining & utilities VA -0.07 (0.02)*** Physical capital (pc) 0.78 (0.25)*** Secondary education 0.03 (0.01)** Human & physical capital (pc) 0.51 (0.18)*** Countries 47 R-squared 0.34 0.33

ECA Results Panel fixed-effects (by region) Africa Asia   Africa Asia Employment in agriculture 0.10 0.09 (0.03)*** (0.02)*** Mining & utilities VA -0.07 Physical capital (pc) 0.78 0.55 (0.25)*** (0.25)** Secondary education 0.03 (0.01)** Human & physical capital (pc) 0.51 (0.18)*** Tertiary education 0.02 Countries 47 42 R-squared 0.34 0.33 0.28

ECA Results Panel fixed-effects (by region) Africa Asia   Africa Asia Employment in agriculture 0.10 0.09 (0.03)*** (0.02)*** Mining & utilities VA -0.07 Physical capital (pc) 0.78 0.55 (0.25)*** (0.25)** Secondary education 0.03 (0.01)** Human & physical capital (pc) 0.51 0.57 (0.18)*** (0.15)*** Tertiary education 0.02 Countries 47 42 R-squared 0.34 0.33 0.28 0.29

ECA Results Panel fixed-effects (by region) Africa Asia LAC   Africa Asia LAC Employment in agriculture 0.10 0.09 (0.03)*** (0.02)*** Mining & utilities VA -0.07 Physical capital (pc) 0.78 0.55 (0.25)*** (0.25)** Secondary education 0.03 (0.01)** Human & physical capital (pc) 0.51 0.57 (0.18)*** (0.15)*** Tertiary education 0.02 0.05 (0.02)** Real exchange rate 0.01 (0.00)** Countries 47 42 26 R-squared 0.34 0.33 0.28 0.29 0.44

ECA Results Panel fixed-effects (by region) Africa Asia LAC Other   Africa Asia LAC Other Employment in agriculture 0.10 0.09 0.12 (0.03)*** (0.02)*** (0.01)*** Mining & utilities VA -0.07 Physical capital (pc) 0.78 0.55 (0.25)*** (0.25)** Secondary education 0.03 (0.01)** Human & physical capital (pc) 0.51 0.57 (0.18)*** (0.15)*** Tertiary education 0.02 0.05 0.01 (0.02)** (0.00)*** Real exchange rate (0.00)** (0.00)* Political regime Countries 47 42 26 43 R-squared 0.34 0.33 0.28 0.29 0.44 0.68

Conclusions

ECA Conclusions Key findings Policy implications Pace: accelerated in the 2000s, but still comparatively less important than within-sector effects. Pattern: key driver has been the relocation of labour from agriculture to the services sectors. Determinants: pace of structural change significantly shaped by human and physical capital accumulation. Policy implications Investments in education and economic infrastructure are crucial to accelerate structural change. Governance?

Structural Change: Pace, Patterns and Determinants ECA Structural Change: Pace, Patterns and Determinants Pedro Martins Economic Commission for Africa martinsp@un.org