Diversification, structural change, and economic development

Abstract

This study investigates how structural change that leads to increasing output variety was gradually perceived by economists and eventually incorporated into models of economic growth. We trace the evolution of growth models from exclusively macroeconomic models to those that include micro and meso levels of aggregation, and further, to those that permit explicit and endogenous representation of innovation and technological change. We consider the structure of an economic system as constituted by (i) a variable number of industrial sectors producing highly diversified goods and services, (ii) an increasing range of other activities, such as education or healthcare—which, while not being strictly economic, interact heavily with industrial sectors, and (iii) a series of interactions between these sectors and activities, the intensity of which can vary in the course of economic development. As a consequence, structural change consists of (i) the emergence of new sectors and activities and the reduction or extinction of older ones, (ii) increase in quality and differentiation of sectoral output, and (iii) the changing interactions between industrial sectors and other activities. In this paper, structural change is not considered an epiphenomenon of economic development but one of its fundamental mechanisms, since the emergence of new sectors and activities and their internal diversification contribute to overcoming the development bottleneck. This type of structural change gives rise to a growing diversification of the system through the co-evolution of industrial sectors, other activities, technologies, and institutions. This growing diversification of economic systems has recently been confirmed by an abundance of research, both theoretical and empirical: those studies are examined and analyzed in detail here.