On Development Paths Minimizing the Structural Change Costs in the Three-Sector Framework and an Application to Structural Policy

Abstract

Structural change is associated with high costs for the economy and the society ranging from environmental pollution to unemployment. We focus on the three-sector framework (related to agriculture, manufacturing and services) and assume that the structural change costs increase with the strength of structural change. We show that monotonous structural change paths are minimizing structural change costs in this framework. By using this result and the (qualitative) stylized facts of structural change based on the theoretical and empirical literature consensus, we derive the cost-minimizing strategy for a developing country. We use these results to discuss some well-known structural/trade strategies.