Service-Led or Service-Biased Growth? Equilibrium Development Accounting Across Indian Districts

Abstract

In many developing countries today, the structural transformation is a shift of employment out of agriculture into the service sector. By contrast, industrial employment is mostly stagnant. Is the service sector an engine of growth and hence growth service led? Or is its expansion a mere corollary of growth, where rising incomes stemming from productivity growth in goods-producing industries increases the demand for services? To determine whether growth is service led or service biased, we estimate a spatial equilibrium model with nonhomothetic preferences. Our methodology is in the spirit of development accounting and lends itself to a quantitative assessment of both the aggregate and the heterogenous welfare effects of sectoral productivity growth. In an application to India, we find that productivity growth in consumer services such as retail and hospitality was an important driver of rising living standards between 1987 and 2011. However, such benefits were highly skewed and accrued mostly to high-income households living in urbanized locations. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.