Structural transformation and production linkages in Asia-Pacific least developed countries: An input-output analysis

Abstract

The least developed countries (LDCs) of Asia and the Pacific have achieved significant development gains in recent decades, most visibly in the reduction of extreme poverty. Structural transformation, although still in its formative stages, has played an important role in these processes. Through the movement of labour out of agriculture, structural transformation has resulted in productivity and output growth directly raising incomes of workers. However, it is not clear whether Asia-Pacific LDCs have been able to harness the potential backward and forward linkages between sectors such that productivity growth in one sector indirectly stimulates demand for goods and services of other sectors, which in turn creates additional employment within and across sectors. For an economy to fully benefit from such indirect impacts, structural transformation should be accompanied by strong backward and forward linkages.Using the input-output (I-O) analysis framework developed by Mercer-Blackman, Foronda and Mariasingham (2017), and network theory, this paper examines how backward and forward linkages have evolved in Asia-Pacific LDCs during the process of structural transformation since 2000. The I-O analysis is then complemented by sectoral-level employment multipliers to assess the extent to which agricultural development can sustain job creation and thereby reduce poverty in these countries.This paper argues that, for the Asia-Pacific LDCs, agriculture continues to be the key sector for poverty reduction, for two reasons. First, given the current production structure of these countries, the agriculture sector's job creation potential is higher than other sectors, based on the employment multipliers estimated at the sectoral level. Second, if increases in agricultural productivity are accompanied by stronger production linkages with other sectors of Asia-Pacific LDCs’ economies, as experienced by many developing countries outside of the LDC category, the impact of structural transformation on job creation will be greater in the future.