Technological and structural change: Understanding economic growth in countries and regions

Abstract

The research aims at improving our understanding of the link between economic structure and growth, by tackling a number of open questions. First, it asks whether economic structure – meaning the distribution of production factors among different industries – can significantly explain differences in standards of living across nations and regions. To this aim it proposes a method to decompose cross-country differences in total factor productivity (TFP) into a technological component - a Place effect that depends on the overall productivity of a country - and an allocation component, a Composition effect, which depends on whether factors of productions are allocated to productive or unproductive industries. The analysis estimates that 1/4 of inequality is due to the Composition effect, while 3/4 to the Place effect. Second, it highlights that, theoretically, economic structure is a cause of these differences only if industries have asymmetric externalities. It then documents the heterogeneity across sectors in the impact labor and input-output links have on industry agglomeration. Exploiting the available degrees of freedom in coagglomeration patterns, it estimates the industry-specific benefits of sharing labor needs and supply links with local firms. On aggregate, coagglomeration patterns of services are at least as strongly driven by input-output linkages as those of manufacturing, whereas labor linkages are much more potent drivers of coagglomeration in services than in manufacturing. Third, as the analysis on coagglomeration shows that growth path might result in lock-in, a follow up question is how can countries or region move away from their pre-determined path. The research then looks at the impact of return migration in Mexican city-industries. It shows that the dynamics of migration with the US are such that returnees change the distribution of skills across Mexican cities. Using the exogenous variation in number of city-industry returnees which comes from a) deportation from US authorities and b) the general shock in the late 2000s in the American economy, it estimates an elasticity of employment growth of 9%, while mixed results are found with respect to wage growth. Fourth, it is questioned whether technological change is sufficient for structural change and growth and it is noted that firms in emerging economies not only have to produce high quality, cost-competitive goods, but also win the resistance of consumers in the world market, who are often adverse to purchasing products from countries that yet have to build a reputation. The analysis argues that this country-of-origin bias significantly influences the chances of leadership change. A model that aims at capturing the endogenous dynamics of demand building and leapfrogging is proposed. In sectors with high monopoly power acquiring a superior technology is not sufficient for a latecomer country to become leader, unless a significant share of consumers is aware of the quality of its products. An extension of the model to multiple sectors shows that a latecomer country remains specialized into low-value undifferentiated goods, even after overtaking the technology of the leading country.