What causes structural change?

Abstract

Structural change refers to long-term, systematic changes in the sectoral composition of aggregate economic output. Ordinarily, it means the contraction of agriculture relative to industry and services. We analyse its economic causes, using a small, comparative-static, empirically-based computable general equilibrium model of the economy of Thailand, a country experiencing rapid structural change over recent decades. We test the explanatory power of five potential contributors to structural change, suggested by simple economic theory and relevant literature, using Thai data: (a) differential growth rates of aggregate supplies of physical capital, labour, and land (the Rybczynski effect); (b) differential growth rates of total factor productivity between sectors; (c) changes in relative international prices; (d) changes in sectoral rates of trade protection; and (e) income growth with differences in expenditure elasticities of demand between final consumer goods (Engel’s law). It is concluded that, in Thailand’s case, explanation (b) dominates the other four.