Structural Change and the China Syndrome: Baumol vs Trade Effects

28 Pages Posted: 5 Jun 2017

See all articles by Fabrizio Coricelli

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Farshad R. Ravasan

Université Paris I Panthéon-Sorbonne

Date Written: May 2017

Abstract

In the process of economic development, the share of manufacturing in total employment first increases and then declines after incomes per capita have passed a given threshold. Advanced economies are all beyond that threshold and thus experience a secular decline in the share of manufacturing. Baumol explained such a process of deindustrialization as resulting from faster productivity growth in manufacturing relative to services. More recently, trade with emerging economies, especially with China, is often identified as the main determinant of deindustrialization in advanced economies. Disentangling the trade channel from the traditional productivity channel is a complicated task. In this paper, we develop a simple model of structural change in an open economy to derive empirical implications, which we analyze for a sample of OECD countries. The model is based on trade between advanced and emerging economies. In a closed economy framework, faster productivity in manufacturing induces a fall in the share of manufacturing in total employment but not in total value added. By contrast, in open economies, what matters is not only the relative growth of productivity in manufacturing versus domestic services, but also relative productivity growth of domestic versus foreign manufacturing. When productivity growth of domestic manufacturing is faster than that of services but slower than that of foreign manufacturing, the share of manufacturing in advanced economies may fall, both in terms of value added and of employment. We call this phenomenon "twin deindustrialization." We exploit the comparison between estimates for the employment and value added shares to identify the relevance of the trade channel relative to the pure productivity channel. We find significant and quantitatively relevant effects of trade on structural change in advanced economies. Furthermore, we show that the strength of the trade effect depends on the nature of technological progress occurring in emerging economies.

Keywords: deindustrialization, open economies, structural change

JEL Classification: E21, E22, F31, F41, O40

Suggested Citation

Coricelli, Fabrizio and Ravasan, Farshad R., Structural Change and the China Syndrome: Baumol vs Trade Effects (May 2017). CEPR Discussion Paper No. DP12069, Available at SSRN: https://ssrn.com/abstract=2980829

Fabrizio Coricelli (Contact Author)

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Farshad R. Ravasan

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

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