DP15530 A Technology-Gap Model of 'Premature' Deindustrialization
We propose a parsimonious mechanism for generating what Rodrik (2016) called premature deindustrialization (PD); the tendency that more recent industrializers reach their manufacturing peaks later in time but earlier in per capita income with lower peak manufacturing shares. In our baseline model, the hump-shaped path of the manufacturing share is driven by the Baumol (1967) effect of the productivity growth rates of the frontier technology being the highest in agriculture and the lowest in services. Countries follow different development paths due to the difference in the sector-specific adoption lags. In the setup where the countries differ only in technology gap, we show the sufficient and necessary condition for PD. It turns out that this condition implies that the cross-country productivity dispersion is the largest in agriculture. Moreover, when calibrated to match Rodrik’s findings, it is the smallest in manufacturing.
We then consider three extensions, i) adding the Engel effect (the income elasticity differences across sectors), ii) opening up for international trade, and iii) allowing late industrializers to catch up by narrowing the technology gaps over time, to demonstrate the robustness of the mechanism.
