Institutional change, industrialization and structural change out of agriculture

Author

Didier Yélognissè Alia, Department of Agricultural Economics, University of Kentucky

Abstract

Structural change is an important feature of economics development characterized by a declining share of agriculture in employment and output and an increasing importance of manufacture. The pattern is observed both for an individual country over time and in a cross section of countries. Previous studies have identified productivity increase as a central driver of structural transformation. But little attention have been put on the role of institutions. This paper proposed to examine empirical the relative importance of institutions in the process of industrialization and structural change out of agriculture. By providing a good environment for investment, innovation though the respect of property rights, the enforcement of rule of law in a democratic system, good institutions not only increase the sectoral productivity, but also set the condition for structural change and industrialization. We find a positive and significant correlation between the quality of institutions and the share of manufacture in GDP. This positive correlation is robust to the control of several factors such as the level of development, the relative labor productivity, the degree of openness to trade, the level of financial development and the size of domestics market. We extent the empirical analysis to a panel setting to address both the unobserved heterogeneity across countries, the endogeneity of institutions and the dynamics nature of the structural transformation processes. Across all regressions we consistently find a positive link between institutional change and industrialization. The instrumental variable analysis suggests that this link might be a causal effect with improvement in the quality of institution leading the higher industrialization and progressive structural change out of agriculture. Our findings suggest that developing countries should improve the quality of their institutions to set the favorable conditions for productivity increase in both agricultural and manufacture and to spur their industrialization.

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Conference Venue

United Nations Conference Centre, Addis Ababa

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