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| Structural Transformation in Production and Productivity: Analyses from a Global Perspective |
| Luo Zhangquan, Guo Kaiming, Wu Hongchen
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| Lingnan College, Sun Yat-sen University |
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Abstract In the new stage of development, China faces the dual challenges of a shrinking demographic dividend and a transformation of investment structure. How to promote sustained growth of labor productivity through structural transformation in production has become a vital issue for China to advance high-quality development and achieve qualitative improvement and reasonable quantitative growth in economy. Over the past half-century, global economic development has provided a rich and diverse set of experience in catch-up with the productivity frontier. The success and failure of these economies offer important insights for China to promote steady economic growth and high-quality development. We develop a novel accounting framework for productivity growth, and quantify the contribution of structural transformation in production to the catch-up with the productivity frontier among the world's major economies from both global and long-term perspectives.
We first calculate the industry-level Purchasing Power Parity indices based on micro survey data from the World Bank's International Comparison Program. We integrate these indices with the World Input-Output Database to apply double-deflation method on both nominal final outputs and intermediate inputs, through which value added measured by industry-level PPP is calculated yielding internationally comparable and additive measures of industry-level productivity. We incorporate the non-homothetic constant elasticity of substitution preference into productivity comparison study and employ a multi-sector general equilibrium model to characterize and estimate the mechanisms through which productivity drives structural transformation of industry. We calibrate the model with cross-country long-term panel data, allowing for a more accurate quantification of structural transformation. Compared to existing literature, this paper offers a novel theoretical framework from an international comparative perspective for understanding the process of catch-up to the productivity frontier and patterns of development. Prior research has seldom focused on the issue of catch-up. Besides, this paper improves on methodologies for analyzing productivity growth and structural transformation. Most previous studies either rely on aggregate PPP as industry-level price deflator for international productivity comparisons, or neglect the input-output structure and fail to employ accurate structural transformation models in their quantification, which may cause potential measurement errors.
Key findings are as follows. First, we find that the ability of economies to catch-up with productivity frontier hinges critically on labor productivity in manufacturing and nontraditional services. These sectors constitute the primary distinction between successful and unsuccessful catch-up economies. Specifically, the catch-up in labor productivity within manufacturing and nontraditional services contributes the most to the overall labor productivity catch-up, with the contribution rates reaching 32.2% and 46.6%, respectively. Second, we find that nontraditional services exhibit the greatest contribution to overall catch-up, followed by manufacturing and traditional services, with agriculture contributing the least. Counterfactual analysis suggests that, if labor productivity in nontraditional services across all economies were to grow in tandem with that of the United States, the average productivity gap (relative to the U.S.) would narrow by 2.1 percentage points. Structural transformation plays a pivotal role in this process, as growth and catch-up in sectoral productivity alter the employment structure across sectors, thereby significantly influencing the dynamics of overall productivity growth and catch-up. Third, we find that dominant sectors contributing to overall catch-up vary across stages of economic development. In low-income economies, overall catch-up is mainly driven by agriculture and traditional services. Importance of manufacturing and nontraditional services increases with income. At the middle-and high-income stages, these two sectors become the central engines of catch-up. Notably, in high-income economies, the contribution of nontraditional services to overall catch-up exceeds 60%, underscoring its significance in the advanced stages of development.
To further advance the upgrading of China's production structure and enhance labor productivity, thereby sustaining the catch-up toward the productivity frontier, we propose the following policy implications. First, the government should maintain the stability of manufacturing share and accelerate the development of modern services, supporting the modern industrial system anchored in the real economy. Second, the government should deepen market-oriented reforms to enhance the efficiency of factor and resource allocation and provide sustained momentum for productivity growth. Third, the government should integrate the strategy of expanding domestic demand with supply-side structural reform to realize economies of scale in the domestic market, and upgrade the demand structure to drive the structural transformation in production. Fourth, the government should promote coordinated regional development and optimize the spatial distribution of industries, to foster a complementary, synergistic regional economic structure and an integrated industrial spatial system.
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Received: 16 October 2023
Published: 22 May 2025
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