The role of resource misallocation in structural change

Abstract

We develop a multi-sector model of economic growth to explain the distinct patterns of structural change in manufacturing sectors in industrialized countries and those in developing and emerging industrial countries. To this end, we include a redistribution mechanism generated by a government because this mechanism affects an economy’s relative prices and dynamic of resource allocation. This mechanism can imply changes in the production structure or the perpetuation of structures harmful to economic growth. We also demonstrate that sufficient conditions for the coexistence of structural change and unbalanced aggregate growth in this environment impose fewer restrictions on the elasticity of substitution between intermediate goods, the technological gap across sectors and the household’s income effect. Moreover, using micro-founded parameters, our numerical results are consistent with the observed data from Brazilian industry.