SECTORAL SHIFT, WEALTH DISTRIBUTION, AND DEVELOPMENT

Abstract

Two phenomena are widely observed when an economy departs from an underdeveloped state and starts rapid economic growth. One is the shift of production, employment, and consumption from the traditional sector to the modern sector, and the other is a large increase in educational levels of the population. The question is why some economies have succeeded in such structural change, but others do not. To examine the question, an overlapping generations (OLG) model that explicitly takes into account the sectoral shift and human capital accumulation as sources of development is constructed. It is shown that, for a successful structural change, an economy must start with a wealth distribution that gives rise to an adequate size of the “middle class.” Once the economy initiates the “take-off,” the sectoral shift and human capital growth continue until it reaches the steady state with high income and equal distribution. However, when the productivity of the traditional sector is low, irrespective of the initial distribution and the productivity of the modern sector, it fails in the sectoral shift and ends up in one of steady states with low income and high inequality. Thus, sufficient productivity of the traditional sector is a prerequisite for development.