to these opportunities. According to Nelson and Pack 1999, the response in East Asia was much higher than in most other developing countries due to, among others,
a more stimulating policy environment and a greater availability of educated labour. More formal models of industrial development, either from the supply side as
in Lucas 1993 or from the demand side as in Verspagen 1993, also tend to stress the importance of structural change for productivity growth. Specialisation in a
limited number of expanding, technologically dynamic branches boosts aggregate productivity additional to any intra-industry growth. Another line of reasoning in
favour of the structural-bonus hypothesis refers to the beneficial effects of structural changes induced by liberalisation of the economy. When a country liberalises its
domestic markets and opens up to international trade and foreign direct investment, neo-classical theory predicts that factor inputs move towards more productive and
efficient activities. South Korea and Taiwan gradually liberalised domestic and international trade markets in the 1960s and 1970s and India and Indonesia in the
1980s. Hence, we expect to find evidence in favour of the structural-bonus hypothesis, if not for labour productivity then at least for total factor productivity growth.
3. Data description
In our analysis of the structural-bonus hypothesis, we use data on value added, labour input, capital input and the share of labour compensation in value added for
13 manufacturing branches which are taken from various national sources. The 13 branches correspond to ISIC two-digit divisions or groups of three-digit major
industries.
2
For India, Indonesia and South Korea, data on value added is derived from annual industrial censuses deflated by branch-specific wholesale price indices
from the national accounts. Numbers of persons employed are taken from the industrial census. For Taiwan, value added at constant prices is derived from the
national accounts and employment from the annual labour survey. Capital stocks have been estimated according to the perpetual inventory method using annual
investment data from the census in the case of India and Indonesia and from the national accounts in the case of South Korea and Taiwan. Data on India refers to
the so-called registered sector that includes establishments with 20 employees or more and establishments with ten to nineteen employees that use electrical power. Data
on Indonesia refers to establishments with 20 employees or more and data on South Korea to firms employing at least five workers. Data on Taiwan refers to all
establishments. The complete data set is given and described extensively in Timmer 2000.
The hypothesis that structural change in manufacturing is an important source of aggregate productivity growth involves two important basic assumptions. First,
2
The 13 branches are the following: food, beverages and tobacco isic 31, textile mill products 321, wearing apparel 322, leather products 323 + 324, wood products 33, paper, printing and publishing
34, chemical products 351 − 354, rubber and plastic products 355 + 356, non-metallic mineral products 36, basic and fabricated metal 37 + 381, machinery and transport equipment 382 + 384,
electrical machinery 383 and other manufacturing 385 + 39.
there have to be major shifts in the distribution of factor inputs over time. Second, productivity levels and growth rates must differ considerably across manufacturing
branches. It is well known that in the East-Asian countries profound changes have taken place in the industrial structure since 1963, with an increasing share of heavy
industries and especially of the electrical machinery branch and a declining share of food manufacturing and textiles. In India and Indonesia, industrial growth did not
typically involve a change from light to heavy industries. Due to the emphasis on self-reliance after independence, India had already developed a sizeable heavy
industry in the 1960s, alongside a large textile sector the importance of which dwindled in the 1980s. In Indonesia the industrial sector only started to develop in
the 1970s. In the 1990s, the larger part of manufacturing output is still being produced in the light industries. Within light industry, the importance of food and
rubber manufacturing declined rapidly in favour of growth in branches such as textiles and wearing apparel.
3
Huge factor shifts combined with a large variance of productivity levels and growth rates across branches suggest a potentially important
role of structural change as a source of productivity growth.
4. Impact of structural change on labour productivity growth
