How strongly can industrial structural transformation affect GDP?

Abstract

It is well known that when a country develops, its leading industry shifts from agriculture to non-agriculture. This industrial structural transformation has recently attracted considerable attention from scholars. Then, how strongly can this industrial structural transformation affect a country’s income? In this study, we shed light on this research question. More specifically, we measure magnitudes of the industrial structural transformation’s influence on GDP, by examining the following counterfactual GDP. We calculate a country’s counterfactual GDP when the country specializes in agriculture. If the counterfactual GDP is considerably small without the non-agricultural sector, this suggests that the industrial structural transformation from agriculture to non-agriculture is considerably important, in terms of GDP. We use Japan as our sample economy. Consequently, we find that the counterfactual GDP is surprisingly small, which suggests that the industrial structural transformation’s influence on GDP is surprisingly large. We also find that one of the main factors responsible for the surprisingly small counterfactual GDP is land, which has not been deeply examined.

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