The Determinants of Structural Transformation in Asia: A Review of the Literature

Abstract

Structural transformation — the movement of workers from low-productivity to high-productivity activities — is an essential ingredient of inclusive growth. This paper reviews the evidence on why the pace of structural transformation has differed widely across countries in Asia, with a specific focus on the People’s Republic of China, India, and Thailand. It argues that both government failures relating to the functioning of labor, land, and product markets; and market failures relating to coordination of investment, credit market imperfections, and human capital formation have been the primary causes of the slow pace of structural transformation in several Asian countries. The paper suggests that a specific focus is needed to reform policies that impede the functioning of labor, land, and product markets as well as on strengthening industrial and education policies to address specific market failures around investment coordination and human capital formation.

Keywords: Asia, government failure, market failure, structural transformation

JEL Classification: O14, O53, P51