# **1. Introduction**

Structural change is integral to economic development. In the development context, it refers both to the reallocation of labor from one low-productivity sector to another, higher-productivity sector, and to the economic growth resulting from this shift. Structural change is a dynamic process powered by several key features – productivity levels within sectors, productivity gaps between them, and the movement of labor from low productivity to high productivity sector(s). In poor economies, agriculture is typically the sector that employs the most people and uses labor least productively. Therefore, structural change is tightly associated with the exit of labor from agriculture to other sectors of the economy (Timmer 1988). The larger the productivity gap between agriculture and other sectors, the larger the opportunity to achieve growth through structural change. Over time, cross-sector productivity gaps tend to shrink, as factor market integration gradually equalizes returns to labor across sectors. However, productivity gaps generally do not disappear altogether, and small labor productivity gaps between agriculture and other sectors persist even in high income countries (Lele, Agarwal, and Goswami 2013).

Growth in labor productivity, overall and within agriculture, has been a strong predictor of poverty reduction because of the important linkages between wages, household self-employment, and the real incomes of the poor. Though land productivity growth typically precedes labor productivity growth, the process of agricultural development is thought to begin when output per agricultural worker increases (Timmer 1988). Agricultural labor productivity growth is particularly important because of the direct effects on the many workers who participate in the agricultural sector, and also because it causes growth in other sectors (De Janvry and Sadoulet 2009). Agricultural growth also plays a role in lowering agricultural employment shares. Through farmer income effects, agricultural productivity growth stimulates rural demand for non-agricultural non-tradable goods and services, pushing up wages outside of agriculture and pulling workers out of the sector (McMillan and Harttgen 2014). Historically, agricultural growth has been shown to contribute more to poverty reduction than non-agricultural growth (Christiaensen, Demery, and Kuhl 2011).

# _1.1 Relevant Literature_

This paper focuses on Sub-Saharan Africa, the region with the lowest per capita incomes, largest shares of value added captured by agriculture, largest shares of the work force employed in agriculture, and lowest agricultural labor productivity (Figure 1a) (World Bank Group 2014). According to national accounts data, labor in developing countries is 4.5 times more productive outside of agriculture than in it. In middle income countries, the ratio is 3.4, and in high income countries, it is 2.2. Within African countries, non-agricultural labor is 6 times more productive outside of agriculture than in it<sup>2</sup> (Figure 1b) (Gollin, Lagakos, and Waugh 2014b). Other recent assessments of productivity gaps confirm that large cross-sector productivity differentials persist in Sub-Saharan African countries (McMillan and Harttgen 2014; Lele, Agarwal, and Goswami 2013).

> 2 These ratios were calculated using data Gollin et al. (2014a) and World Bank classifications of countries by income.

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