# **1 Introduction**

Modern economic growth is accompanied by shifts in the distribution of economic activity across the three broad sectors of the economy. As a sustained period of growth takes off, the share of agriculture in employment and output declines and this loss is picked up by industry and services. While services continue to expand, industry reaches a threshold after some time after which it starts to lose its share in the economy. These stylized facts of structural transformation have been documented since the late 1950s (Clark (1957), Chenery (1960), Kuznets (1957)). More recently, using data from multiple sources Herrendorf _et al._ (2014) documents these patterns of transformation for a broad set of countries.<sup>1</sup> Nonetheless, there exist deviations in the transformation experience of countries. In particular, Rodrik (2016) documents an intriguing aberration in the industrialization pattern of the developing countries in which the transformation started much later compared to the early industrializers. Industry in many developing countries fails to reach the thresholds achieved by the developed countries in the past. Moreover, the onset of deindustrialization from this lower peak happens at a lower level of GDP per capita. The Latin American economies are more adversely affected by this _premature deindustrialization_ compared to the other regions of the world.

In this paper, I investigate the relative strength of different channels in accounting for the low share of industry in Latin American economies. I employ a version of the open economy multi-sector accounting framework developed in Uy _et al._ (2013) in which the sectoral good is an aggregate of a continuum of tradeable varieties which are in turn produced using labor and composite sectoral goods as intermediates (Eaton & Kortum (2002)). The specification links sectoral production to the production activity in other sectors as well as in other countries. The framework yields a system of equations that establishes a relationship between the sectoral share of the economic activity and various channels that are readily measured from the data and bear association with different aspects of the transformation process. The share of a sector rises with an increment in its share of the total value-added in the economy, either via an increase in domestic consumption or net exports. A sector also realizes an expansion if it sees an upturn in the intensity with which it is used as an intermediate. Moreover, sectors differ in how intensely they employ labor relative to intermediates and any rise in the intensity of labor use of a sector needs to be compensated by the transfer of labor towards it. All the above changes affect the value-added and the employment shares in the same way which equal each other. To account for the difference in the value-added and the employment share of a sector as seen in the data, I allow for labor market barriers which restrict the flow of labor thereby generating wage (or productivity) gaps across sectors.

> 1Also refer to the paper for a comprehensive survey of both the theoretical and the empirical literature on structural transformation.

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