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East Asia and Pacific

Trade, Employment, and Structural Transformation

Margaret McMillan's picture
  Photo: istockphoto.com

There is a shared sense that globalization has a strong potential to contribute to growth and poverty alleviation.  There are several examples of countries in which integration into the world economy was followed by strong growth and a reduction of poverty, but evidence also indicates that trade opening does not automatically engender growth. The question therefore arises, why the effects of globalization have been so different among countries of the world.

A look at changes in the structure of employment in Latin America and in Asia hints at possible explanations for observed differences in the growth effects of trade.  Since the 1980s, Asia and Latin America have both rapidly integrated into the world economy.  Asia has enjoyed rapid employment and productivity growth, but the consequences for Latin America have been less stellar.

The chart below shows how the pattern of structural change has differed in the two continents. The chart decomposes labor productivity growth in the two regions into three components: (i) a “within” component that is the weighted average of labor productivity growth in each sector of the economy; (ii) a “between” component that captures economy-wide gains (or losses) from the reallocation of labor between sectors with differing levels of labor productivity; and (iii) a “cross” component that measures the gains (or losses) from the reallocation of labor to sectors with above-average (below-average) productivity growth.  The underlying data for the charts come from the Groningen Growth and Development Centre.

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