Government intervention, sectoral productivity growth and structural transformation

ABSTRACT

This article examines the long-term impact of government intervention and sectoral productivity on structural transformation. We construct a multi-sector Dynamic General Equilibrium model that explicitly incorporates government intervention as a force of structural transformation. The government affects the economy through taxation and lump sum transfers. We show that in the steady state, a reduction in the tax rate and an increase in sectoral productivity will decrease the agricultural employment share, and when nonhomotheticity of preference is strong enough, these changes can also increase the share of services employment.

KEYWORDS:

• Government intervention
• Engel’s law
• structural transformation
• DGE

JEL CLASSIFICATION:

• E13
• E62
• O11

Acknowledgment

The author acknowledges the financial support of the Major Program of Humanities and Social Science Key Research Base of Ministry of Education (grant number 13JJD790036), the Outstanding Innovative Talents Cultivation Funded Programs 2014 of Renmin University of China, the Fundamental Research Funds for the Central Universities (grant number 106112016CDJSK01JD05) and the National Social Science Foundation of China (grant number 12XTJ001).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Similar to Dekle and Vandenbroucke (2012), we calibrate some parameters using data from China first and then judge the relationship between RHS and H_a. Holz (2006) estimates the labour income share of China’s three sectors for the 1978–2003 period, from which we calculate that the average level of μ, α and γ are 0.12, 0.52 and 0.5, respectively. We set δ = 0.05, β = 0.97 and τ = 0.4 as in Dekle and Vandenbroucke (2012). Obviously, Σ, π and are less than 1. Thus, the coefficient of H_a in Equation 33 is negative, and RHS is decreasing in H_a.

² RHS can be converted to, which is obviously increasing in τ, as η is decreasing in τ.

Additional information

Funding

The author acknowledges the financial support of the Major Program of Humanities and Social Science Key Research Base of Ministry of Education [grant number 13JJD790036], the Outstanding Innovative Talents Cultivation Funded Programs 2014 of Renmin University of China, the Fundamental Research Funds for the Central Universities [grant number 106112016CDJSK01JD05] and the National Social Science Foundation of China [grant number 12XTJ001].