The Role of Trade in Structural Transformation

Abstract

This paper examines the effects of international trade in agricultural goods on structural transformation and economic growth. To do the analysis, I introduce international trade into a neoclassical growth model with two sectors, agriculture and non agriculture. A key feature of the model is the low-income elasticity of the agricultural good. Consequently, in the closed economy model, as countries get richer labor moves out of agriculture and into the other sector. International trade can accelerate this transition for countries with low agricultural productivity because it allows them to import food and thus reduce their agricultural employment. I calibrate and simulate the model to show it can match three different structural transformations: the United States in the 20th century, the United Kingdom in the 19th century, and South Korea for nearly the last 50 years. The results show that trade had large effects in the United Kingdom, and smaller but positive effects in South Korea. Agricultural production subsidies and agricultural import tariffs reduced the role of trade in South Korea. Without these policies, the volume of trade would have been larger and the country would have experienced a faster transformation as well as higher real income growth and higher welfare.

Keywords: Structural Transformation, International Trade, Agricultural Productivity

JEL Classification: O41, F11, Q18