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This CGD Working Paper tells the story of the powerful historical pathway of structural transformation that all successful developing countries undergo and of the diverse approaches to coping with the political pressures generated along the way. This structural transformation involves four main features: a falling share of agriculture in economic output and employment, a rising share of urban economic activity in industry and modern services, migration of rural workers to urban settings, and a demographic transition in birth and death rates that always leads to a spurt in population growth before a new equilibrium is reached.
Even a highly successful structural transformation—with its rapid economic growth—is not without problems for the poor. Two newly revealed and analyzed features of the structural transformation reported here give special cause for concern. First, there is a strong historical pattern of worsening income distribution between rural and urban economies during the initial stages of the structural transformation. Even the currently rich countries saw this pattern during their early development in the 19th and early 20th centuries.
Secondly, the tendency for sectoral income distribution to worsen during the early stages of the structural transformation is now extending much later into the development process. Consequently, with little prospect of reaching the turning point quickly, many poor countries are turning to agricultural protection and farm subsidies sooner rather than later in their development process. The tendency of these actions to hurt the poor is then compounded because there are so many more rural poor in these early stages.
It is too soon to say whether the recent reversal of long-run downward trends in real prices of agricultural commodities—a reversal driven by rapid economic growth in China, India, and several other developing countries, demand for bio-fuels in rich countries, and possibly by the impact of climate change on agricultural productivity—will also reverse the steady movement of the turning point in the structural transformation to higher income levels. If so, the short-run impact on the poor is almost certain to be negative, but the higher real returns promised to commodity producers, without agricultural protection, could stimulate real productivity increases in rural areas, raise real wages, and be the long-run pathway out of rural poverty.