KUZNETS BEYOND KUZNETS Structural Transformation and Income Inequality in the Era of Globalization in Asia Edited by Saumik Paul ASIAN DEVELOPMENT BANK INSTITUTE PANTONE 281C KUZNETS BEYOND KUZNETS Structural Transformation and Income Inequality in the Era of Globalization in Asia Edited by Saumik Paul ASIAN DEVELOPMENT BANK INSTITUTE © 2018 Asian Development Bank Institute All rights reserved. First printed in 2018. ISBN 978–4–89974–099–5 (Print) ISBN 978–4–89974–100-8 (PDF) The views in this publication do not necessarily reflect the views and policies of the Asian Development Bank Institute (ADBI), its Advisory Council, ADB’s Board or Governors, or the governments of ADB members. ADBI does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. 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Asian Development Bank Institute Kasumigaseki Building 8F 3–2–5, Kasumigaseki, Chiyoda–ku Tokyo 100–6008, Japan www.adbi.org Contents Figures, Tables, and Boxes v List of Contributors viii Abbreviations ix Preface x Acknowledgments xii 1 Introduction 1 Saumik Paul 2 Structural Transformation, Growth, and Inequality in Asia since the 1990s 9 Saumik Paul PART 1. Conceptual Frameworks 3 Structural Transformation, Growth Incidence, and Inequality: A Framework 23 Saumik Paul 4 A Framework to Study the Role of Structural Transformation in Productivity Growth and Regional Convergence 42 Kyoji Fukao and Saumik Paul 5 Accounting for Structural Change Patterns in Small Open Economies: A Comparison of Paraguay and the Republic of Korea 64 Cesar Blanco 6 Tr ade Liberalization, Productivity Growth, and Structural Transformation: A Synthetic Control Approach 76 Cesar Blanco, Rasyad Parinduri, and Saumik Paul iii iv Contents Part II. Structural Transformation, Globalization, and Inclusive Growth: Empirics 7 Structural Change, Trade, and Inequality: Cross-country Evidence 93 Rudra Prosad Roy and Saikat Sinha Roy 8 Structural Change and Urban Inequality in the People’s Republic of China 132 Yuan Zhang and Guanghua Wan 9 Growth Empirics: Structural Transformation and Sectoral Interdependencies of Sri Lanka 147 S. P. Jayasooriya 10 Structural Transformation and the Dynamics of Income Equality in Indonesia: 1996–2014 171 Teguh Dartanto, Edith Zheng Wen Yuan, and Yusuf Sofiyandi 11 Structural Transformation, Growth, and Inequality: Evidence from Viet Nam 200 Vengadeshvaran Sarma and Saumik Paul Figures and Tables Figures 1.1 Decomposition of Productivity Growth into “Within Sector” and “Structural Change” 4 2.1 Decomposition of Productivity Growth by Country Group, 1990–2005 12 2.2 Structural Transformation in Indonesia, 1990–2005 14 2.3 Structural Transformation in the Philippines, 1990–2005 16 3.1 The Kuznets Curve 26 3.2 The Development–Inequality Relationship Using Growth Incidence Curves 27 3.3 Structural Transformation and the Development–Inequality Relationship 30 3.4 Growth Incidence Curves in Cote d’Ivoire, 1993–2002 and 2002–2008 31 3.5 Changing Structure of the Ivoirian Economy from 1993 to 2008 32 3.6 Change in Participation Rate in Agriculture across Income Quantiles 33 3.7 Unconditional Quantile Regression Coefficients 35 3.8 Total Decomposition of Growth Incidence into Composition and Structure Effect 37 3.9 Detailed Composition and Structure Effects, 1993–2002 38 3.10 Detailed Composition and Structure Effects, 2002–2008 39 4.1 Lorenz Curves Illustrating the Decomposition of Labor Productivity Growth 48 4.2 Structur al Transformation in Japan 53 4.3 Conv ergence of Aggregate Labor Productivity, 1874–2008 54 4.4 Contribution of Structural Transformation and the Within-Sector Effect to Regional Convergence (σ) in Labor Productivity 55 A4.1 Distribution of the Adjustment Term 60 5.1 Data for Paraguay 67 5.2 Data for the Republic of Korea 68 5.3 Employment in Agriculture in Paraguay 72 5.4 Employment in Manufacturing in the Republic of Korea 72 5.5 Counterfactual Simulations 73 6.1 Employment Shares of Manufacturing 85 6.2 Employment Shares of Agriculture 86 6.3 Value-added Shares of Manufacturing 87 v vi Figures and Tables 6.4 Value-added Shares of Agriculture 89 8.1 Inequality Decomposition of the Second and Services Industry 138 8.2 Growth Rate of Employment in the Second and Services Industry 140 8.3 Employment Share of Low-end Services in the Services Industry 141 8.4 Mean Wage Gap between Low-end and High-end Services 142 9.1 Sectoral Growth from 1950 to 2015 148 9.2 Sub-s Growth from 1950 to 2002 148 A9.1 Structural Break of Agricultural GDP 168 A9.2 Structural Break of Industrial GDP 168 A9.3 Structural Break of Service GDP 169 10.1 Structural Transformation, Poverty, and Inequality Trends, 1985–2014 176 10.2 The Relationship between Income per Capita (Gross Regional Domestic Product) and the Gini Index 181 11.1 Annual GDP Growth 205 11.2 Gini Index 205 11.3 Sectoral Participation by Income Quantile 209 11.4 Per Capita Gross Regional Product 210 11.5 Growth Incidence Curves 212 11.6 Change in Ethnic Composition across Income Quantiles 213 11.7 Unconditional Quantile Regression Coefficients 214 11.8 Decomposition Analysis 216 A11.1 Sectoral Contribution to GDP and Share of Labor Force 218 A11.2 Sectoral Productivity (Share of GDP/Share of Employment, by Sector, $, PPP) 218 A11.3 Net Migration 219 A11.4 Change in Sectoral Participation by Region 219 A11.5 Structural Change among Ethnic Minorities by Income Quantile 222 A11.6 Decomposition of Structure Effect 224 Tables 4.1 Productivity Growth and Regional Convergence in a One-sector and a Multi-sector Model 45 4.2 Evidence on Productivity Catch-up and Convergence 56 6.1 Technical Change and Employment Growth across Sectors 82 7.1 Trend in Income Inequality across Regions 98 7.2 Sectoral Shares of GDP across Regions 99 7.3 Summary Statistics 105 Figures and Tables vii 7.4 Estimation Result (Overall) 107 7.5 Region-specific Estimation Result (Manufacturing) 110 7.6 Region-specific Estimation Result (Service) 111 A7.1 Description and Sources of Data 112 A7.2 Average Inequality across Countries in the 1990s and 2000s 114 A7.3 Correlation Coefficients amongxplanatory E Variables 124 A7.4 Correlation Coefficients among Interaction Dummies 124 8.1 Inequality of Wage Income in Urban PRC (Urban Locals + Migrants) 134 8.2 Inequality of Wage Income in Urban PRC (Urban Locals) 134 8.3 Sample Size of Survey Data Used in this Study 135 8.4 Gini Index of Wage Income for Urban Locals 137 8.5 Theil Mean Log Deviation of Wage Incomes for Urban Locals 138 8.6 Definition of High-end Services 141 8.7 Variable Definition of egressionR Models 142 8.8 Wage Equation for Urban Locals (2003–2012) 143 9.1 Changes in Employment Share and Output Share 153 9.2 Changes in Sectoral Share in South Asian Countries 153 9.3 Unit Root Test Results 159 9.4 Zivot and Andrews Unit Root Test 160 9.5 Granger Causality Results 162 9.6 Interdependencies of the Sectoral Gross Domestic Product 162 9.7 Gregory–Hansen Test for Cointegration with Regime Shifts 163 9.8 Vector Error Correction Results 165 A9.1 Eigenvalue Stability Condition 167 A9.2 Selection Order Criteria 167 A9.3 Normality—Jarque-Bera Test, Skewness Test, and Kurtosis Test 167 10.1 Inequality Trends in Indonesia 178 10.2 Sectoral Gross Domestic Product and Employment 179 10.3 Rural Development and the Informal Sector 180 10.4 Descriptive Analysis of Subgroup Partition 187 10.5 Static Decomposition of Theil’s L 189 10.6 Structural Transformation and Dynamic Decomposition of Income Inequality 191 10.7 Structural Transformation and Income Inequality: Fixed Effect Estimations 195 11.1 Effect of per Capita Income on Gini—Provincial Analysis 206 A11.1 Descriptive Statistics 220 A11.2 RIF Regression 222 List of Contributors Cesar Blanco is an economist at the Bank of Paraguay, Paraguay. Teguh Dartanto is the head of the Department of Economics, Faculty of Economics and Business, Universitas Indonesia. Kyoji Fukao is a professor at Hitotsubashi University, Tokyo. S. P. Jayasooriya is a chartered economist (economic policy) and consultant at the Asian Development Bank (ADB). Rasyad Parinduri is an associate professor at the University of Nottingham, Malaysia campus. Saumik Paul is a research economist at the ADB Institute, Tokyo. Rudra Prosad Roy is a research scholar at the Department of Economics of Jadavpur University, Kolkata. Vengadeshvaran Sarma is an assistant professor at the University of Nottingham, Malaysia campus. Saikat Sinha Roy is a professor at the Department of Economics, and joint director at the School of International Relations and Strategic Studies of Jadavpur University, Kolkata. Yusuf Sofiyandi is a research fellow at the Institute for Economic and Social Research, Faculty of Economics and Business of the University of Indonesia. Guanghua Wan is a director at the Institute of World Economy, Fudan University, the People’s Republic of China. Yuan Zhang is a professor of economics at the China Center for Economic Studies of Fudan University, the People’s Republic of China.