Justin Yifu Lin, Peking University and Haipen Xing, State University of New York at Stony Brook

"Endogenous Structural Transformation in Economic Development"

Abstract

This paper proposes a method to model how a country develops from the early and catching-up stage to the advanced and sustained stage by endogenous structural transformation and efficient resource allocation in a market mechanism. To achieve this goal, we first summarize from the literature and empirical observations three attributes of economic structures during an economy's development process, namely, structurality, durationality, and transformality, and discuss their implications for methods of economic modeling. Then, assuming that the knowledge on the world's economic structures can be freely obtained, we propose a generic endogenous structural transformation model in which the social planner chooses the optimal industrial structure, resource allocation with the chosen structure, and consumption to maximize the representative household's total utility subject to the resource constraint. We next establish the mathematical underpinning of the competitive equilibrium theory for endogenous structural transformation and study the competitive equilibrium in the generic model. The endogenous structural transformation and its equilibrium theory for the generic model are then extended to economies with complicated economic structures involving hierarchical production, composite consumption, technology adoption and progress, infrastructure, and economic and political institutions. The paper concludes with a brief discussion of applications of the proposed methodology to economic development problems in other scenarios.

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