Structural Change, Growth and the Increasing Service Trade in Low and Middle Income Countries

Abstract

This paper explains the increasing service export in low and middle-income countries of the world and tries to relate it with structural change and pattern of growth. The authors have constructed a theoretical model to derive hypotheses and estimated empirical results from panel regressions based on data from 34 low and middle-income countries. The theoretical results show that productivity differences caused by endogenous technological innovations and human capital formation lead to a reallocation of resources and structural change. As a result, the relative prices of the goods change. This paper shows that the growing service export is the reflection of industrial backwardness due to lack of capital, technological innovation and infrastructure. The results of panel regression also reveal that service sector-led growth and investment in human capital formation have a significant effect on service export while expenditure on Research and Development (R&D) is so low in such countries that it has no effect on per capita income, industrial growth and service export. As investment in human capital formation is high and R&D expenditure is low, the developing countries experience unbalanced growth with an increasing share of services in GDP and export.