Structural change and economic growth: Advances and limitations of Kaldorian growth models

Abstract

Many different approaches have addressed the issue of why were some developing countries able to reduce the income gap with developed economies while others were not. However, few approaches take into account the process of structural change. This paper reviews the theoretical basis of the Kaldorian approach for the relationship between structural change and countries’ long-term economic growth, emphasising its recent developments and its limitations. According to Kaldor, structural change towards specific sectors continuously increases countries’ growth rates through a cumulative causation process. Although he had stressed it exhaustively, only recently Kaldorian models have explicitly incorporated this feature. Nevertheless, these models still face significant limitations to show how a cumulative causation process takes place in an open economy. The paper discusses the most relevant such limitations, and suggests options for future directions. JEL codes: 041, E12, F43