Structural transformation in China and India: A note on macroeconomic policies

This paper explores macroeconomic policies that can sustain structural change in China and India. A two-sector open-economy model with endogenous productivity growth, demand driven output and income distribution as an important determinant of economic activity is calibrated to a 2000 SAM for China and a 1999/2000 SAM for India. Short-run analysis concerns temporary equilibria for output, productivity and employment growth rates in the formal sector. In the long-run, the model allows for multiple equilibria which can describe cases of (a) underdevelopment and structural heterogeneity or (b) sustained growth and development. Several simulation exercises are conducted. Specifically, we consider how changes in investment, wages, labor productivity trend and a depreciation of currency affect the macroeconomy and job creation in the formal sector.

► We explore macroeconomic policies that can sustain structural change toward formal activities and long-run growth in China and India.
► The model can describe cases of (a) underdevelopment and structural heterogeneity or (b) sustained growth and development.
► The impact of a demand shock on formal employment depends on the size of the spending multiplier and on the growth rate of the labor force.
► Technical change, by itself, leads to jobless growth which has undesirable effects on the structural transformation of the two economies.