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14 L. SCHLOGL AND A. SUMNER
(so labor can move across sectors and firms easily), leads to growth-enhanc-
ing structural transformation. In a similar vein, Diao, McMillan, Rodrik,
and Kennedy (2017) argue that the most recent growth accelerations in
the developing world, unlike East Asia’s historical experience, have not
been driven by industrialization but by within-sector productivity growth
(in Latin America) and growth-increasing structural transformation, but
this has been accompanied by negative labor productivity growth within
nonagricultural sectors (in Ethiopia, Malawi, Senegal, and Tanzania).
Others, such as Herrendorf et al. (2014), concur empirically with the
argument that the sectoral composition of economic activity is key to
understanding not only economic development but also regional income
convergence, productivity trends, business cycles, and inequality in wages.3
2.2 economic development with structurAl
trAnsformAtion: kAldor revisited
The theoretical basis or model of economic development of the third
school, as noted, is that associated with Nicholas Kaldor and Arthur
Lewis. The special characteristics of manufacturing argument is pred-
icated on the work of Kaldor (1967). Kaldor posited that economic
development requires industrialization because increasing returns in
the manufacturing sector mean faster growth of manufacturing output
which is associated with faster economic growth. Kaldor’s arguments
were because backward and forward input–output linkages are strong-
est in manufacturing, and the scope for capital accumulation, techno-
logical progress, economies of scale, and knowledge spillover are strong.
Further, there is a strong causal relationship between manufacturing
output growth and labor productivity because of a deepening division of
labor, specialization, and learning-by-doing, and the scope for productiv-
ity gains is large due to economies of scale.
Kaldor (1978 [1966], 1967) outlined a set of empirical regulari-
ties which came to be known as “Kaldor’s growth laws” that are framed
around ST (see for discussion in particular Storm, 2015; Targetti, 2005).4
Kaldor (1967) sought to explain the economic development of Western
Europe through the development of manufacturing which he argued
was the engine of growth for every country at every stage of economic
develop
ment. He posited that: (i) Economic development requires indus-
trialization because increasing returns in the manufacturing sector mean
faster growth of manufacturing output which is associated with faster GDP
Disrupted Development and the Future of Inequality in the Age of Automation