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2 ECONOMIC DEVELOPMENT AND STRUCTURAL TRANSFORMATION 15
growth. This is because backward and forward input–output linkages
are strongest in manufacturing and the scope for capital accumulation,
technological progress, economies of scale and knowledge spillover are
strong. Further, there is a strong causal relationship between manu-
facturing output growth and labor productivity because of a deepening
division of labor, specialization, and learning-by-doing and the scope for
productivity gains is large due to economies of scale; (ii) industrialization
requires a basis in agricultural modernization to ensure food supply and
labor will transfer from other sectors to manufacturing. As manufacturing
grows, productivity across the economy will rise even in agriculture and
services through positive spillovers such as technological knowhow and
complementary markets in services. Kaldor argued that the agriculture
and industrial sectors are not only connected by the Lewis labor transi-
tion (the elastic supply of labor is due to industry wages exceeding agri-
culture wages) but also because agriculture creates autonomous demand
for the manufacturing sector and thus land reform is required if agri-
culture is not to hinder ST; (iii) aggregate demand should be managed
to ensure growth (e.g. policies on public investment, taxation, directed
credit); and (iv) as exports become increasingly important as a source of
demand for the manufacturing sector as the economy grows, global com-
petition requires temporary domestic industry protection accompanied
by export-led growth policies.5 In sum, for Kaldor, the virtuous cycle or
Myrdal’s cycle of cumulative causation is that demand and output growth
fuel productivity growth due to increasing returns to scale which in turn
fuels capital accumulation.
It is Kaldor’s second law, also known as Kaldor-Verdoorn law, that
contains a tension of particular importance to ST and inclusive growth.
The Kaldor-Verdoorn (respectively, 1966 and 1949) coefficient is the
employment elasticity of growth. The more manufacturing grows the
more productivity grows across the whole economy because manu-
facturing provides capital goods across the economy. This is because
increases in manufacturing employment raise agriculture productiv-
ity (as labor migrates) and because the manufacturing sector is the only
sector with static and dynamic returns to scale due to new processes.6
Kaldor’s (1978 [1966]) interpretation of Verdoorn (1949) is that output
growth induces improvements in labor productivity (assuming an elastic
labor supply) and not vice versa. In contrast, the hypothesis of neoclas-
sical models such as Solow is that productivity growth is due to techno-
logical progress. Verdoorn’s argument was one of cumulative causation
Disrupted Development and the Future of Inequality in the Age of Automation