Growing Like India-the Unequal Effects of Service-Led Growth

Structural transformation in most currently developing countries takes the form of a rapid rise in services but limited industrialization. In this paper, we propose a new methodology to structurally estimate productivity growth in service industries that circumvents the notorious difficulties in measuring quality improvements. In our theory, the expansion of the service sector is both a consequence-due to income effects-and a cause-due to productivity growth-of the development process. We estimate the model using Indian household data. We find that productivity growth in nontradable consumer services such as retail, restaurants, or residential real estate was an important driver of structural transformation and rising living standards between 1987 and 2011. However, the welfare gains were heavily skewed toward high-income urban dwellers.

Automated summary

Structural transformation in developing countries often involves a rise in services but limited industrialization. This paper proposes a new methodology to estimate productivity growth in service industries, addressing the challenges of measuring quality improvements. The theory suggests that the expansion of the service sector is both a consequence and a cause of the development process. Using Indian household data, the study finds that productivity growth in nontradable consumer services played a significant role in structural transformation and improving living standards from 1987 to 2011, but the benefits were mainly concentrated among high-income urban dwellers.