Dynamic Sectoral Linkages and Structural Change in a Developing Economy

The literature on the stylised facts of structural change in LDCs has been bedevilled by three problems: (i) drawing time-series inferences from cross-section results; (ii) endogeneity of the variables involved; and (iii) an inability to separate short-run from long-run effects. This paper uses time-series econometric techniques to address each of these problems investigating linkages between agricultural, manufacturing and service GDPs (and productivity) for Malaysia. Our results suggest that expansion of manufacturing GDP, though associated with reduced agricultural output in the shortrun, was associated with agricultural expansion over the long-run. Service GDP growth on the other hand seems to be inimical to growth of agricultural GDP in both the shortand long-runs. Interestingly, both manufacturing and service GDPs appear to be (weakly) exogenous in the sense that they 'Granger-cause' changes in agricultural GDP but not vice versa. Evidence on sectoral productivity indicates that increases in manufacturing and services both impact positively on agricultural productivity in the long-run. This is consistent with neoclassical arguments suggesting that higher productivity techniques in manufacturing tend to spill over to agriculture, so encouraging convergent tendencies in sectoral productivity levels. Outline