A model of unbalanced sectorial growth with application to transition economies

This paper studies the implications of a dynamic general equilibrium model with three production sectors, which are agriculture, industry and services. Due to the assumption of increasing returns in industry and services, our model has multiple equilibria. Two equilibria are stable: one, in which a country produces only agricultural goods and converges to a steady state, and the other, in which a country operates all three sectors and has positive unbalanced long-run growth by contracting agriculture and expanding industry and services. These predictions agree well with the real-world development experiences of rich and poor countries. In the context of our model, we also investigate the evolution of the sectorial composition in the transition countries and find that such countries move to the rich rather than to the poor world