The Nature of Industrial Structural Change and Economic Growth: A Decomposition Analysis

The concentration of the economy on the specific sector and lack of industrial structural change is the cause for the divergence of developing countries. Using data from the Asian KLEMS database for China and South Korea, we employed decomposition techniques to analyze the nature of structural transformation and industries' contribution to growth. It is confirmed that both within-sector and between-sectors structural change contribute to the growth, but the modern economy does not follow the traditional linear structural transformation. Structural transformation through industrial upgrading, technological innovation, institutional and infrastructural development can stimulate dynamic and rapid economic growth. Therefore, the existence of structural transformation is another factor that affects economic performance, and hence income gaps. Since the rate of structural transformation is declining as the economy becomes advance, developing countries have the advantage of transforming their economy faster. They have the technological advantage of a latecomer. To undertake structural change and uphold sustainable development, diversification of the economy is required