Diversification, Structural Change and Economic Development

In this paper we study how the type of structural change leading to increasing output variety was gradually perceived and incorporated into models of economic growth. We trace the evolution of growth models from exclusively macroeconomic ones to the inclusion of the micro and meso levels of aggregation and to the explicit and endogenous representation of innovation and technological change. Here we consider the structure of an economic system as constituted by (i) a variable number of industrial sectors producing highly diversified goods and services, (ii) an increasing range of other activities, such as education or health care, which while not being strictly economic, interact heavily with industrial sectors, (iii) a series of interactions between these sectors and activities, the intensity of which can vary in the course of economic development. As a consequence, structural change consists of (i) the emergence of new sectors and activities and the reduction or extinction of older ones, (ii) the increasing quality and differentiation of sectoral output, (iii) the changing interactions between industrial sectors and other activities. In this paper structural change is not an epiphenomenon of economic development but one of its fundamental mechanisms since the emergence of new sectors and activities and their internal diversification contribute to overcome the development bottleneck first identified by Pasinetti. This type of structural change gives rise to a growing diversification of the system through the co-evolution of industrial sectors, other activities, technologies and institutions. Such growing diversification of economic systems has recently been confirmed by a growing number of papers, both theoretical and empirical, that will be analyzed here