Stages of Diversification and Industry Productivity Differences

Economies tend to diversify and then re-specialize as they develop. In an economy with many industries that experience different rates of productivity growth, these "stages of diversification" may obtain if initial conditions are skewed away from the industries that dominate economic structure in the long run as a matter of productivitydriven structural change. A calibrated multi-industry growth model with many countries replicates the main features of the "stages of diversification". We also present evidence that countries shift resources towards high-TFP growth manufacturing industries, and towards low-TFP growth sectors, consistent with the model.