Is agricultural productivity a prerequisite for structural transformation? Evidence on the role of trade openness

A high agricultural productivity is usually seen as a precondition for the development of industry and services, but this idea relies crucially on the assumption of an economy closed to international trade. In a globalized world, can a country industrialize or tertiarize without prior agricultural development? There is still little practical knowledge of this possibility. In this paper, I assess the relevance of closed- versus open-economy models of structural transformation using data on the sectoral productivity levels of developed and developing countries over the 1950–2018 period. The empirical findings suggest that most countries behave approximately as closed economies. Therefore, except for small city-state countries, the emphasis on agricultural development to achieve industrialization and tertiarization is justified. Nonetheless, the results reveal that in Latin America and Africa, a high agricultural productivity causes tertiarization with little development of the industrial sector. This “premature deindustrialization” hints at the influence of specific barriers to the creation of industrial jobs: an adverse business environment for large manufacturing firms and a downward trend in the world prices of manufacturing goods. • I investigate the relevance of closed vs open economy models of structural transformation. • Most countries behave approximately as closed economies. • This justifies the importance of agricultural productivity for industrialization. • However Latin America and Africa face tertiarization without industrialization. • Reasons: an unattractive business environment/a drop in manufacturing prices.