International capital mobility and structural transformation

Abstract

This study examines the role of international capital mobility in shaping the relation between economic growth and structural transformation. We build a small open economy Ramsey model with two goods, tradables and nontradables. We show that if the long-run autarky interest rate of a small open economy is higher than the world interest rate, the employment and value-added shares of the tradables sector will rise over time. In the opposite case, the shares will fall. Because the autarky interest rate increases with the rate of technological progress, our result suggests that cross-country differences in the rate of technological progress may be a significant factor in accounting for diverse patterns of structural changes among countries.