Chapter 6: Distributional Change during Development

Understanding distributional change during the process of development entails identification of the drivers of the development process and their impact on the distribution of living standards. The process of development is characterized by changes in the structure of the economy. In particular, the literature identifies the notion of overall transformation of demand, trade, production and employment as the defining feature of development (Chenery, 1989). Thus, during the course of development, one may observe a reallocation of the labour force from agriculture to manufacturing and services along with increased urbanization. Similarly, Bourguignon, Ferreira, and Lustig (2005) note that in addition to changes in the composition of economic activity, structural change is characterized by long-term trends and short-term shocks and fluctuations induced by changes in the incentive structure in terms of changes in relative prices of goods and factors of production. They also identify changes in the socio-demographic characteristics of the population, in the patterns of socio-economic behaviour and in holdings of both human and physical capital as further manifestations of the structural change underpinning the process of socio-economic development. This structural transformation necessarily entails changes in the distribution of living standards. Policymakers seeking to promote individual prosperity and social progress need to understand the nature of distributional change induced by development.