Sectoral Productivity and Structural Transformation in Transition Economies: Panel Evidence from China and the Former Soviet Union

<title>Abstract</title> <p>This paper compares industrial structural change in 31 Chinese provinces (1978–2018) and 15 former Soviet Union (FSU) countries (1991–2018) following their respective transitions from planned to market economies. The two regions entered transition with sharply different industrial structures — China from an underdeveloped agrarian base, FSU countries from an artificially over-industrialised one — creating a natural comparative framework for testing structural transformation models. Using feasible generalised least squares, fixed effects, and seemingly unrelated regressions, we identify the drivers of sectoral change after each transition. Chinese provinces exhibit an inverse U-shaped relationship between secondary-sector output share and income, while FSU countries exhibit a U-shaped relationship, consistent with their over-industrialised starting positions. Both results support the three-sector hypothesis and de-industrialisation model once initial conditions are properly accounted for. Across both regions, sector-specific productivity growth — rather than inter-sectoral productivity gaps — emerges as the primary driver of structural change in both output and employment shares, offering a departure from Baumol's cost disease and contributing to the emerging literature on the determinants of structural transformation. JEL: L16, P27, O14, O47</p>