The goal of this project is to examine the role of the government in the structural transformation phenomenon.

Two facts motivate the study of this relationship. On the one hand, recent contributions to the literature on structural transformation have emphasized the importance –especially in the future and in developed economies –of structural change within services. On the other hand, the magnitude of the government –measured as the ratio of public spending to GDP– has steadily grown since 1870 in developed economies. This expansion has been accompanied by a notable decline in public investment in rich countries in recent decades.

This project will consist of two parts: one theoretical, and one empirical. The theoretical part will involve the development of a sufficiently rich model to capture the primary mechanisms through which the public sector interacts with structural change. Ideally, the model will include the following elements:

• i) price effects, which are a fundamental driving force of structural change.
• ii) income effects that do not disappear in the long term, which are the other major driving force.
• iii) the presence of a government that reflects its dual role as a producer and consumer of final goods.
• iv) private and public investment goods with different sectoral compositions, as the literature has pointed out the importance of taking into account the differences between investment and consumption goods. Also, given the growth of the health sector in recent decades and the fact that the public sector is the main producer of health in most countries, some deviations from the standard theoretical framework, such as population aging, may be introduced.

The empirical part will allow me to discern the contribution of each of the above-mentioned mechanisms, compare groups of countries with different institutions, and carry out predictions about the future.

In a later phase, the model could be taken into the context of an open economy and compare the political implications in that theoretical framework with those of a closed economy.