Over the development process, modern service firms like supermarkets and restaurants replace traditional micro-entrepreneurs like street vendors and food hawkers. I argue that this transformation is a central driver of service-led growth. I show empirically that modern services are more productive on the margin, and that consumer demand for them rises with income. Then I build these two features into a novel theory of the service sector. Together they imply that even a small improvement in the technology used by modern service firms sets off a cycle of amplified productivity growth. As workers transition to the modern sector, they increase aggregate income and redirect demand to modern services, which pulls in more workers and generates further growth. I estimate the model with local-level data from Brazil and show that demand effects amplified the technology-driven rise of modern services by a factor of 1.24. The resulting service transformation generated service-led growth by shifting workers in to more productive jobs.
STEG Working Paper Series
• Research Theme 0: Data, Measurement, and Conceptual Framing,
Research Theme 2: Labour, Home Production, and Structural Transformation at the Level of the Household,
Cross-Cutting Issue 1: Gender,
Cross-Cutting Issue 3: Inequality and Inclusion
From Street Markets to Shopping Malls: The Transformation of the Service Sector
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