Research

Many developing economies today experience limited industrialization and rapid growth in low-skill services. I show how workforce aging gives rise to this pattern of premature deindustrialization and slower economic growth. First, I document a new fact: within birth cohorts, the probability that a worker is employed in manufacturing declines sharply with age. I trace this pattern to life-cycle changes in workers’ productive abilities. Manufacturing relies more on early-peaking abilities such as physical strength and reasoning. Services rely on accumulated knowledge and interpersonal skills that improve throughout working life. I then develop a quantitative open-economy model of structural transformation where workers sort on their abilities given sector-specific ability requirements. Each ability combines a shared life-cycle profile with a permanent individual component. Younger demographics alone make the calibrated Indonesian economy industrialize further and grow faster. Manufacturing’s employment share peaks 4.8 percentage points higher under the younger path of an early industrializer than that of a rapidly aging developing economy. This helps generate 19.5 percentage points more cumulative growth in real output per worker over five decades.

This paper explores the macroeconomic consequences of levying tariffs on imported investment goods, which directly affect the household’s investment Euler equation. First, we construct a new multi-country and multi-sector investment input-output matrix to trace investment goods through international production chains. Second, we embed this in an open-economy New Keynesian model with production networks. In a uniform US tariff experiment, this channel more than doubles the impact contraction in GDP, with investment-goods exposure as the best predictor of aggregate output losses. Holding the average tariff fixed, redesigning its composition to avoid the investment network cuts cumulative domestic output losses by two-thirds.

Why do some economies experience a pronounced manufacturing phase during structural transformation, while others move more directly into low-skilled services? This paper shows that financial underdevelopment, by shaping export competitiveness and domestic investment demand, is a quantitatively important driver of flat-manufacturing paths. Motivating evidence links financial depth to manufacturing activity and export performance. We then quantify the mechanism in a dynamic multi-country model of structural transformation and trade, where financial underdevelopment both weakens competitiveness in finance-dependent sectors and lowers demand for manufacturing-intensive investment goods. Moving flat-manufacturing economies halfway to the financial frontier closes over a quarter of the observed flat–steep peak gap; it raises real output per worker by 13 to 17 percent and real consumption per worker by 8 to 12 percent. Paired with lower nonfinancial trade costs, the same financial improvement closes almost three quarters of the peak gap, as finance shapes the manufacturing response that openness amplifies.

We develop a welfare-based theory of IMF governance in which voting weights and contributions reflect economic size, crisis risk, and trade linkages that transmit crises across countries. In the relatively balanced risk environment of Bretton Woods, the efficient voting rule can be implemented by quotas proportional to GDP at PPP and openness. After Bretton Woods, as IMF borrowing shifted toward emerging and developing economies, quotas remain optimal, but vote aggregation must account for unequal crisis risk. In a bipolar world with alliance-dependent trade costs, the model’s efficient allocation gives more voice to China and countries exposed to China-centered trade. Without governance reform, a China-centered coalition may find the Fund less attractive, raising the risk of institutional separation.