THE THREE-SECTOR GROWTH HYPOTHESIS AND THE EULER-MALTHUS ECONOMIC GROWTH MODEL: APPLICATION TO THE ANALYSIS OF GDP DYNAMICS OF BRAZIL, 1985-2004-2020 Michael Sonis Department of Geography, Bar-Ilan University, Israel Carlos R. Azzoni University of Sao-Paulo, Department of Economics, Brazil, and Regional Economic Application Laboratory, University of Illinois at Urbana-Champaign USA Geoffrey J.D. Hewings Regional Economic Application Laboratory, University of Illinois at UrbanaChampaign USA Abstract. The paper describes the interpolation and extrapolation of annual relative growth of GDP in the three basic economic activities: Primary, Secondary and Tertiary economic activities. The annual regional economic growth is evaluated with the help of the Euler-Malthus dynamic growth model in three different analytical realizations. As a regional example of annual economic growth in Brazil represents the results of interpolation and extrapolation of empirical dynamics of GDP in Brazil in the years 1985--2004-2020. I. INTRODUCTION Simon Kuznets stated in his Nobel lecture that “rapid changes in production structure are inevitable” (Kuznets, 1973, p. 250). In a recent survey presented by Jens Kruger, he argues that “the topic of structural change is frequently neglected in economic research (Kruger, 2008, p. 331). However, many authors devoted energy to analyzing the changing structure of the economy in the process of growth, as surveyed by Kruger. One of these is the Three-sector Growth hypothesis, which is an economic theory which divides economies into three aggregated sectors of activity: agriculture and extraction of raw materials (AGM), and manufacturing (IND) and services (SRV). In was initially developed by Clark (see three editions of his book "Conditions of Economic Progress", 1940, 1951, 1957) and Fourastie (see Fourastie, 1949). Clark's studies spread widely over the economics, including the agricultural economics, macroeconomics, demography, economic policy, economic growth and national income accounting (see Maddison, 2004).He is credited with the introduction of the concept of Gross National Product (GNP) (at around the same time as Kuznets' introduction of Gross Domestic Product (GDP) (Kuznets , 1953)). GNP gives a qualitative measure of total economic activity of a nation assessed yearly or quarterly. The GNP equals the GDP plus income earned by domestic residents through foreign investments minus the income earned by foreign investors in the domestic markets. GDP is calculated from the total value of goods and services produces in an economy over the specific period of time. Clark has stressed the dominance of different sectors (Agriculture + Mineral Industry, Manufacturing and Services) of economy at different stages of its development and modernization. 7-153 Clark introduced the analysis of comparative performance in three main sectors of economy and initiated the discussion (in The Conditions of Economic Progress, 1940, p 176) by quoting what he called the Petty's Law (Petty, 1676, see Hull' collection, 1899). "There is more to be gained by manufacture then husbandry, and by merchandise than manufacture." He stressed the significance of the three-sector breakdown and structural change in interpreting economic growth. According to Fourastie the main focus of an economy's activity shifts from the Agriculture + Mineral Industry (primary activity), through the Industry (secondary activity) and finally to the Services (tertiary sector). Forastie (1949) saw the process as essentially positive and writes of the increase in quality of life, social security, blossoming of education and culture, higher level of qualifications, humanization of work and avoidance of unemployment. Subsequent work by Kuznets (1966) elaborated upon these ideas, presenting a sectoral transitions perspective on macroeconomic growth and development. In continuation of ideas of Petty, Clark, Forastie and Kuznets, in this paper an attempt will be made to measure the rates of change in agriculture, industry and services and present the analytical structure of interaction, development and dynamics of major three economic activities sectors. Let us formalize the Three-sector growth hypothesis: let SRV , IND , AGM be the average multiplicative rate of change for of these sectors; over time, (see chapter II). The three-sector growth hypothesis, including the Petty' Law means the following ordering: SRV IND 1 AGM . But obviously the different forms of such ordering exist for different countries in different time periods. This difference is caused by different forms of economic evolution in different countries In Brazil, from 1960 to 1980, one observes an increase in the share of services and parallel decreases in the share of agriculture, while the participation of industry first increased and then diminished. From 1980 to 1990, there was s significant grows in the share of services mainly at the expense of industry. After 1994, there was smaller increase in the share of services and a further reduction in the share of industry. (Da Fonceca, 2001) As will be shown below the recent situation in Brazil corresponds to the inequalities SRV AGM IND >1 . This implies an increase of the GDP dynamics in all of three sectors of activity; the difference in the position of agriculture is connected with the extension of the area of sugar-cane for the production of ethanol. In the three next chapters the mathematical structure of dependences between rates of growth of three sectors and the rate of growth of all economy will be presented in detail with the help of deterministic Euler-Malthus growth model and its modifications. Section II presents the analytical structure of Euler-Malthus growth model and interpolation/extrapolation method of dynamics of sectoral change; the major part of the section III describes the approximate equation of the dependencies between the rate of growth of total economy and the rates of growth of the sectoral rates; section IV. II. THE THREE-SECTOR DETERMINISTIC EULER-MALTHUS DYNAMIC GROWTH MODEL Consider the three deterministic empirical sequences mtIND , mtAGM , mtSRV ; t 0,1,..., T 7-154 (1) presenting the dynamics of annual GDP values generated by three major economic activities industry, agriculture and services during the time intervals t 0,1,..., T . The three-activity deterministic Euler-Malthus dynamic Growth models (Euler, 1760; Malthus, 1798, Hoppenstead, Peskin, 1992) can be introduced in the form of the following iterative dynamic processes: IND SRV mtAGM AGM mtAGM , mtIND , mtSRV 1 1 IND mt 1 SRV mt (2) t 0,1,..., T , T 1, T 2,... where mtAGM , mtIND , mtSRV are the values of annual GDP for agriculture + mineral industry, industry and services; the growth parameters AGM , IND , SRV are the average annual growth rates and m0AGM ,m0SRV ,m0SRV is the initial state of the iteration processes (2). It is easy to rewrite the three sector Euler-Malthus model (2) in the simple form: t t t mtAGM m0AGM AGM , mtIND m0IND IND , mtSRV m0SRV SRV . (3) t 0,1,..., T , T 1, T 2,... This form of the three-sector Euler-Malthus model presents the interpolation/extrapolation procedure for the empirical sequences (1) (interpolation for t 0,1,..., T , 1985 2004; ; extrapolation for t T 1, T 2,..., 2005 2020. An approximation procedure for the derivation of the annual growth parameters AGM , IND , SRV will now be proposed. Calculate the empirical annual growth parameters for each pair of sequential years i, i 1; i 1, 2,..., T miAGM miIND miSRV (4) ; ; i , IND i , SRV IND SRV miAGM m m 1 i 1 i 1 The average annual multiplicative rates of GDP growth in agriculture + mineral industry, industry and services are: i , AGM AGM 1T iAGM ; T i1 IND 1T 1T iIND ; SRV iSRV T i1 T i1 (5) The approximated initial state m0AGM , m0IND , m0SRV of the Euler-Malthus model is given by the averages: 1 T miAGM 1 T miIND 1 T miSRV IND SRV (6) m0AGM = , m = , m = i i i 0 0 T 1 i 0 AGM T 1 i 0 IND T 1 i 0 SRV The partial sectoral correlation coefficients RAGM , RIND , RSRV representing the goodness of fit between the empirical GDP dynamics (1) and the model (3) can be calculated with the help of equations: T RAGM T mtAGM mtAGM t 0 1 2 AGM 2 AGM 2 mt mt t 0 t 0 T T 1 2 ; RIND m t 0 IND t 1 2 mtIND IND 2 IND 2 mt mt t 0 t 0 T T 1 2 ; T RSRV p t 0 SRV t 1 ptSRV 1 T 2 2 T SRV 2 SRV 2 m t mt t 0 t 0 (7) 7-155 In the next two sections the different ramifications of Euler-Malthus growth model will be presented: the total Euler-Malthus dynamics and the probabilistic chain dynamics. III. THE TOTAL GDP EULER-MALTHUS DYNAMICS The three-sector Euler-Malthus dynamics (2, 3,) yields the simple total GDP dynamics (2): M t mtAGM mtIND mtSRV t t t m0AGM AGM m0IND IND m0SRV SRV = (8) t t t M 0 p0AGM AGM p0IND IND p0SRV SRV where m0AGM m IND m SRV ; p0IND 0 ; p0SRV 0 M0 M0 M0 is the initial probabilistic sectoral distribution of the GDP. p0AGM Let us consider further the annual multiplicative rate of change i (9) Mi M i 1 and the average rate of change 1 T 1 T miAGM miIND miSRV (10) i AGM SRV T i 1 T i 1 mi 1 miIND 1 mi 1 Next we replace the Arithmetical mean with the Geometrical mean. Using the formulae (4,5,) we obtain the approximate equation 1 AGM IND SRV (11) 3 which represents the connection between total average rate of growth and the rates of growth of all sector rates of growth. IV. THE PROBABILISTIC THREE-SECTOR GDP EULER-MALTHUS DYNAMICS The probabilistic three-sector GDP growth dynamics mtAGM mtSRV m1IND AGM IND SRV pt ; pt ; pt (12) Mt Mt Mt can be written with the help of equations (2, 3, 8, 9 and 12) in the following probabilistic chain dynamics: t p0AGM AGM ptAGM AGM t ; t t p0 AGM p0IND IND p0SRV SRV IND t p t p0AGM AGM t p0IND IND ; t t p0IND IND p0SRV SRV (13) t p0SRV SRV t t t p0AGM AGM p0IND IND p0SRV SRV This probabilistic chain dynamics is equivalent to the following logistic growth probabilistic chain (see Sonis, 1987, 2003): ptSRV 7-156 ptAGM 1 ptIND 1 ptSRV 1 AGM ptAGM AGR ptAGM , IND ptIND SRV ptSRV AGM ptAGM IND ptIND , IND ptIND SRV ptSRV AGM ptAGM SRV ptSRV IND ptIND SRV ptSRV (14) Let introduce the multiplicative rates of growth in each sector frequency: AGM 1 T piAGM 1 T piIND 1 T piSRV AGM ; IND IND ; SRV SRV T i 1 pi 1 T i 1 pi 1 T i 1 pi 1 (15) Analogously to the approximate equation (11) it is possible to prove that AGM ARM ; IND IND ; SRV SRV (17) In the next sections we will present the analysis of the tendencies of sectoral growth in the economic GDP dynamics in Brazil, 1985-2004-2020. V. BRAZILIAN RELATIVE GDP GROWTH DYNAMICS, 1985-2004 Brazil is a good case to apply the above methodology, since it is a large country, and has been under intensive productive changes, notably after 1990. Starting from a typical Third World agricultural economy previously to World War II, in which coffee exports accounted for most of its foreign-oriented activities, the country followed an import substitution strategy until the mid-80s, but remained quite closed to foreign trade. Starting in 1990, an opening-up process took place, and nowadays, although still relatively closed, its economy is more open. Coinciding with this opening process, a strong movement of increased agricultural production took place, together with an impressive investment in energy-related crops, of which its ethanol program is emblematic. As a result, Brazil is a major international player nowadays in beef, grains, cotton, coffee, and, of course, energy-related products. These changes took place in a context of a fast-growing internal market, since its population increased from 41 millions in 1940 to 187 millions in 2008. These productive changes had consequences in the shares of the three main productive sectors in total output. In the decade 1985-1995 the shares of primary and secondary activities were almost the same, around 20% - 25%, with the tertiary sector accounting for the remaining share. From mid-1985s to the2004, the share of the secondary activities changes between 56% and 71%, its highest share ever. This came about from a decrease in the share of primary activities, reaching around 9%- 10% in late 1990s, and even the tertiary activities, with around 35% in that period. Opening the economy to foreign trade cased important changes in these shares. Primary activities, in spite of the success of Brazilian exports in the above mentioned products, stabilized their share around 10% in 2000.and growing to 14% in 20041. Given the changes mentioned, we will deal in this paper with a period, 1985-2004. Table 1 represents the distribution of Brazilian GDP during two decades, 1985-2004. 1 See Contas Regionalis de Brazil, 1985-2004, and Guilhoto and Hewings (2001) and Baer (2007) for a detailed description of the evolution of Brazilian economy. 7-157 Table 1. Brazilian sectoral GDP growth dynamics: Empirical data and Interpolation 1985-2004; Extrapolation 2005-2020, (billion R$). SRV SRV model IND IND model AGM AGM model Total Total Years model 207.091 189 733.0998 737 111.6944 157 1051.885 1083 1985 219.9155 222 747.6841 753 115.2315 162 1082.831 1137 1986 233.5342 227 762.5585 795 118.8807 134 1114.973 1156 1987 247.9963 222 777.7289 831 122.6454 130 1148.371 1183 1988 263.354 223 793.201 860 126.5293 123 1183.084 1206 1989 279.6627 299 808.9809 844 130.5363 114 1219.18 1257 1990 296.9814 362 825.0748 886 134.6701 111 1256.726 1359 1991 315.3725 288 841.4888 902 138.9348 101 1295.796 1291 1992 334.9026 267 858.2294 856 143.3346 108 1336.467 1231 1993 355.6421 331 875.303 838 147.8737 153 1378.819 1322 1994 377.666 454 892.7163 905 152.5566 136 1422.939 1495 1995 401.0537 510 910.476 856 157.3878 137 1468.917 1503 1996 425.8897 545 928.589 902 162.3719 138 1516.851 1585 1997 452.2638 558 947.0624 886 167.5139 138 1566.84 1582 1998 480.2712 544 965.9032 893 172.8187 154 1618.993 1591 1999 510.0129 512 985.1189 869 178.2916 162 1673.423 1543 2000 541.5965 504 1004.717 897 183.9377 182 1730.251 1583 2001 575.1359 483 1024.705 895 189.7626 215 1789.603 1593 2002 610.7524 470 1045.09 949 195.772 240 1851.615 1659 2003 648.5744 500 1065.881 1018 201.9718 249 1916.427 1767 2004 688.7387 1087.086 208.3678 1984.192 2005 731.3902 1108.712 214.9664 2055.069 2006 776.683 1130.769 221.7739 2129.226 2007 824.7807 1153.265 228.7971 2206.842 2008 875.8569 1176.208 236.0426 2288.107 2009 930.0961 1199.607 243.5176 2373.221 2010 987.6941 1223.472 251.2293 2462.396 2011 1048.859 1247.812 259.1853 2555.856 2012 1113.812 1272.636 267.3931 2653.841 2013 1182.787 1297.954 275.861 2756.601 2014 1256.033 1323.775 284.5969 2864.405 2015 1333.816 1350.11 293.6095 2977.535 2016 1416.415 1376.969 302.9076 3096.292 2017 1504.129 1404.363 312.5 3220.992 2018 1597.275 1432.301 322.3963 3351.973 2019 1696.19 1460.795 332.6059 3489.591 2020 7-158 Table 2. Interpolation and extrapolation relative GDP dynamics of Primary, Secondary and Tertiary economic activities, Brazil, 1985-2004-2020 (billion R$). Tertiary Tertiary model Secondary Secondary model Primary Primary Years model 0.196876 0.174515 0.696939 0.680517 0.106185 0.144968 1985 0.203093 0.195251 0.69049 0.662269 0.106417 0.14248 1986 0.209453 0.196367 0.683925 0.687716 0.106622 0.115917 1987 0.215955 0.187658 0.677246 0.702451 0.1068 0.10989 1988 0.222599 0.184909 0.670452 0.713101 0.106949 0.10199 1989 0.229386 0.237868 0.663545 0.67144 0.107069 0.090692 1990 0.236313 0.266372 0.656527 0.65195 0.107159 0.081678 1991 0.243381 0.223083 0.649399 0.698683 0.10722 0.078234 1992 0.250588 0.216897 0.642163 0.69537 0.107249 0.087734 1993 0.257932 0.250378 0.634821 0.633888 0.107247 0.115734 1994 0.265413 0.303679 0.627375 0.605351 0.107212 0.09097 1995 0.273027 0.339321 0.619828 0.569528 0.107145 0.091151 1996 0.280772 0.343849 0.612182 0.569085 0.107045 0.087066 1997 0.288647 0.352718 0.604441 0.560051 0.106912 0.087231 1998 0.296648 0.341923 0.596607 0.561282 0.106745 0.096794 1999 0.304772 0.331821 0.588685 0.563189 0.106543 0.10499 2000 0.313016 0.318383 0.580677 0.566646 0.106307 0.114972 2001 0.321376 0.303202 0.572588 0.561833 0.106036 0.134965 2002 0.329849 0.283303 0.564421 0.572031 0.10573 0.144665 2003 0.338429 0.282965 0.556181 0.576118 0.10539 0.140917 2004 0.347113 0.547873 0.105014 2005 0.355896 0.539501 0.104603 2006 0.364772 0.53107 0.104157 2007 0.373738 0.522586 0.103676 2008 0.382787 0.514053 0.103161 2009 0.391913 0.505476 0.102611 2010 0.401111 0.496863 0.102026 2011 0.410375 0.488217 0.101408 2012 0.419698 0.479545 0.100757 2013 0.429074 0.470853 0.100073 2014 0.438497 0.462147 0.099356 2015 0.44796 0.453432 0.098608 2016 0.457455 0.444716 0.097829 2017 0.466977 0.436003 0.09702 2018 0.476518 0.427301 0.096181 2019 0.486071 0.418615 0.095314 2020 7-159 These empirical statistical data can be used for the evaluation of parameters of Euler-Malthus models (2, 3). Equation (5) provides the aggregate relative growth rates, SRV 1.0619 : AGM 1.0317; IND 1.0179 . The type of the GDP growth in Brazil has a form: (18) SRV > AGM IND 1 with average total rate of growth 1 ( SRV + AGM IND ) 1.0372 Total =1.0279 (19) 3 This means that the aggregate relative change in services is larger than in agriculture and industry. Because each sectorial rate of growth is bigger then 1 the GDP is increasing in each economic sector. Agriculture presents the important unusual behavior. The initial states of GDP dynamics calculated with equation (6) are: m0AGM 111.7, m0IND 333.1, m0SRV 189.2 . The interpolation and extrapolation GDP dynamics provide the interpolation and extrapolation forecast of Brazilian GDP relative dynamics for 1985-2004-2020 (see table 2): Inte rpolation/Extrapolation Brazilian GDP Dynamics: 1985-2004-2020. 4000 Extrapolation Interpolation 3500 3000 Total Total Model 2000 1500 R$ billions 2500 AGM AGMmodel IND gIND mo SRV SRVmodel 1000 500 2020 2004 34 31 28 25 22 19 16 13 10 7 4 0 1985 1 YEARS Fig. 1. Interpolation and Extrapolation of Brazil GDP dynamics in different sectors and total annual GDP dynamics. 7-160 The goodness of fit between empirical agricultural GDP relative dynamics and the model can be measured with the help of the partial correlation coefficient (8), which generates the following value RAGR 0.6963 . Using the same equation, the goodness of fit between empirical industrial GDP relative dynamics is RIND 0.8324 . For services the value is RSRV 0.9833 . The low value of the correlation coefficient for Agriculture + mineral Industry can be explained by jump in change in 2001 in Primary sector during the decade 19942004 (see table1). Figure 1 presents the geometrical presentation of the GDP empirical and model dynamics for the three macro sectors in Brazil including interpolation for 1985-2004 and extrapolation for 2005 through 2020 (cf. tables 1-2). We also include in this figure the total relative growth of GDP in Brazil calculated by equations (8, 9). VI THE PROBABILISTIC CHAIN OF SECTORAL GROWTH IN BRAZIL, 1985-2004-2020 Probabilistic Chain of basic e conomic activ itie s in Brazil, 1985-2004-2020 0.8 0.7 Extrapolation 0.6 Primary 0.5 Primary model 0.4 % Interpolation 0.3 Secondary Secondary model Tertiary Tertiary model 0.2 0.1 2020 2004 1985 34 31 28 25 22 19 16 13 10 7 4 0 1 YEARS Fig. 2. Probabilistic Chain of Main Sectors in Brazil. Equation (16) presents the chain of probabilistic dynamics of relative growth GDP dynamics of sectors of main economic activities in Brazil. The relative rates of growth in frequencies of GDP growth in different sectors of Brazilian economy calculated with the help of formula (19) are: AGM ARM 0.9946; IND IND 0.9814; SRV 7-161 SRV =1.0238 (20) The type of the rates of growth in frequencies of GDP growth in different economic sectors (21) SRV >1> AGM IND This mean that frequency of GDP in Tertiary sector (Services) is increasing; the frequency of Primary and Secondary sectors (Agriculture+ Mineral Industry and Industry) are decreasing in such a way that decrease in Secondary sector bigger then in Primary sector. The chains of the probabilistic distribution of GDP for the aggregated sectors in Brazil (see figure 2) reveal the growth of the relative portion (%) of GDP in services, the stability of the relative portion (%) of GDP in Primary activities and the decrease in relative portion (%) of GDP in industry. VII. CONCLUSIONS The theoretical part of this paper introduced consideration of the Euler-Malthus dynamic growth model in three different forms: the three economic activities growth, the total economic growth and the log-linear probabilistic growth realizations. All these dynamic growth forms provide the basis for the interpolation/extrapolation procedure of relative, total and probabilistic non-linear growth dynamics.The second part of the paper presents the application of the interpolation/extrapolation technique to the analysis of the three-sector growth of GDP in Brazil, based on empirical data of annual GDP in Primary, Secondary and Tertiary activities for the period 1985-2004, interpolation of this data using average annual rates of GDP growth and the extrapolation of Brazilian economic dynamics for 2004-2020. It is possible to stress that the analytical scheme of GDP dynamics and especially the formula (11) presented in this paper can be expanded to the analysis of GDP of multi-sectoral and multuregional dynamics in Brazil and in this way to classify types of regional growth of GDP in Brazil in different time periods. Here the notions of so called Matrioska principle (Matrioshka principle represent the nesting hierarchy of economic regions) (cp Sonis and Hewings, 1990; Sonis, Hewings and Okuyama, 2001) could be used. REFERENCES Baer, W., 2007. Brazilian Economy: Growth and Development, Lynne Rienner Publishers, 6th Revised Edition. Clark C., 1940, 1951, 1957. "Conditions of Economic Progress", Macmillan, London. Contas Regionalis de Brazil, 1985-2004. Da Foncseca M.A.R, 2001. “Analysis of Brazil's Macroeconomic Trends.” In J.J.M. Guilhoto and G.J.D. Hewings (eds), 2001. Structure and structural change in the Brazilian Economy, Aldershot, Ashgate, pp.9-31. Fourastie J, 1949. Le Grand Espoir du XXe Siecle. Progress Technique, Progress Economique, Progress Social. Paris, Presses Universitaires de France, 224 p. (Reprinted in 1989 collection, Tel Gallimard.) Hoppenstead F.C. and Peskin C.S., 1992. Mathematics in Medicine and Life Sciences. Berlin, Heidelberg, New York, Springer Verlag. 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