Skipping the Factory: Service-Led Growth and Structural Transformation in the Developing World

In today’s developing world, many economies appear to bypass industrialization and transition directly from agriculture to services. The largest rise in service employment has occurred in non-tradable consumer services, such as retail and hospitality, especially in urban areas, where many cities resemble consumer hubs built around local demand. These patterns of growth raise fundamental questions: Can service-led growth sustain improvements in living standards over time? Is service-led growth inherently biased toward affluent urban consumers? What role should policy play? To address these questions, we propose a parsimonious general equilibrium framework that incorporates non-homothetic preferences and locally non-tradable consumer services in a spatial setting. We apply the framework to a set of fast-growing sub-Saharan African economies and contrast their experience with economies following more industrialization-led path, highlighting how service-led growth shapes productivity, welfare, and inequality. Our framework bridges macro and micro perspectives and enables counterfactual analysis that accounts for both individual and spatial heterogeneity. We relate the framework to the recent literature and discuss several extensions and directions for future research.