POSITION: PRO

DEBATE N°4:

"LET IT BE RESOLVED THAT IN A GLOBAL COMPETITIVE ENVIRONMENT STRUCTURAL CHANGE IS THE PRECONDITION FOR LONG TERM GROWTH IN BOTH ADVANCED AND DEVELOPING COUNTRIES”

May 20, 2014

GIACOMO BOVATUDOR CARSTOIUSZILVIA VARSZEGI

Everything that grows changes its structure As a tree changes its size, shape, and structure of its

branches, a growing economy changes the proportions and interelations among its sectors (agriculture, industry and services)

Pattern of growth of the economy1. Agriculture-oriented2. Industrialization3. Post-industrialization

INTRODUCTION

Natural resources Finite Vulnerable to market value Eg.: Nigeria no diversification of the economy, no growth after

discovery of oil fields Capital resources

Increasing stock of capital and using it more effi ciently can be an important source of growth

BUT eg.: Japan over-investing in declining industries Investment has to go to new industries to achieve long-term growth

Labor resources Increase in population can contribute to growth, but not necessarily

growth in income/capital Only the increasing quality of workforce can result long term

growth per head of the population Eg.: Australia great increase in population and GDP, but GDP/capita

growth lower (rate similar to Japan who has decreasing population)

Increase in single factors of production can only achieve short-term growth

SOURCES OF GROWTH

Long term growth Growth is determined by the capacity of the economy to increase

output, which is determined by the rate of growth of productivity of BOTH capital and labor

That is; increasing the QUANTITY and QUALITY of the factors of production in the economy

Only way to achive long term increase in productivity: continuous reallocation of resources from low- to high-productivity sectors

ARGUMENT:No long-term growth unless movement of labor and capital from traditional into new and more productive industries.

HOW TO ACHIEVE LONG TERM GROWTH

Dual economy by Lewis“An economy starts with two sectors, agriculture and industrial. Agriculture under employs workers and the marginal productivity is very low (close two zero). Therefore, transferring workers allows industrialization and capital accumulation, which can be further invested to sustain the economy.“(Focus on inter-sectorial relations and flows)

Neoclassical growth (derives from Solow)“Different types of economic activity are structurally similar enough to be aggregated into a single representative sector.Growth depends on the incentives to save, accumulate physical and human capital and innovate by developing new products and processes.”(Growth process within modern sectors)

SCHOLAR TRADITIONS

Engel’s law“Consumers increase their expenditures for food products (in % terms) less than their increases in income (1857), so the demand for other goods increases.”

Kuznets fact“Strong structural change takes place during the development process. In the early stages production factors are primarily reallocated from the agricultural sector to the industrial sector and in later stages to the services sector.”

Pasinetti“It is inevitable that sectorial imbalances will arise due to the changing structure of the demand for goods.”

IMPORTANT SCHOLARS

Change in composition of PRODUCTION and EMPLOYMENT Main drivers:

Change in customer demand Change in labor productivity (due to innovation and tech.

development)

Industrialization Income increases Demand for goods other than food increases Technological development Labor productivity increases Agricultural goods become less expensive + Employment opportunities in industry growSmaller share in GDP relative to industrial products

STRUCTURAL CHANGE AND GROWTH

Post-industrialization: Income further increases Less material needs, more demand

for services BUT labor productivity in services does not increase as fast as in

agriculture and industry It makes services more expensive + Employment in service sector continues to grow Larger share in GDP of services relative to agriculture and

industry

Service sector growth and sustainable development Less natural capital required envirionmentally more sustainalbe More human development required socially more sustainable

STRUCTURAL CHANGE AND GROWTH

Structural change is one of the most striking empirical facts of the development and growth process

Developing countriesAdvanced countries

EMPIRICAL EVIDENCE

Sectoral structure of world economies 1995

Industrial output as a percentage of GNP 1980-1995

Asia is an example of a region where structural change has been very positive for growth Economies with surplus labor and very low productivity

levels, which are dependent on subsistence agriculture Then, new industries started to emerge, mainly in urban

areas, and although still poorly educated, farmers became more productive factory workers

They were able to increase their income, and could send their children to school

This increased productivity has also set in motion a self-sustaining process of improvement in human capital skill

EMPIRICAL EVIDENCEASIA

STRUCTURAL CHANGE OVER THE YEARS INDIA

STRUCTURAL CHANGE OVER THE YEARS CHINA

Trade and globalization are important drivers of structural change!

GLOBALIZATION AND STRUCTURAL CHANGE

STRUCTURAL CHANGE OVER THE YEARS SOUTH KOREA

NORTH-KOREA VS. SOUTH-KOREA

Productivity growth + low unemployment= increase both in aggregate supply and demand

STRUCTURAL CHANGE OVER THE YEARS

ADVANCED COUNTRIES

Importance of composition of sectorsEg. : US faster long-term growth due to the dynamic eff ects of a s ignifi cant increase in investments in IT sector

EMPIRICAL EVIDENCECOMPARISION OF REGIONS

Structural change can be initiated by: Policy decisions Permanent changes in resources, population or the society

A general framework: It is overly naïve to expect that simply reducing tariffs or liberalising

finance will automatically increase growth.

Stabilisation and macroeconomic management need to be growth-oriented.

Governments need to be made accountable, not bypassed.

Governments should abandon formulaic policymaking

“The very need to state them suggests how far away from common sense the mainstream consensus had moved” (World Bank)

POLICIES SUPPORTING STRUCTURAL TRANSFORMATION

Policies characterizing “sustainable high growth” countries (average growth rate of 7% a year for 25 years):

investment rates of at least 25 per cent of GDP, including 5-7 % of GDP in infrastructure, with such investment predominantly fi nanced by domestic savings;

spending by private and public sectors of another 7-8 % of GDP on education, training and health;

inward technology transfer, facil itated by exploitation of opportunities for trade and inward foreign direct investment;

acceptance of competition, structural change and urbanisation; competitive labour markets, at least at the margin; the need to bring environmental protection into development

from the beginning; equality of opportunity, particularly for women.

(Report of the high-profi le Commission on Growth and Development, chaired by Nobel Prize-winning economist Michael Spence)

POLICIES SUPPORTING STRUCTURAL TRANSFORMATION

Possible problems: obsessive attachment to a particular ideology

eg.: 1960s-1970s, many African and Latin American countries took import substitution to extremes

Then, in the 1990s adopted the orthodoxy of a “Washington Consensus,” which urged countries to forego any structural change policies. They focused on the fundamentals, but structural transformation did not follow automatically.

Labor market imperfections discouraging formal or existing enterprises to grow

Credit constraint Poorly performing financial markets Political instability

WHY STRUCTURAL CHANGE DOES NOT HAPPEN IN SOME COUNTRIES

Long-term economic growth happens as a result of movement of labor and capital from low‐ to high‐productivity sectors AND productivity improvements within sectors

Emergence and expansion of new industries is necessary to the dynamics of the development process

Therefore sectoral change (in which labor and capital fl ow from low- to high productivity sectors) is a precondition to long term growth for both advanced and developing countries

Vast empirical evidence supporting the argument

In the current global competitive environment globalization is an important driver of structural change in the world economy

Well desisgned policies supporting structural change are able to foster long term economic growth

CONCLUSION

THANK YOU FOR YOUR ATTENTION!

WE ARE READY FOR DISCUSSION

http://www.imf.org/external/pubs/ft/survey/so/2013/INT062813A.htm

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https://lh4.googleusercontent.com/-vF8GK-rvi-M/TWwqc8c4akI/AAAAAAAAPBo/0bDZmiecLl4/s1600/japan.jpg

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