Structural Change Fundamentals and Growth an Overview Revised

8/11/2019 Structural Change Fundamentals and Growth an Overview Revised

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STRUCTURALCHANGE,FUNDAMENTALS,ANDGROWTH:ANOVERVIEW

DaniRodrik1

InstituteforAdvancedStudy

September2013,revised

I.Introduction

Twotraditionsexistsidebysidewithingrowtheconomics. Oneofthemhasitsrootsin

developmenteconomicsandisbasedonthedualeconomyapproachfirstformalizedbyLewis(1954)

andRanisandFei(1961).Theotherhasitsrootsinmacroeconomics,andderivesfromtheneoclassical

growthmodelofSolow(1956). Thedualeconomytraditiondrawsasharpdistinctionbetweenthe

traditionalandmodernsectorsoftheeconomy,typicallycharacterizedasagricultureandindustry,

respectively. Theneoclassicalmodeleschewssuchdistinctionsandpresumesdifferenttypesof

economicactivityarestructurallysimilarenoughtobeaggregatedintoasinglerepresentativesector.

Dualeconomymodelsarebuiltonstructuralheterogeneity.Theyassumetherearedifferent

economiclogicsatworkintraditionalandmodernpartsoftheeconomy,sothesetwocannotbe

lumpedtogether.Accumulation,innovation,andproductivitygrowthalltakeplaceinthemodernsector

often

in

unexplained

ways

while

the

traditional

sector

remains

technologically

backward

and

stagnant.Economywidegrowththereforedependsinlargepartontherateatwhichresources

principallylaborcanmigratefromthetraditionaltothemodernsectors. Inneoclassicalmodels,by

contrast,growthdependsontheincentivestosave,accumulatephysicalandhumancapital,and(in

subsequentvariantsthatendogenizetechnologicalchange)innovatebydevelopingnewproductsand

processes(GrossmanandHelpman1991;AghionandHewitt1992).

1Thisessaywaspreparedasantheintroductiontoaseriesofcountrystudiesonstructuralchangeundertaken

undertheaegisofaWorldBankfundedresearchproject. IamgratefultoMaggieMcMillanforheroverall

directionoftheprojectandsuggestions.


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Thesetraditionsoffercomplementaryperspectivesoneconomicgrowth.Onewaytocombine

theirinsightsistothinkoftheneoclassicalmodelasessentiallyfocusingonthegrowthprocesswithin

modernsectors,whilethedualeconomymodelfocusesonintersectoralrelationshipsandflows.

Assuch,eachperspectiveprovidesadistinctreasonwhygrowthinthelaggingcountriesshouldbenot

justfeasible,butalsoeasyandthereforerapid. Inthedualeconomyworld,growthisjustmatterof

movingtraditionalfarmersintomodernindustriesinurbanareaswhereproductivityisonapositive

trajectory.Intheneoclassicalworld,physicalandhumancapitallevelsinpoorcountriesarelowand

thereforereturnstoaccumulationshouldbehigh. Eitherway,economicconvergencewithrichnations

shouldbethenormratherthantheexception.

Thosepredictionshavenotbeenborneout,buttheirfailureinformsusabouttheobstaclesthat

needtobeovercomeifeconomicdevelopmentistohappen. Usingthesetwosetsofmodelstoguideus,

wecanidentifytwobroaddevelopmentchallenges. First,thereisthestructuraltransformation

challenge:howtoensurethatresourcesflowrapidlytothemoderneconomicactivitiesthatoperateat

highereconomicproductivity.Second,thereisthefundamentalschallenge:howtoaccumulatethe

skillsand

broad

institutional

capabilities

needed

to

generate

sustained

productivity

growth

not

just

in

a

fewmodernindustrialsectorsbutacrosstheentirerangeofservicesandothernontradableactivities.

Thereisconsiderabledebateonwhetheritisprimarilythequalityofinstitutionsorthelevelofhuman

capitalthatdriveslongrunlevelsofincome(seeAcemoglu,Robinson,andJohnson2001versusGlaeser

etal.2004).Forpresentpurposes,weneednottakeapositiononthisdebate.Wecanlumpbothof

theseundertherubricoffundamentals. Animportantquestionistherelationshipbetweenthese

fundamentalsandtheprocessofstructuraltransformation.

Thepapersthataccompanythisoverviewhoneinonthestructuraltransformationchallenge.

TheycoverBotswana(McCaigetal.2013),Brazil(FirpoandPieri2013),Ghana(OseiandJedwab2013),

India(AhsanandMitra2013),Nigeria(Adeyinka,Salau,andVollrath2013),Vietnam(McCaigand


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Pavcnik2013),andZambia(ResnickandThurlow2013) Theyshowthattheexperiencewithstructural

changehasbeenquitediversearoundtheworld,withcountriessuchasVietnamundergoingmuch

moregrowthpromotingstructuraltransformationfromtraditionalagriculturetomodernindustries

alongdualeconomylinesthanthetypicalAfricaneconomy.

Thestudiessuggestnoeasypolicyrecommendations. Thepolicyrequirementsofrapid

structuralchangedonotseemtoalignneatlywithconventionalrecommendationsofthefundamentals

type.DespitesignificantimprovementinpolicyregimesinAfricaandLatinAmericamacroeconomic

stabilization,externalopening,democratizationtherateanddirectionofstructuraltransformation

havebeendisappointingintheseregions.Toplacetheseresultsinperspective,Ibeginthisoverviewby

presentinganoverallunifyingframeworkforthinkingaboutgrowth,drawingonRodrik(2013a). Iwill

thenselectivelyhighlightsomeoftheprojectsfindings.

II.Aunifyingframework

Idrewaboveadistinctionbetweenthestructuraltransformationandfundamentals

challengesin

growth,

the

first

focusing

on

moving

resources

into

modern

industries

and

the

second

on

developingbroadcapabilities. Atfirstsight,thesetwochallengesmayseemoneandthesame,too

closelylinkedtobeseparable.Muchofthedevelopmentliteratureoperatesontheassumptionthat

policythatisgoodononefrontisalsogoodontheother. Forexample,investinginhumancapitaland

improvingthelegalregimeshouldbegoodbothforoverallproductivityandforpromotingindustrial

expansion. Deregulationofindustrialrestrictionsandofinternationaltradeshouldbegoodforthe

economyasawholeaswellasfosterentryintoneweconomicactivities.Whatisdesirablepolicyfor

growthneednotdifferbasedonwhetherwelookatgrowthfromtheperspectiveofaffectingstructural

transformationorbuildingfundamentals.


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Whilethereissubstantialoverlapbetweenthetwosetsofpolicies,itisalsoclearthatthetwo

challengeshavesomewhatdifferentstrategicimplications.Inpractice,itmaybefareasiertopromote

industrializationdirectly,bysubsidizingindustryindiversewaysorremovingspecificobstaclestoit,

thantodoitindirectlybymakingbroadinvestmentsinhumancapitalandinstitutionsandhopingthat

thesewilltrickledowntoinvestmentincentivesinindustry. Itispossibletohaverapidstructural

transformation(industrialization)withoutcommensurateimprovementsinfundamentals.EastAsiais

thepremierexampleofthisstrategy.InChina,governanceandhumancapitalhavelaggedsignificantly

behindthecountrysmanufacturingprowess. Vietnam,reviewedbelow,isasimilarcase,followingon

Chinasfootstepswithsomelag.

Itisalsopossibletoinvestsignificantlyinfundamentalswithoutreapingmuchrewardinterms

ofstructuraltransformation. Sincetheearly1990s,LatinAmericahasconsiderablyimprovedits

governanceandmacroeconomicfundamentals,yetstructuralchangeintheregionhasbeen,ifanything,

growthreducing.Manufacturingandsomeothermodernsectorshavelostemploymenttolower

productivityservicesandinformalactivities(McMillanandRodrik2011).

InRodrik

(2013a),

Isummarized

the

implications

for

growth

using

the

22

table

reproduced

below. Structuraltransformationcanfuelrapidgrowthonitsown,butifitisnotbackedupby

fundamentals,growthpetersoutandremainsepisodic.Theaccumulationoffundamentals,ontheother

hand,requirescostly,timeconsuming,andcomplementaryinvestmentsacrosstheentireeconomy. So

itproducessteadybutslowgrowth.

Ultimately,sustainedgrowthandconvergencerequirebothprocesses.Eveninthebestofall

worlds,structuraltransformationwilleventuallyrunitscourseandindustrializationwillreachitslimits.

Fromthatpointon,growthmustdependonthesteadyaccumulationoffundamentalsemphasizedby

neoclassicalgrowththeory. LongtermsuccessessuchasBritain,Germany,andtheUnitedStateshave

allgonethroughthesephases,ashavemorerecentexamplessuchasJapan,SouthKorea,andTaiwan.


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IfdoubtsremainaboutChinaseconomicfuture,itisbecausesomuchofthecountrysinstitutional

transformation,particularlywithrespecttopoliticalinstitutions,stillremainsaheadofit.

Structuraltransformation

Slow

rapid

Investmentin

fundamentals

low (1) nogrowth (2) episodicgrowth

high (3) slowgrowth (4) rapid,sustainedgrowth

Figure1:Atypologyofgrowthpatternsandoutcomes

Thetypologyhelpsclarifyoneofthepuzzlingaspectsofcrossnationaldata. Institutionalquality

andhumancapitalarebothhighlycorrelatedwithincomelevels.Yetimprovementsininstitutionsand

humancapitalarenotareliablepredictorofeconomicgrowth. Thisframeworksuggeststhisisnota

contradiction. Onlycountriesthatsteadilyenhancetheirfundamentalcapabilitieseventuallybecome

rich.Butinvestmentinfundamentalsisnotthequickestoreasiestwayofgettingthere,atleastduring

theearlystagesofdevelopment. Earlyon,itisrapidindustrializationthatfuelsgrowth,andthis

requirespoliciesthatmaydifferconsiderablyfromconventionalfundamentals.Countriesthatrely

exclusivelyonbuildingupbroadbasedcapabilitiesarerewardedwithmodestgrowth,andmayinfact

bedivertedfromthosepoliciesasaresult(Rodrik2013a).

III.Ataleoftwocountries:VietnamversusGhana

Thestudiesthatfollowlookatgrowthfromtheperspectiveofstructuraltransformation.Taking

astheirstartingpointthecrosscountryanalysisofMcMillanandRodrik(2011),theyanalyzethe


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contributionofbroadpatternsofstructuralchangetoaggregatetrendsinlaborproductivity. Oneofthe

strikingfindingsinMcMillanandRodrikwasthedifferenceinthisrespectbetweenAsia,ontheone

hand,andAfricaandLatinAmerica,ontheother.Unlikeintheothertworegions,wheregrowthhad

beenslowanderratic,Asiangrowthtendedtorelyheavilyontheengineofstructuralchange.

ConsiderhowthisprocessworkedinVietnam,asdescribedinMcCaigandPavcnik(2013). Inthe

late1980s,threequartersofthecountrysworkforceremainedinagriculture,andproducedathirdof

thecountrysGDP.Thisdiscrepancybetweenagriculturesclaimontheeconomysresourcesandits

contributiontooutputreflectedthelargedifferentialinlaborproductivityacrossactivities. Thetypical

workerinmanufacturingproducedfourtimesmoreoutputthanthetypicalworkerinagriculture.The

typicalworkerinservicessuchasconstructionorwholesaleandretailtradeproducedevenabigger

multiplethanthis.

Tobesure,someoftheseproductivitygapsreflecteddifferencesinthestockofphysicalcapital

thatworkerswereequippedwith,ordifferencesinlaborskills. Forexample,laborproductivityin

finance,insurance,andbusinessservicesstood30timeshigherthaninagriculture.Butthismultipleis

largelymeaningless

since

the

skills

(i.e.,

human

capital)

required

in

this

sector

are

substantially

greater

thaninagriculture.Aricefarmerandabankaccountantareessentiallydifferentfactorsofproduction,

asonecannotbetransformedintoanotherwithoutsubstantialinvestmentoftimeandresources. Buta

farmercanmoreeasilytransformherselfintoaproductionworkerinagarmentfactory,thereby

multiplyingherincome,ifnotbyafactoroffour,byamultipleclosetothat.Whilemanufacturingjobs

mightrequirerudimentaryliteracyskills,theseskillsareafractionofthoseneededinfinanceorother

businessservices.

Fromthelate1980son,thatisindeedwhathappened,andataremarkablepace. Agricultures

employmentsharedeclinedby20percentoverthenexttwodecades,whilemanufacturingssharerose

from8percentto14percentandservicesrosefrom19percentto32percent. Employmentin


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manufacturingasawholeroseatanannualrategreaterthan10percentduringthe2000s,withthe

growthexceeding15percentingarmentsandreaching30percentinofficeandcomputingmachines

(McCaigandPavcnik2013,Table5). Figure2illustratesthemovementoflaborfromlow tohigh

productivityactivities.ThegrowthofmanufacturingjobswasparticularlyrapidintheSouthEastand

RedRiverDelta,whichenteredtheworldeconomyonthebackofexportorientedindustrialization.

Figure2:Vietnam:Therelationshipbetweeninitialproductivityandchangesinemploymentshare,

19902008

Source:McCaigandPavcnik(2013).Sizeofcircleindicatesemploymentin1990.

AsMcCaigandPavcnikemphasize,thisstructuraltransformationfromagricultureto

manufacturingandmodernservicescamealongsidetwootherimportantshifts,whichwereclosely

linked. Thereweretransitionsfromstateownedfirmstoprivateemployment,andfromfamilyfarms


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andbusinessestoformal,registeredfirms. Thesestructuralshiftscontributeddirectlytoproductivity

growthwithinsectors,butalsoenabledreallocationoffactorsofproductionacrosssectors.

Asaresult,GDPpercapitatripledinrealtermsovertwodecadesandpovertyfellsharply. The

growthinaggregatelaborproductivitywas5.1percentperannum(19902008). Structuralchange

accountsfor38percentofthisincrease,withlaborproductivitygrowthwithinsectorsaccountingforthe

rest. Vietnamisaclearcutcaseofdevelopmentsuccessenabledinimportantpartbystructural

transformationatleastovertheperiodcoveredbytheMcCaigPavcnikstudy.

InexaminingacaselikeVietnams,expostexplanationsareeasytocomeby.Thecountry

startedwithalargepoolofexcesslaborinthecountryside.Theunexploitedproductivitygainsfrom

movingpeoplefromthefarmtourbanemploymentwerehuge.Relaxingthegripofstateregulations

andstateownedenterprisescouldunleashthesehiddensourcesofproductivity.InVietnamthismeant

abolishingcollectivefarmsandreplacingthemwithhouseholdfarms,titlingofland,liberalizationof

internalandexternaltrade,andintroductionofcompetitionandofprivatebusinesses.Openingupto

theworldeconomythroughspecialeconomiczonesandliberalizationofinvestmentruleswould

bringin

foreign

investment

and

technology,

rendering

modern

sectors

even

more

competitive.

Encouragingexportswouldenableexpansionofmanufacturingenterpriseswithoutrunningintomarket

sizeconstraints.

NowconsiderGhana,acountrythathasalsodonereasonablywellinrecentyears,certainlyby

Africanstandards. OseiandJedwab(2013)tellthecountrysstoryfromtheperspectiveofstructural

change. Followingasharpdeclineinthe1970s,GhanasrealGDPpercapitapickedupfromthemid

1980son,withlaborproductivityregisteringgrowthof3.0percentperyearbetween1992and2010.

Thisisonly60percentofVietnamsgrowthrateoverthesameperiod.Whilestructuralchangeappears

tohavecontributedroughlyathirdoftheincreaseoverthisperiod,acloserlookindicatesthatthe

impactwashighlyunevenacrosssubperiods.Thecontributionofstructuralchangewasinfactnegative


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during20002006(OseiandJedwab2013,Table1).Whileagriculturalemploymentdiddecrease,the

laborthatwasreleasedwasabsorbedmostlybylowproductivityservices,withlimitedimpacton

economywideproductivity.Moreover,thebulkofmanufacturingtookplaceintheinformalsector,

whereproductivityismorethan20timeslowerthaninformalmanufacturing(OseiandJedwab2013).

Despitetheapparentpotential,structuralchangehassofarplayedamuchmoremodestroleinGhana

thaninVietnam.

Whythedifferencebetweenthetwocountries?ItistemptingtoascribeVietnamssuperior

performancetoitsgovernmentsliberalizationpoliciesandothereffortstoremoveobstaclesfacing

privatebusiness.Forexample,McCaigandPavcniklaudVietnamforitsprogressontheWorldBank

DoingBusinessindicators. TheynotethatVietnamwasranked99thoutof185countriesin2013,

slightlybehindChina,ranked91st,andaheadofcountriessuchasIndonesiaandBangladesh.

YetGhanaranks27countriesaheadofVietnam,in64thplace.

2 Accordingtotheindicators,it

wasconsiderablyeasiertogetcreditinGhanathaninVietnam,payingtaxeswaslessofahassle,

insolvencywasmuchmorequicklyresolved,andaccesstoelectricitywaslessproblematic. Intermsof

howwell

investors

are

protected,

there

isawhopping

40

rank

difference

between

the

two

countries,

in

favorofGhana. Othercrossnationalindicestellasimilarstory.TheCatoInstitutesIndexofEconomic

Freedom,whichattemptstoquantifytheextenttowhicheconomiesarefreeofgovernment

encumbrance,ranksVietnamin96thplace,comparedto71stforGhana.(Thisisfor2010,whichisthe

latestyearavailable.)3

Areasonableobjectiontothesecomparisonswouldbethatwhatmattersismorethechange

thanthelevelofanindex.Economicprogressmaybemoreafunctionofhowmuchpolicieshave

improvedthanwheretheystandattheendoftherelevantperiod. Butheretoo,itishardtomake

2http://www.doingbusiness.org/rankings,accessedAugust12,2103.3Seethe2012AnnualReport,availableathttp://www.cato.org/economicfreedomworld.Therankingsreferto

theunadjustedversion,sincethatistheonlyoneavailableforVietnam.Thechainlinkedversionoftherankings

showGhanaat53rdplacein2010.


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thecasethatVietnamlooksbetterthanGhana.Bothcountrieshaveundertakensignificantreforms

sincethe1980s,openinguptheireconomiestotrade,reducingtheroleofthestate,andderegulating.

GhanassummaryratingontheCatoIndexsteadilyrose(onascalefrom0to10)from3.05in1980to

5.53in1995andto7.09in2010.Unfortunately,CatodoesnotprovideacomparableseriesforVietnam

overthefullperiod,soadirectcomparisonisnotpossible.Butinlightofthescaleofimprovementin

Ghanasrating,itisdifficulttoimaginethatVietnamcouldhavedonemuchbetter.(Togetasenseof

theseratings,notethatU.S.hadaratingof7.70in2010.)

NoneofthisisdenythepossibilitythatVietnamsgovernmentdoesindeedprovideamore

hospitableenvironmentforprivatebusiness,bothbynurturingneweconomicactivitiesandby

removingobstaclesthatexistingonesface.Thepointisthatthemannerinwhichsuchanenvironment

isconstructedisobviouslyrathermoresubtlethanwhatiscapturedbystandardindicesand

conventionaltypesofpolicyadvice.Economicliberalizationandremovingredtapemayfosterprivate

investment.ButthecomparisonwithGhanasuggestsitwouldbemistaketodescribeVietnamsstrategy

inthosetermsorthosetermsalone. AsimilarargumentcouldbemadeformanyotherEastAsian

successstories

as

well

of

course.

IV.Specializationmatters:naturalresources,services,andmanufacturing

SoitisdifficulttomakethecasethatthedifferenceinperformancebetweenVietnamand

Ghanaisduetotheformerhavingpursuedmoremarket andbusinessfriendlypoliciesthanthelatter,

ortoVietnamhavingbeenthemoreaggressivereformeralongconventionallines.Whatelsethen?

Oneproximatecauseofthedifferenceseemstoberelianceonnaturalresources.InGhana

manufacturingexpandedverylittlewhileinvestmentandgrowthwereconcentratedintheresource

sectoratrendthatwasexacerbatedafterthediscoveryofoilin2008. Asidefromoil,Ghanasmain

exportsaregold,cocoabeans,timberproductsandothernaturalresources.Vietnam,meanwhile,isa


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majorexporteroftextilesandgarments. In2012,manufacturesshareofmerchandiseexportsstoodat

65percentinVietnam,butonly9percentinGhana(havingactuallycomedownfromapeakof25

percentin2009).4

Amanufacturesbasedgrowthstrategyhastwodistinctadvantages.First,muchof

manufacturingislaborintensive,soitcanabsorblargeamountsofrelativelyunskilledworkersfromthe

restoftheeconomy.Itiscomparativelyeasytoturnaricefarmerintoagarmentfactoryworker,

withoutsignificantinvestmentsinhumancapitalandwithmanageableinvestmentinphysicalcapital.

Andtheindustrializationprocesscangoonforquitesometimeseveraldecadesduringwhich

incomeandproductivitylevelsconvergewithrichcountries. Bycontrast,resourcesectorsthatexhibit

highlaborproductivity,suchasoil,tendtobeverycapitalintensiveandabsorbfewworkers.Continued

growthinaresourcebasedeconomyisdependentonrapidandsustainedproductivityincreasesinthe

resourcesector,newdiscoveries,orsteadyriseinworldmarketprices.Andevenifoneormoreofthese

fortuitouscircumstancesmaterialize,thepatternofgrowthtendstobecomeveryskewed.Growth

benefitsthestateorarentierclass,spawnsinequalityanddistributivepolitics,andprovesgenerally

detrimentalto

institutional

development.

Resource

based

growth

tends

to

produce

spurts

of

growth,

followedbystagnationordecline;Ghanaseconomichistoryisasgoodanexampleofthisasany.

Thesecondadvantageofmanufacturingorofformalmanufacturingspecificallyisthatit

exhibitsaremarkableproperty:unconditionalconvergence. Laborproductivityinlaggingmanufacturing

sectors,whichisthenormfordevelopingnations,tendstoconvergetothefrontierasifonan

automaticescalator,atarateof23percentperyear. Thegreaterthedistancefromtheproductivity

frontier,thefastertherateofproductivitygrowth.IreportedthisresultinRodrik(2013b),basedon

detailedsectoraldatafromUNIDO,coveringmostlyformalmanufacturingactivities.Whatisremarkable

aboutthisisthatconvergencetakesplaceregardlessofthequalityofdomesticpoliciesorinstitutions

4WorldBankWorldDevelopmentIndicators,http://data.worldbank.org/indicator/TX.VAL.MANF.ZS.UN.


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andotheraspectsofeconomiccontextsuchasgeographyandinfrastructure. Ofcourse,convergence

canbeevenmorerapidinmoreadvantageousenvironments.

Figure3providesagraphicalillustrationoftheresult,restrictingthecoveragetothe21sub

Saharancountries(includingGhana)withtherequisitedata. Eachobservationrepresentsa2digit

manufacturingindustryinanAfricancountry,forthelatest10yearperiodforwhichdataareavailable.

Thehorizontalaxisistheinitialleveloflaborproductivity(inlogarithms),andtheverticalaxisisits

growthrateoverthesubsequentdecade.Period,industry,andperiodindustrydummiesareincluded

ascontrols,sothatvaluesontheaxesarepurgedofthesefixedeffects. Buttherearenocountry

levelcontrols.Thenegativeslopeofthescatterplot,evenintheabsenceofanycountrycontrols,

capturestheessenceofunconditionalconvergence.ThetrendisasunmistakableinAfricaasitis

elsewhere.

Somanufacturingisessentiallyasourceofdoublewhammyforproductivetransformation. First,

itcanabsorbasubstantialpartoftheeconomyslowskilledlaboratasubstantialproductivitypremium.

Second,italsoputsthelaboritemploysonanautomaticescalatorthatrisesuptotheglobalfrontier.

Whilewe

cannot

be

sure,

because

we

lack

systematic

data,

the

same

islikely

to

be

true

of

arange

of

modernserviceslinkedtomanufacturing andthatexpandalongsideit.


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Figure3: UnconditionalconvergenceinAfricanmanufacturinglaborproductivity

Source: Authorscalculations,basedonRodrik(2013b). Seetextforexplanation.

AsiancountriessuchasVietnamstartoutwithahighlaborlandratioandarelativedearthof

naturalresources.Sotheyhavealatentcomparativeadvantageinlowskillintensivemanufactures.

AfricancountrieslikeGhana,ontheotherhand,havebeenblessedwithplentifulnaturalresource

endowments,everythingfromcashcropstominerals.

Butcomparativeadvantageisalsopartlytheresultofpolicydecisionsandstrategies. Brazilin

the1950swasacountryrichinnaturalresources,yetexperiencedsignificantgrowthpromoting

structuralchangethroughthe1970s.Tradeandindustrialpolicies,aswellasthelevelofthereal

exchangerate,playanimportantroleinpromotingordelaying,asthecasemaybeproductive

diversification.

-.2

-.1

0

.1

.2

subs

equentgrowth(controllingford

ummies)

-2 -1 0 1 2 3initial labor productivity (controlling for dummies)


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AsFirpoandPieri(2013)show,structuralchangewasquiterapidinBrazilfromthe1940s

throughthe1970s,accountingforuptohalfoftotalgrowthduringpartsofthisperiod(e.g.,19651979).

Asagriculturalemploymentshrank,manufacturingexpanded,andmodernserviceactivitiesevenmore

so. Bythelate1970s,manufacturingaccountedfor45percentofBrazilsGDP. Thisperiodofhigh

growth,rapidstructuralchangewasoneinwhichpoliciesofimportsubstitutionpredominated. Itgoes

withoutsayingthatsuchpoliciesareanomalousfromtheperspectiveofCato/DoingBusinesstypeof

indicators. FirpoandPieriarguethatbythelate1970sthecountryhadrunoutofroomforfurther

structuralchangeatleastalongbroadintersectorallines.Fromthe1980son,growthhadtorelyon

withinsectorenhancementsinproductivity,whichinturnrequiredsustainedinvestmentsinhuman

capitalandnewtechnologies(inagricultureespecially)aswellasinstitutionalimprovements.

Indiaprovidesaninterestingcontrast. Onpaper,ithasthemakingsofanindustrialsuccess

story,withitslargeendowmentofrelativelyunskilledlaborforcestillinruralareas. Yetithas

underperformedremarkablyonthatdimension. AsAhsanandMitra(2013)note,duringthe45year

periodbetween1960and2004,agriculturesshareofemploymentfellonlyby10percentagepoints

(from71.5

percent

to

61.5

percent)

and

manufacturings

share

rose

ameager

2.6

percentage

points

(from9.8percentto12.4percent). Toputthesenumbersinperspective,Vietnamwasabletoachieve

morethandoublethisrateofindustrializationinlessthanhalfthetime.

StructuralchangedidmakeapositivecontributiontogrowthinIndiaafterthe1990s,especially

duringthefirstdecadeafterthe1991reforms. Butthebiggestpartofthatcamefromtheexpansionof

finance,insurance,andotherbusinessservices,withmanufacturingactuallyshrinkingandmakinga

negativecontributionduring20002004.Informationtechnology(IT)andbusinessprocessoutsourcing

services(BPO)onwhichIndiasrecentgrowthhasreliedarenodoubthighproductivityactivitieswith

convergencedynamicsthatmaybeevenstrongerthaninmanufacturing. Butthesearealsohighlyskill

intensivesectors,unabletoabsorbthevastmajorityoftheIndianworkforcethatremainspoorly


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educated.Asaconsequence,Indiasunderlyinggrowthtrendissuppressedbythenecessarilyslow

accumulationoffundamentalcapabilities education,infrastructure,andgovernance intheeconomy

asawhole.

LikeIndia,Africancountriesseemtobebypassingtheindustrializationstagethatwasso

importanttoEastAsiasrapidgrowth.ImentionedtheGhanacasepreviously.Zambia,Nigeria,

Botswanaprovideadditionalexamples. InZambia,duringthenegativegrowthperiodofthe1990s,

workersactuallymovedfromurbanjobsbacktoagriculture,producinggrowthreducingstructural

change. Duringtherecoveryofthesubsequentperiod(20022010),positivestructuralchangekickedin,

butitwasmainlyservicesthatabsorbedworkersleavingthefarms(ResnickandThurlow2013). In

Nigeria,labormovedfromagricultureandwholesaleandretailtradetootherservicesand

manufacturing,butstructuralchangecontributedonlyaboutafifthoftheincreaseinaggregate

productivity.Adeyinka,SalauandVollrath(2013)reckonNigeriacouldhaveaddedanextra1.7percent

peryeartoitsgrowththroughfurtherstructuralchange. InBotswana,McCaigetal.(2013)findthat

tradeliberalizationledtoasubstantialincreaseintradeflows,alongwithsizableexpansionof

employmentin

wholesale

and

retail

trade

activities

(presumably

linked

to

international

trade).

Employmentindirectlytradedsectorsmeanwhilefell.

Encouragingly,themorerecentAfricanevidenceforthepost2000periodpaintsabrighter

picture.McMillan(2013)notesthattherehasbeenageneralturnaroundinAfricafromgrowthreducing

structuralchangeduringthe1990stogrowthenhancingstructuralchangeinthemostrecentdecade.

Onaverage,structuralchangehascontributed0.87percentagepointsofthe2.18percentannualpost

2000growthrate(or40percentofthetotal)forthe19countriesinMcMillanssample(2013,Table7).

Butthebulkofthiscontributionisaccountedforbythemovementintoservices,withtheexpansionof

manufacturingremainingmodestatbest.TheshareofemploymentinAfricanmanufacturesisstill

roughlyhalftheshareinAsia(McMillan2013).


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Anexpansionofservicesisnotnecessarilyabadthingforstructuraltransformationandgrowth,

aslongastheeconomyhasbeenabletobuilduphumancapitalandaccumulatefundamental

capabilitiesthattransformthoseservicesintohighproductivityactivities.However,thistypically

happensratherlateinthedevelopmentprocess,afterindustrializationrunsitscourse.Aparticularly

successfulinstanceofthispatterncanbeobservedinHongKong.Thestructuraltransformationpicture

inHongKonglooksjustlikethatinVietnam,exceptthattherolesofagricultureandmanufacturesare

reversed(Figure4).InHongKong,itismanufacturesthathasrapidlyshrunksince1990,releasingmore

than20percentoftheeconomyslaborforcetoothersectors.Thedisplacedlaborfoundemploymentin

services(wholesaleandretailtrade,finance,insuranceandbusinessservices,etc.),butatevenhigher

levelsofproductivity.Sodeindustrializationwasgrowthpromoting. Thedifferencewithother

countriesistwofold. First,HongKongfirstachievedsignificantlevelsofindustrializationbeforede

industrializing. Second,itusedtheinterveningperiodtostrengthenitshumancapitalbaseandother

fundamentalcapabilities.


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Figure4:StructuralchangeinHongKong

Source:McMillanandRodrik(2011).

Inprinciple,then,structuraltransformationcanplayapotentpositiverolebothduringtheearly

stagesofdevelopmentwhenthereisexcesssuppliesoflaborinagricultureandinformaleconomic

activities,andduringlaterstageswhencapabilitieshaveaccumulatedandmodernserviceshavecaught

upandsurpassedindustrialactivities.Butneitheroftheseisassured.Structuralchangeisfrequently

slow,andoftengoesinthewrongdirection. Andthecorrespondencebetweenmarketliberalization

andstructuralchangeisweak,atbest.

agr

con

cspsgs

fire

man

min

pu

tscwrt

-2

-1

0

1

2

Lo

g

ofSectoralProductivity/TotalProductivity

-.2 -.1 0 .1

Change in Employment Share(Emp. Share)

Fitted values

*Note: Size of circle represents employment share in 1990**Note:denotes coeff. of independent variable in regression equation: ln(p/P) =+ Emp. Share

Source: Author's calculations with data from Timmer and de Vries (2009)

= 2.8359; t-stat = 2.51

Correlation Between Sectoral Productivity andChange in Employment Shares in Hong Kong (1990-2005)


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V.Prospectsforstructuraltransformation

TheclassicpathofrapidcatchupthroughindustrializationplayedoutwellinEastAsia,aswell

asinLatinAmericaandcertainothercountriessuchasTurkeyduringtheirearlier,importsubstituting

phase. Buttherearereasonstothinkthispathwillfiguremuchlessprominentlyinthefuture. Aswe

haveseen,manyAfricancountriesarestartingoutwithamuchbetterendowmentofnaturalresources

andarelesswellpositionedforspecializationinmanufactures. ThesuccessofEastAsianeconomies

ChinaanditssuccessorssuchasVietnamandCambodiaposesignificantcompetitivechallengesto

newcomersinmanufactures,especiallyinlightofglobalizationandthereducedbarrierstotrade

virtuallyeverywhere. Newtraderuleslimittoamuchgreaterextentthanpreviouslytheroomfor

industrialpolicieslocalcontentrequirements,subsidies,importrestrictionswhichAsiancountries

havedeployedwithsomesuccess.Theeconomicdifficultiesoftheadvancedcountriesmakethemmore

resistanttosignificantsurgesofmanufacturedimportsfromlowcostsources. Thenthereare

technologicalchangesinmanufacturingitself,whichhavemadethesectormuchmorecapital andskill

intensivethaninthepast,reducingboththeadvantageofpooreconomiesinmanufacturingandthe

scopefor

labor

absorption

in

the

sector.

Finally,

the

prospect

of

climate

change

and

the

greater

awarenessoftheassociatedriskscallforgreentechnologiesthataremoreenvironmentfriendlybut

alsomorecostlyfordevelopingnationstodeploy.

Therearecounterargumentsthatonecandeploy. Diversificationintomanufacturingcan

sometimesbefacilitatedbythepresenceofnaturalresources;Ethiopia,forexample,candeployits

highqualitylivestocktoturnitselfintoanexporterofdesignershoes. Chinesemanufacturersarenow

lookingforlowcostsuppliersthemselves,nottheleastinAfrica. Eveniftheworldeconomystagnates,

therearesizabledomestic(Nigeria)andregionalmarketsinAfrica. Thereareglimmersofhopeinallof

thesedirectionsinthedata.Buttheyremainglimmersforthetimebeing.


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Itisalsotrue,asBaldwin(2011)hasemphasized,thatthespreadofglobalsupplychainswhat

Baldwincallsglobalizationssecondunbundlinghasfacilitatedthespreadofindustryfromthe

advancedcountriestotheperiphery. Newentrantsdonothavetobuildentiresupplychainsfrom

intermediateinputstofinalproductsathome;theycansimplyjoinexistingglobalonesbyproducinga

narrowrangeofcomponents. Butbythesametoken,industrializationremainslimitedandfleeting,

evenwhenacountrycanovercomeglobalissuccessfulinpluggingintoglobalsupplychains.

Takentogether,thesetrendsimplythateventhemostsuccessfulcountriesofthefutureare

likelytofallfarshortoftheindustrializationlevelsthathavebeenthenormineconomichistory. The

availabledataindicatethatdeindustrializationisnowbeginningtohappenatlowerlevelsofincome.

Manufacturingsshareofemploymentpeakedatabove30percentintheUnitedKingdomandGermany,

andataround25percentinJapanandSouthKorea. InChina,manufacturingemploymentrosetojust

under15percentinthemid1990sbeforeitstartedtocomedowngradually. Vietnam,Cambodia,and

othersmallercountrieswilllikelynotsurpasssuchlevels.

TheapparentfailureofAfricancountriestoindustrializetodateandthedeindustrializationof

LatinAmerica

have

to

be

seen

against

such

aglobal

context.

The

industrialization

led

growth

model

may

haverunitscourse.Thequestioniswhatwilltakeitsplace.

Naturalresourceboomscanfuelgrowth,buthasalltheproblemsmentionedearlier:capital

intensity,lowlaborabsorption,andthepoliticsofrents.Tradableservicescansubstitutetosomeextent

formanufacturing,buttheevidencetodateonthathasnotbeenencouragingeither.Mosthigh

productivityservices,suchasfinanceandbusinessservices,areskillintensiveandillsuitedtothefactor

endowmentsofpoorcountries.Andlaborintensivetradableservicessuchastourismhavetypically

spawnedfewlinkagestotherestoftheeconomyandhavenotproducedmuchdiversification. Non

traditionalagriculturalproductshorticulture,aquaculture,floriculture,andsooncouldwellactasan


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intermediatesteppingstoneoutoftraditionalfarmproducts,butheretootherecordwithlabor

absorptionisnotterriblyencouraging.

Allofthissuggeststhatweshouldnotbesurprisedifbroadpatternsofintersectoralstructural

changeplayamoremutedroleinthefuture. Developmentwillhavetohappenthehardwayforthe

mostpart,throughthesteadyaccumulationofskillsandhumancapitalandimprovementsin

governanceandinstitutions. IntermsofthecentralgrowthdecompositionequationusedinMcMillan

andRodrik(2011)andthepapersthatfollow,growthwillcomepredominantlyfromthewithin

componentofproductivitychangeratherthanthestructuralchangecomponent.5

Acorollaryisthatsustainedrapidgrowth,ofthetypeexperiencedinSouthKorea,Taiwan,China,

VietnamandotherEastAsiancases,willbeoutofreachformostdevelopingcountries. Ithasproved

significantlymorecomplicatedandtimeconsumingtoupgradeacountryshealthsystem,tertiary

education,orjudiciary,tonamejustafewexamplesofnontradablesectors,tofirstworldstandards

thantoridethewaveofglobalcompetitivenessinanarrow,butexpandingrangeofstandardized

manufacturingindustries. Thereisnoautomaticescalatorinnonmanufacturingpartsoftheeconomy.

Onereason

isthat

human

capital

and

institutions

entail

in

practice

awide

range

of

reforms

andinvestmentsthatarebothhighlycontextspecificandcomplementarytoeachother.Context

specificityhastheimplicationthatofftheshelfimportedblueprintsarenotveryuseful.Local

experimentationandexpertiseareneededtogetsystemstocohereandworkwell. Complementarity

5FollowingMcMillanandRodrik(2011),thechangeinaggregatelaborproductivityinaneconomycanbe

decomposedintothefollowingtwoterms:

ni

tititi

ni

ktit yyY ,,,,

where tY and tiy , refertoeconomywideandsectorallaborproductivitylevels,respectively,and ti , istheshare

ofemploymentinsectori.Theoperatordenotesthechangeinproductivityoremploymentsharesbetweentk

andt. Thefirstterminthedecompositionistheweightedsumofproductivitygrowthwithinindividualsectors,

wheretheweightsaretheemploymentshareofeachsectoratthebeginningofthetimeperiod. Thisisthe

withincomponentofproductivitygrowth.Thesecondtermcapturestheproductivityeffectoflaborre

allocationsacrossdifferentsectors. Itisthesummationoftheproductofproductivitylevels(attheendofthe

timeperiod)withthechangeinemploymentsharesacrosssectors. Thissecondtermisthestructuralchange

component.


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meansinvestmentsonabroadfrontarerequiredforanyofthemtopayoff. TogethertheseimplyanS

shapedrelationshipbetweenfundamentalsandgrowth(seeRodrik2013a):investmentsinhuman

capitalandinstitutionsproduceatbestmoderategrowthuntilthey(andincome)accumulateandreach

acertainthreshold. Thedownsideofthismodeofgrowthisthatitcaneasilyproducereformfatigue.

Growthpayoffswillappearasdisappointingdespitesubstantialeffortsatreform.

OneinterpretationofrecentgrowthinLatinAmericaandAfricaisthatinvestmentsineducation

andimprovementsinmacroeconomicstabilityandgovernancearefinallypayingoff(seeMcMillan2013

onAfrica). Animportanttestofthisideawillbewhethergrowthissustainedbeyondtheupswinginthe

commoditycycle.

VI.Concludingcomments

Economicgrowthhappensasaresultofbothmovementoflaborfromlow tohighproductivity

sectorsandproductivityimprovementswithinsectors. Inmanufacturing,thewithineffecthasastrong

convergenceproperty,asdiscussedabove. Growthbasedonindustrializationisthereforetherelatively

easykind

of

growth,

which

can

be

accomplished

without

placing

too

great

demands

on

an

economys

fundamentalcapabilities.

Asthecountrystudiesthatfollowdemonstrate,however,eventhiseasytypeofgrowthhas

beentheexceptionaroundtheworldratherthantherule.Thisunevenrecordcannotbeexplained

easilybydrawingonthestandardlistofpolicyrecipes,emphasizingeconomicliberalizationandthe

costsofdoingbusiness. Furthermore,thescopeforindustrializationappearstohaveshrunk,for

reasonsIhavediscussedabove. Thebalanceofforcesgoingforwardappearlessfavorabletorapid

structuralchangethanhasbeenthecaseduringthelastsixdecades.Wemaywellneedtomoderatethe

optimismwhichtherecentexperienceofhighgrowthacrossthedevelopingworldhasspawned.


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Documents

Structural Change Fundamentals and Growth an Overview Revised