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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