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Seven steps to structural transformation

Shanta Devarajan's picture

 

 

 

 

 

 

 

 

 

 

 

 

 

My colleagues Justin Lin and Celestin Monga have proposed a six-step plan for identifying industries that could help developing countries industrialize. 

The first step in the plan is to find countries that have a per-capita income that is roughly double yours and have a similar endowment, and observe what they are producing.  These industries would then serve as the basis for possible government intervention to either protect or create, depending on the country’s situation.

However, the six-step plan seems to gloss over the fact that countries, even seemingly successful ones, produce certain goods for political rather than economic reasons. 

 

Someone who was trying to apply the framework to Kenya found that the country with double the per-capita income and a similar endowment—in terms of labor/land and labor/capital ratios, etc.--was India, which produces high-tech goods and services. The implication was that Kenya should gear up for making these its future industries.  But a paper by Kalpana Kochhar and colleagues shows that India’s pattern of development is idiosyncratic: despite a large pool of unskilled or semi-skilled labor, India produces skill-intensive goods and services.  One reason is the restrictive labor regulations in India that leave formal-sector manufacturing at a low level, but are politically very difficult to remove.

Likewise, once an industry has been identified, it may not be competitive because policies and regulations in the poor country make certain prices immovable. 

For instance, in South Africa, again for political reasons, it is very hard to lower the minimum wage, so that certain labor-intensive industries, even if they conform to the country’s comparative advantage, may not be the best way to industrialize. 

The Lin-Monga framework does consider this, by ensuring in one of the subsequent steps that all other prices in the economy reflect market conditions.  But it is not clear what to do when this condition doesn’t hold.  Should we work on removing the distortion, or find an industry that doesn’t rely on the distorted prices (something which is hard to do when the distorted price is the price of labor).

The attempt to identify “winners” in a systematic way is certainly welcome.  Countries are not satisfied with the recommendation to simply improve the business climate and let the winners emerge. 

As Justin and Celestin observe, governments around the world already practice industrial policy; their paper tries to provide some economic reasoning for it.  But, in keeping with other self-improvement programs, I hope they will add a seventh step, namely, to examine the political economy of industrial policy—both in the “model” country with double the per capita income, and in the country trying to industrialize.
 

Photo: Arne Hoel, World Bank

Comments

Submitted by Celestin Monga on
Shanta: Good to see that there is interest in revisiting industrial policy, and in the spirit of debate, I hope you as well as your faithful blog readers will check out my rejoinder post on 'Let's Talk Development' Link-https://blogs.worldbank.org/developmenttalk/growth-identification-and-facilitation-let-the-debate-begin

Submitted by olugbenga adesanya on
The Lin-Monga proposal is apt and a step in the right direction. African nations need more of ideas than grants and loans that adds to the debt burden due to highly undefined policies and self serving project management styles. Can i have access to the full study?

You can access the full study by clicking on Justin's name in the original blog post. It will take you to the working paper.

Submitted by olugbenga adesanya on
The 35 page document is not in English. Kindly avail me with an English version.

Submitted by olugbenga adesanya on
Thanks for the English version. Why did Lin recommend local industry protection? It could be counterproductive in my view.

Submitted by bernhard on
Dear Shanta. I am writing this and at the same time not having a lot of hope to be fully understood (Out of experience in talking to people and decision makers). Closely watching the state of the earth as a whole, especially the amount of available resources left, here again especially fossil fuels left, one must be shaken by the insights. Insights, a lot of leaders of this world seem to deny out of, to me, unknown reasons. Some call it "denial of reality". As the end of cheap oil in sight and already experiencing, everything is going to change. Steps taken "early" could mitigate the consequences for at least some countries and areas in favourable climate. These steps in favourable climate can only mean to bring people, given the opportunities, back to producing food without involving fossil fuels. As for Africa, there might be solutions left, and there are indeed a lot of people and organizations recommending this. On the other hand, the actual opposite is evolving, as countries are giving away their fertile land to heavy industrialized agricultural industries of foreign countries and companies. (E.g. http://www.farmlandgrab.org/ ) To give, at least a chance, to mankind in some areas with favourable climate of the earth, only agriculture on a sustainable level, means close to markets, not involving fossil fuels not even fossil produced fertilizer, bringing the waste back to the land to keep the land fertile, involving man labour and at the maximum draught animals, can help and mitigate. I know this letter might look like the writing of just another alarmist. But I have been an optimistic person, watching closely for decades and hoping for good solutions for mankind. It turns out very different from my hopes. The ones who want to see and put the bits and pieces evolving into a picture, can easily be quite speechless, at least at first. I do hope to receive an answer in one or the other way. As I see you are in such a responsible position, maybe some people can make a change to at least some people of the world. Kind regards, Bernhard

Submitted by olugbenga adesanya on
Thank you Shanta.

Submitted by Mapi on
Shanta, Justin Lin has responded to your blog post here: https://blogs.worldbank.org/developmenttalk/choosing-countries-as-models-for-industrial-growth

Submitted by olugbenga adesanya on
Africa should grow at double digits to avoid not being left behind. Let us concentrate on food security, industrialization and poverty eradication rather than exploitative tendencies of multinationals. Even the template of the southern economic engines grew via this pathway.

Submitted by bernhard on
Why not learn from the events in other parts of the world? All the countries that you called "economic engines" lost their ability to feed themselves. The current land grab in Africa and elsewhere, especially when driving poor farmers (means mostly also, they still could produce without the use of fossil fuel) worsens the food situation, this maybe beyond a point of possible repair. I urge you all to take deep looks and try to find some insights about the worlds situation on resources. One site, I believe you all can trust in, is: http://www.iea.org/ Once you search for peak oil on the page, there you will find a lot of pages (published 2010 and 2011) concerning this, most disturbing, facts. But please, stop denying reality and act! Maybe there is half a decade left to act, but this time used properly can change the outlook and survival of so many people. In continuing the path taking farmers, especially the ones producing in subsistence and for local markets away from their land, there will only be more of famine, of hunger and revolutions. If there is a chance that people in important positions like all of you understand the actual - fact based - situation of the world, not panic should drive moves, but putting all the efforts into bringing people into situations of being able once again to produce food on true sustainable level. My plead to inform yourselves, not shy away by denying reality ( which of course is understandable on personal level, for all the hurt it implies) and then please act for a renewed food production in Africa.

Submitted by olugbenga adesanya on
Subsistence farming and small farm holdings definitely should be part of the food security matrix. We should admit that land available for cultivation in Africa outweighs the portion covered by subsistence farming. Mega farms are needed to feed the teeming African population. Fossil fuels would still be relevant till 2035 for your information. Would you rather the production processes are put on hold till renewable energy technologies penetrate the markets and compete with other fuel sources? African leaders should be responsive enough to development and growth challenges facing their nations and stop seeking grants and loans that would add to the burden of nationhood. We should study closely the strategies adopted by the BRICS nations and modify to suit local requirements. Africa should grow.

Submitted by bernhard on
level and for local markets. Of course there will be fossil fuel around by 2035. But most of us will not be able to afford it. A farmers representative, asked about the consequences of doubled and tripled oil prices said: Large spread famine is the consequence. So if Africas leaders can listen and understand they would swiftly change the development efforts into growing food on levels mentioned above. Please read my comment further up once again and do some Internet searches by yourself. Kind regards, Bernhard

Submitted by Ejaz Ghani on
The big question for Kenya is whether it should emulate China (global center for manufacturing exports) or India (global centre for service exports)? More importantly, what is feasible for Kenya(read Howard Pack's blog on why it may be difficult to emulate China)? There are two things that policy makers care about--the pace of "growth" and "inclusiveness of growth"--the latter gets reflected in the pattern of growth. Shanta rightly seems to be more concerned about the "pattern" of growth or inclusiveness, But should this come at the expence of the pace of growth? India's "idiosyncratic" growth pattern was led by service exports because India took advantage of globalization of service, while China was focused on the globalization of manufacturing. Shanta is correct in arguing that service is generally more skill intensive compared to manufacturing, and does not create as many jobs. But it did deliver a fast pace of growth for India. Kenya need not just focus on what is wrong with its current and past system, or for that matter what is wrong with the current systems in China and India. It needs to anticipate the future, and do what it will take to advantage of it. Globalization of service may just be the tip of the iceberg (Blinder). Jobs are created by entrepreneurs. The world production systems have become more skill intensive So Kenya should take advantage of it, even if it means fewer jobs. But they are good and productive jobs.

Submitted by olugbenga adesanya on
My take is that each nation should adapt succeeding economic development templates to suit local parameters. After all China and India grew on differently developed home grown strategies.

Submitted by olugbenga adesanya on
We are now on the same page. Perhaps better subsidy management and adoption of farm gate prices would correct your fears. I shall search the internet as advised.

Submitted by bernhard on
Dear Olugbenga. If you find new points of view on your Internet researches, please let me know. I wonder if there is any possibility to bring some change in the current way of food production as there still may be some time left to change. Especially if institutions like the world bank understands where we, globally, are heading to and maybe talk to some leaders in Africa and succeed in convincing them to change ways of production and distribution - we must say back the way - production was working a hundred years ago. Kind regards, Bernhard

Submitted by olugbenga adesanya on
Dear Bernhard, The issues centre in part around economy of scale, access to funds by farmers and not speculators, integrated agribusinesses and farm gate prices. The Bretton Wood institutions can only offer advice to Heads of Governments in Africa.

Submitted by bernhard on
My motivation to write on this page and to you as you keep answering is out of a reason of deep, utmost concern about the problems we face as mankind. We surely will not stop our ignoring all the signs of depleting world resources. But it is this, that some regions in the world, again the ones with favourable climate so far, can make a lot of change in preparing for the descent of industrial growth even being possible for most regions world wide. But as long as it is possible to use all the information and the benefits of working on transitions, we all should do it. Maybe not for most of us, but it sure will make a difference to a lot of people involved in transition processes towards a sustainable economy. If I lived in a country with favourable climate I'd start that process immediately for myself. I have two links for you, it is about how can some parts of the world still shape economy, maybe only in some regions towards an economy that is going to work also as scarcities hit the fossil depending parts of the economy ever more. http://www.fao.org/news/story/en/item/51165/icode/ http://en.wikipedia.org/wiki/Humanure Kind regards, Bernhard

Submitted by bernhard on
I want to send you one link more as this seems best of practice already on the way. http://blogs.worldwatch.org/nourishingtheplanet/amathole-economic-development-agency-aspire-ndakana-farmers-cooperative-south-africa-livestock-garden-organic-bio-dynamic-certification-authority/

Submitted by olugbenga adesanya on
Dear Bernhard, I thank you for the useful links. They confirm my position that the transition to sustainability is not a short one. While transiting, we have to embrace clean energy technologies that would assist in fossil fuel exploitation in a more sustainable way. I like to be in touch with you. Kind Regards, Gbenga 2348032452740

Submitted by bernhard on
Dear Olugbenga. You said: "...transition to sustainability is not a short one." No, it is not, but it has to start and I believe, perfectly suited decisions, based on obeying local possibilities and knowledge in spite of bringing in new knowledge can bring changes to the better quite quickly. This link shows a project I'm not so comfortable with, it helps on one hand but brings new dependencies that can not be influenced in case of trouble on a local (self help/ adaption) scale. http://blogs.ei.columbia.edu/2011/01/07/9988/ This evening it was a pleasure to listen to a radio series on World Vegetable Center. Those people already trying (and succeeding) to cross breed vegetable varieties that are able to cope with warming climate, some of this work going back 40 - 50 years. So there were always far sighted, truly intelligent people working in nearly every field mankind is working at. Unfortunately the short sighted seem to be the vast majority in our species, creating short time "gold" rushing whilst destroying long serving structures (like sustainable, self sufficient farming!). The link below brings you to World Vegetable Center: http://www.avrdc.org/index.php?id=1 Btw. Strauss Kahn from International Monetary Fund was cited, stating the importance of food production. Ah yes. email is yes2bertl(at)gmx.at Kind regards, Bernhard Pity Shanta Devajaran doesn't share this conversation

Submitted by bernhard on
To Olugbenga. Found today, people are waking up, still trying to do the absolute necessary, better today than never. Link: http://gulftoday.ae/portal/28b585b9-0a08-4131-bcae-f5871fe58a0e.aspx Love and Peace, Bernhard

Submitted by Bernhard on
Dear Olugbenga. You might be interested in the following links: http://www.foreignpolicy.com/articles/2011/05/04/can_the_world_feed_10_billion_people?page=full http://www.fao.org/news/story/en/item/68390/icode/ In my opinion Africa has the chance to develop in different ways the industrialised countries have, avoiding the mistakes, empowering the people themselves. I know it is not happening now, it should. For further exchange would like to correspond using email, yes2bertl(at)gmx(dot)at

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