Leading up to the 26th anniversary of “Africa Industrialization Day,” a big new report by the UN Economic Commission for Africa (UNECA) puts the structural transformation of African economies through industrialization back in the spotlight as imperative to ensure sustained economic growth and poverty eradication on the continent.
Economic transformation is necessary for growth that can lead to poverty reduction. However, economic transformation in low-income countries is changing as recent evidence suggests countries are running out of industrialization options much sooner than once expected. Is this a cause for concern? What does the past, present, and likely future of structural transformation look like? Read on to find out why leading economist Dani Rodrik is pessimistic and what some possible rays of light are.
Dani Rodrik was in town his week, and I attended a brilliant presentation at ODI. Very exciting. He’s been one of my heroes ever since I joined the aid and development crowd in the late 90s, when he was one of the few high profile economists to be arguing against the liberalizing market-good/state-bad tide on trade, investment and just about everything else. Dani doggedly and brilliantly made the case for the role of the state in intelligent industrial policy. But now he’s feeling pessimistic about the future (one discussant described it as ‘like your local priest losing his faith’).
The gloom arises from his analysis of the causes and consequences of premature industrialization. I blogged about his paper on this a few months ago, but here are some additional thoughts that emerged in the discussion. He’s also happy for you to nick his powerpoint.
Dani identified two fundamental engines of growth. The first is a ‘neoclassical engine’, consisting of a slow accumulation of human capital (eg skills), institutions and other ‘fundamental capabilities’. The second, which he ascribed to Arthur Lewis, is driven by structural differences within national economies – islands of modern, high productivity industry in a sea of traditional low productivity. Countries go through a ‘structural transformation’ when an increasing amount of the economy moves from the traditional to the modern sector, with a resulting leap in productivity leading to the kinds of stellar growth that has characterized take-off countries over the last 60 years.
Manufacturing has been key to that second driver. It is technologically dynamic, with technologies spreading rapidly across the world, allowing poor countries to hitch a ride on stuff invented elsewhere. It has absorbed lots of unskilled labour (unlike mining, for example). And since manufactures are tradable, countries can specialize and produce loads of a particular kind of goods, without flooding the domestic market and driving down prices.
But that very dynamism has produced diminishing returns in terms of growth and (especially) jobs. Countries are hitting a peak of manufacturing jobs earlier and earlier in their development process (see graph). And it could get much worse – just imagine the impact if/when garments, the classic job-creating first rung on the industrialization ladder, shift to automated production in the same way as vehicle production.
Recently, economists began proposing the strategy for industrial development in low-income countries. But there are few explicit recommendations as to what role governments should play in fostering industrialization. Related question is whether we can draw useful lessons from successful experience of industrial development in East Asia for other regions, such as sub-Saharan Africa (SSA).
The paper entitled “A Cluster-Based Industrial Development Policy for Low-Income Countries” (Policy Research Working Paper 5703) proposes an industrial policy consisting of four pillars of recommendations based on roughly 20 case studies of industrial clusters in Asia and sub-Saharan Africa.
The potential for expanding the industrial sectors of African countries is substantial – this was a message I delivered on a recent trip to Italy, Tanzania, Mozambique and Malawi. This can happen through an improved understanding of the mechanics of economic transformation as well as by focusing on how such countries can follow their comparative advantage in natural resources and labor supply.
During my site visits and meetings with the private sector for the African segments of my trip, I became more convinced than ever of the strong untapped potential for private sector-led industrialization. Yet that can only happen when the government plays a facilitating role, such as by overcoming information asymmetries, coordination failures and externalities associated with first-mover actions. In Tanzania, initial experiments with industrial parks look promising, as do agricultural development projects and rural transport initiatives currently under way. In the case of industrial parks, it’s important to have a one-stop shop for registration and other administrative obligations, adequate electricity and water supply, and good transport/logistics links.
In the past 30 years, China has achieved phenomenal economic growth, an unprecedented development “miracle” in human history. Since the institution of its reforms and Open Door policy in 1978, China’s gross domestic product (GDP) has been growing at an average annual rate of more than 9 percent (figure 1). In 2010, it has surpassed that of Japan and become the world’s second-largest economy.
In a recent blog post “Ricardian Confusions”, Paul Krugman commented on my paper “Beyond Keynesianism and the New New Normal” delivered at the Council on Foreign Relations on Feb. 28. He points out that the government’s fiscal stimulus generally is temporary and households will not increase savings by the full amount of the stimulus. As a result, the stimulus is expansionary even if Ricardian equivalence holds. His comment triggered a series of discussions (Antonio Fatas and Ilian Mihov, Mark Thoma, Paul Krugman, Nick Rowe, and Brad Delong).
I have no disagreement with Paul about the possibility of an expansionary effect of a temporary fiscal stimulus. But if the effect exists and the stimulus does not increase productivity as in his example, there will also be a contractionary effect after the exit of stimulus and the increase of tax to retire the public debts. At the end the issue of underutilization of capacity, which my paper attempts to address, will still be there.
|Light manufacturing operations in a Chinese standardized factory building|
The post on 'Understanding India and China's success' is a nice summary of Professor Bardhan's key messages of ‘Awakening Giants, Feet of Clay: A China-India Comparative Economic Assessment.’ It debunks many myths, but it can not debunk an emerging trend that industrialization is no longer the only route to rapid growth and development".
From Project Syndicate:
|Click here to download the book (pdf).|
China and India are both racing ahead economically. But the manner in which they are growing is dramatically different. Whereas China is a formidable exporter of manufactured goods, India has acquired a global reputation for exporting modern services. Indeed, India has leapfrogged over the manufacturing sector, going straight from agriculture into services.
The differences in the two countries’ growth patterns are striking, and raise significant questions for development economists. Can service be as dynamic as manufacturing? Can late-comers to development take advantage of the increasing globalization of the service sector? Can services be a driver of sustained growth, job creation, and poverty reduction?
|A view of Beijing's traffic gridlock from my office.|