Dani Rodrik November 2012 Structural Transformation Policies
and Economic Growth
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Latin America has been doing better (sort of) Developing
country growth trends by region, 1950-2011
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Outline Structural change: why and how it matters Structural
transformation and fundamentals as drivers of economic growth
Policies for structural transformation What can/does go wrong?
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Why structural change matters Developing and emerging nations
are characterized by structural heterogeneity wide dispersion in
labor productivity across activities Some industries are escalator
industries higher productivity level and trajectory typically
tradables and manufactures though increasingly tradable services
exhibit similar features too Moving resources (especially labor) to
these escalator industries (i.e., structural change) is a key
source of economy-wide productivity growth
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Escalator industries: unconditional productivity convergence in
manufacturing Source: Rodrik (2012) Notes: Vertical axis represents
relative growth rate of labor productivity, controlling for period
fixed effects. Each country enters with most recent decade for
which data are available.
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Manufacturing as indicator of structural change South Korea
Colombia Thailand
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How structural change contributes (or not) to economic growth
Different patterns of structural change Thailand Hong Kong Colombia
Argentina
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Growth-increasing structural change: Thailand
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Growth-increasing structural change: Hong Kong
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Colombia: Growth-neutral structural change
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Growth-reducing structural change: Argentina
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The two dynamics of growth 1. Fundamentals: building broad
capabilities in the forms of human capital and strong institutions
Takes time, requires broad-based complementary investments, and
produces steady but moderate growth 2. Structural transformation:
emergence and expansion of modern industries Requires narrower
range of reforms (that are often sectoral) to remove/compensate for
costs modern industries face, and produces rapid growth until
dualism eliminated The set of policies required to foster these two
dynamics overlap, but are not same In particular, role of
unconventional policies to stimulate new industries (as in East
Asia)
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A typology of growth outcomes
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Structural transformation is impeded by both market failures
and government failures Government failures generic poor labor
laws, inadequate property rights, lack of contract enforcement, red
tape, corruption, macro instability, high taxes, sectoral/micro
specific regulations and taxes; lack of specific public inputs
Market failures Demonstration effects and learning spillovers from
introduction of new products or new technologies (discovery)
Coordination and agglomeration externalities (e.g., clusters)
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Orthodox development policy Government failures generic poor
labor laws, inadequate property rights, lack of contract
enforcement, red tape, corruption, macro instability, high taxes,
sectoral/micro specific regulations and taxes; lack of specific
public inputs Market failures Demonstration effects and learning
spillovers from introduction of new products or new technologies
(discovery) Coordination and agglomeration externalities (e.g.,
clusters) unsatisfactory outcomes in Latin America since 1990
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The new industrial policy Government failures generic poor
labor laws, inadequate property rights, lack of contract
enforcement, red tape, corruption, macro instability, high taxes,
sectoral/micro specific regulations and taxes; lack of specific
public inputs Market failures Demonstration effects and learning
spillovers from introduction of new products or new technologies
(discovery) Coordination and agglomeration externalities (e.g.,
clusters) is about removing bottlenecks to new economic activities,
whether due to market or government failures
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The wrong questions Should we have IP? Case for IP no different
than case for government policies in other areas such as education,
health, infrastructure, macroeconomic stabilization Failures occur
in all these areas too, but are not an argument for non-
intervention How to do it better, rather than whether to do it Most
countries are engaged in IP, whether they say so or not
Sector-specific incentives pervasive in Colombia Better to do it
explicitly and self-consciously than surreptitiously But can
governments pick winners? Of course not Good IP requires much less
from government: Ability to learn, revise policies, and to let
losers go Mistakes are a natural, expected feature of good IP Too
few mistakes indicate too timid IP
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The right question: how to do IP? Traditional IP: A list of
sectoral priorities + sectoral incentives Top-down, relying on
quality of bureaucracy (honesty, competence, implementation)
Presumes solutions are known Modern IP: A process of
institutionalized collaboration and dialog Focused on
identification of constraints and opportunities And the generation
of pragmatic private-public solutions Continuous monitoring and
evaluation Presumes only that solutions can be discovered
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Institutional design for industrial policy Must be built on
three ideas, each of which leads to a different design principle:
1. The requisite knowledge about the existence and location of the
spillovers, market failures, and constraints that block structural
change are diffused widely within society => embeddedness 2.
Businesses have strong incentives to game the government =>
carrots and sticks, discipline 3. The intended beneficiary of IP is
neither bureaucrats nor business, but society at large =>
accountability
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The many ways in which IP can fail No institutionalized dialog
No clear targets Market failures? Protecting rents? Social policy?
No clear instruments No clear commitments No monitoring No
review/revisions Not enough coordination across government agencies
No political leadership and ownership No transparency
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Industrial policy as work in progress No country can get
everything right East Asia, for example, typically falls short on
accountability and transparency But this is not an argument for not
doing it Need to look at IP as a normal government function, that
can be performed better or worse IP is a craft, which improves with
experience
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What industrial policy cannot do Substitute for the lack of
fundamentals human capital proper institutions Compensate for macro
imbalances fiscal unsustainability large external deficits
across-the-board uncompetitiveness due to high prices/overvalued
currency