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Title: The role of industrialization in economic development: theory and evidence

The role of industrialization in economic
development theory and evidence
  • Bineswaree Aruna Bolaky
  • Africa Section
  • Division for Africa, LDCs and special programmes
  • United Nations Conference on Trade and
    Development UNCTAD

Outline of presentation
  • A Conceptual definitions
  • B - The case for industrialization Economic
    Arguments (based on Szirmai-UNU)
  • C - The case for industrialization some
    econometric evidence
  • D - Challenges and opportunities from
  • E-African initiatives on industrialization

A - Concepts
  • 1. Concept of a production function and sources
    of economic growth
  • Yit Ait. F( Kit, Hit, Lit) i country t time
  • Y output over time Gross National Product
  • K Stock of Capital H Human capital L
  • A Total Factor Productivity TFP
  • Growth rate of output over time is a function of
  • Rate of growth in capital stock investment
  • Rate of growth in human capital
  • Rate of growth in labor
  • growth in total factor productivity (TFP) or
    technological change/technological progress
  • TFP Solow Residual portion of output not
    explained by the amount of inputs used in
  • Endogenous (new growth theory) or exogenous (old
    growth theory)??

A - Concepts
  • Determinants of TFP TFP is commonly identified
    with level of technology but actually
    incorporates a wider variety of factors such as
    internal organization of firms, level of worker
    effort, knowledge, ideas, RD, technical
    efficiency, economic structure
  • Capital intensity (K/Y) and labor productivity
    (L/Y) depend in the long-run on TFP growth or
    technological change. Both embodied and
    disembodied. And vice versa
  • Technological change can be embodied in the
    quality of new capital goods capital-embodied
    technical change
  • 2. TFP and concepts of efficiency
  • Productive efficiency Resources are allocated
    such that firms are producing at lowest possible
    costs, producing output by minimizing use of
    inputs, cannot produce more of one good without
    producing less of another
  • Allocative efficiency Resources are allocated
    to their best possible uses , producing right
    goods at the right prices for the right people

A - Concepts
  • 3. Increasing returns to scale a given
    proportional change in inputs leads to a more
    than proportional change in output.
  • 4. Structural change An economys structural
    transformation changes the composition of output
    and the contributions of each sector to GDP and
    employment over time.(UNECA)
  • 5. Globalization
  • a. free movement of factors of production and
    goods and services b. the integration of
    national economies into the international economy
    through trade, foreign direct investment, capital
    flows, migration, the spread of technology, and
    military presence (Bhagwati)

B-The case for industrialization Theory/Economic
  • Industrial development is a driver of structural
    change which is key in the process of economic
  • Recent research suggests that economic
    development requires structural change from low
    to high productivity activities and that the
    industrial sector is a key engine of growth in
    the development process.
  • Virtually all cases of high, rapid, and
    sustained economic growth in modern economic
    development have been associated with
    industrialisation, particularly growth in
    manufacturing production (Szirmai 2009).
  • .

B-The case for industrialization Theory/Economic
  • The Five Stages of Development1. Traditional
    Society- Refers to a country that has yet to
    begin developing, where a high percentage of
    people are involved with agriculture and a high
    percentage of the countrys wealth is invested in
    activities such as the military and religion,
    seen as nonproductive by Rostow.
  • 2. Transitional Stage- AKA the preconditions for
    takeoff. Under the model, the process of
    development begins when an elite group initiates
    innovations economic activities. Under the
    influence of these well-educated leaders, the
    country starts to invest in new technology and
    infrastructure, such as water supplies and
    transportation systems. These projects will
    ultimately stimulate an increase in productivity
    likely increasing the GDP. There is a limited
    production function, and therefore a limited
    output. There are limited economic techniques
    available and these restrictions create a limit
    to what can be produced. Increased specialization
    generates surpluses for trading. There is an
    emergence of a transport infrastructure to
    support trade. External trade also occurs
    concentrating on primary products.

  • 3. Takeoff- Rapid growth is generated in a
    limited number of economic activities, such as
    textiles or food products. These few, takeoff
    industries achieve technical advances and become
    productive, whereas other sectors of the economy
    remain dominated by traditional practices. After
    take-off, a country will take as long as fifty to
    one hundred years to reach maturity. Globally,
    this stage occurred during the Industrial
    Revolution. Industrialization increases, with
    workers switching from the agricultural sector to
    the manufacturing sector. The level of investment
    reaches over 10 of GNP. The growth is
    self-sustaining as investment leads to increasing
    incomes in turn generating more savings to
    finance further investment.4. Drive to
    maturity- Modern technology, previously confined
    to a few takeoff industries, diffuses to a wide
    variety of industries, which then experience
    rapid growth comparable to the takeoff
    industries. Workers become more skilled and
    specialized. The economy is diversifying into new
    areas the economy is producing a wide range of
    goods and services and there is less reliance on
    imports.5. High Mass Consumption- The economy
    shifts from production of heavy industry such as
    steel and energy, to consumer goods, such as
    motor vehicles and refrigerators. Of particular
    note is the fact that Rostow's "Age of High Mass
    Consumption" dovetails with (occurring before)
    Daniel Bell's hypothesized "Post-Industrial
    Society." The Bell and Rostovian models
    collectively suggest that economic maturation
    inevitably brings on job-growth which can be
    followed by wage escalation in the secondary
    economic sector (manufacturing), which is then
    followed by dramatic growth in the tertiary
    economic sector (commerce and services).

Dual Economy Model-Lewis (source Basu)
  • 2 sectors a small industrialized economy and an
    agricultural sector.
  • The industrialized sector is typically located in
    a few urban pockets and operates ,more or less
    like any modern industrial economy (modern or
    urban sector), technologically advanced
  • Larger agricultural sectorprimitive modes of
    production, vast majority of population is very
    poor-living at or near subsistence consumption
    (primitive, traditional, rural or subsistence
    sector) low wages, very low productivity close
    to zero
  • Workers in the industrial sector earn higher
    wages than those in rural sector, wage gap
    related to productivity gap
  • Assumption of duality an analytical convenience.
    While developed countries may have traits of
    dualism, the claim behind the dual economy
    literature is that such dualism is much sharper
    than LDCs

Dual Economy Model-Lewis
  • A closed economy with an industrial sector and a
    rural sector (or capitalist and subsistence
    sectors) and a fixed endowment of Labor L
  • In the rural sector, there is an unlimited labor
    supply at the subsistence wage excess supply is
    sufficiently large so that no employer incumbent
    or prospective-has to worry when considering
    employment expansion about having to bid up wages
    or about getting rationed in the labor market
  • If the capitalist sector wishes to draw on this
    unlimited supply of labor, it has to do so by
    offering a higher wage w which is a mark-up on
    the rural subsistence wage m
  • Only modern sector capitalists, who are profit
    maximizers, and are wage and price takers save on
    their profits and use their savings to invest to
    raise the productivity of labor in the modern
    sector, demand for labor in the modern sector
    rises absorbing the surplus labor from the rural
    sector and over time w rises causing at a certain
    point m also to rise
  • Turning point, wages in both the rural and modern
    sector get equated, rural-urban wage gap
    disappears and urban employment has grown

  • Replicated from Szirmai(2009)
  • There are powerful empirical and theoretical
    arguments in favour of industrialisation as the
    main engine of growth in economic development.
    The arguments can be summarised as follows
  • 1. There is an empirical correlation between the
    degree of industrialisation and per capita income
    in developing countries.
  • 2. Productivity is higher in the industrial
    sector than in the agricultural sector. The
    transfer of resources from agriculture to
    manufacturing provides a structural change bonus.
  • 3. The transfer of resources from manufacturing
    to services provides a structural change burden
    in the form of Baumols disease. As the share of
    the service sector increases, aggregate per
    capita growth will tend to slow down.
  • 4. Compared to agriculture, the manufacturing
    sector offers special opportunities for capital
    accumulation in developing countries. Capital
    accumulation can be more easily realised in
    spatially concentrated manufacturing than in
    spatially dispersed agriculture. This is one of
    the reasons why the emergence of manufacturing
    has been so important in growth and development.
    Capital intensity is high in mining,
    manufacturing, utilities and transport. It is
    much lower in agriculture and services. Capital
    accumulation is one of the aggregate sources of
    growth. Thus, an increasing share of
    manufacturing will contribute to aggregate growth.

  • Replicated from Szirmai(2009)
  • 5. The manufacturing sector offers special
    opportunities for economies of scale, which are
    less available in agriculture or services.
  • 6. The manufacturing sector offers special
    opportunities for both embodied and disembodied
    technological progress (Cornwall, 1977).
    Technological advance is concentrated in the
    manufacturing sector and diffuses from there to
    other economic sectors such as the service
  • sector.
  • 7. Linkage and spill-over effects are stronger
    in manufacturing than in agriculture or mining.
    Linkage effects refer to the direct backward and
    forward linkages between different sectors.
    Linkage effects create positive externalities to
    investments in given sectors. Spill-over effects
    refer to the disembodied knowledge flows between
    sectors. Spill-over effects are a special case of
    externalities which to refer to externalities of
    investment in knowledge and technology. Linkage
    and spill-over effects are presumed to be
    stronger within manufacturing than within other
    sectors. Linkage and spill-over effects between
    manufacturing and other sectors such as services
    or agriculture are also very powerful.

  • Replicated from Szirmai(2009)
  • 8. As per capita incomes rise, the share of
    agricultural expenditures in total expenditures
    declines and the share of expenditures on
    manufactured goods increases (Engels law).
    Countries specialising in agricultural and
    primary production will not profit from expanding
    world markets for manufacturing goods.

1. Correlation between industrialisation and
economic growth
  • Focus on the share of manufacturing in the total
    commodity production (i.e. agriculture and
    industry, including mining, manufacturing,
    construction and utilities) rather than in total
    GDP. The share of manufacturing in commodities
    is set out against a countrys per capita gross
    national income in 2000.
  • Szirmai finds a significant positive correlation
    of 0.79 between the logarithm of income per
    capita and the share of manufacturing.
  • Major exceptions among the advanced economies are
    primary exporters such as Norway, Canada and
  • Among the developing countries, Taiwan, Thailand
    and Brazil rank higher in terms of
    industrialisation than in terms of income.
  • Nevertheless, the table illustrates the general
    point about industrialisation. The poorest
    countries in the table are invariably those with
    the lowest shares of manufacturing (and the
    highest shares of agriculture). The more
    prosperous countries are the more industrialised

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2. The Structural Change Bonus-static shift and
dynamic shift
  • A transfer of labour from low productivity
    agriculture to high productivity industry results
    in an immediate increase in overall productivity
    and income per capita. This transfer has been a
    major source of growth in developing countries.
    It is referred to as the structural change bonus
    (Positive static effect).
  • Szirmai analyses data on value added per worker
    for a selected number of developing countries for
    which data are available for longer periods.
    Immediately clear that value added per worker is
    much higher in manufacturing than in agriculture.
    Table 5
  • Dynamic shift effect
  • If productivity growth in manufacturing is more
    rapid than in other sectors, a transfer of
    resources to this sector will result in more
    rapid aggregate growth (This is referred to as
    the dynamic shift effect). Here the evidence is
    more mixed. In the richest countries of the world
    growth of labour productivity in agriculture in
    the post-war period has been higher than in
    industry - particularly due to biotechnological
    innovation. However, in developing countries
    since 1950, productivity growth in manufacturing
    has been more rapid than in the primary sector.

2. The Structural Change Bonus-static shift and
dynamic shift Table 6
  • Between 1950 and 1973, the growth rate of labour
    productivity in manufacturing is substantially
    higher than in agriculture and also higher than
    that in the total economy. This is even more
    pronounced if we look at growth of output (8.6
    versus 3.9). Manufacturing is clearly a very
    dynamic sector contributing to overall growth
    performance. In ten of the fourteen developing
    countries, productivity growth in manufacturing
    is higher than in agriculture. In the case of
    value added, all countries show higher growth in
  • After 1973, the picture becomes more complicated.

2. The Structural Change Bonus-static shift and
dynamic shift
  • Summarising the information in both tables, we
    can say that in developing countries
    manufacturing is indeed one of the more dynamic
    sectors in terms of productivity and output
    growth, especially in the period 1950-73. In the
    period 1973-2003, productivity growth in
    agriculture surpasses that of manufacturing, but
    manufacturing still dominates in terms of
  • output growth.

3. Structural change burden-Baumols disease
  • In many service sectors, the possibilities for
    productivity growth are limited due to the
    inherently labour intensive nature of service
    production. This implies that an increasing share
    of services results in a productivity slowdown
    (Baumols law). Such service sectors include
    personal services, restaurants and hotels, health
    care and medical services and government.
  • Baumols law has recently come under fire,
    because there are some very important market
    service sectors such as the financial sector and
    sales and distribution where there are major
    productivity improvements, based on ICT
  • The working hypothesis is that a country with a
    large service sector will tend to grow slower
    than a country with a smaller service sector. As
    advanced economies are predominantly service
    economies, this creates new possibilities for
    catch up in developing countries where the
    industrial and the manufacturing sector have a
    proportionately larger share in output.

4. Capital Accumulation
  • Reasons for high and rapid labour productivity
    growth in manufacturing capital accumulation,
    economies of scale and technological progress.
  • Spatially concentrated activities such as
    manufacturing offer better possibilities for
    capital accumulation and capital intensification
    than spatially dispersed agriculture. The most
    capital intensive sectors in the economy are
    manufacturing, mining, construction and
  • In developing countries capital intensity in
    manufacturing is much higher than in agriculture
    (as expected). The same is true for mining and
    utilities. The shift from agriculture to
    manufacturing is important in the process of
    aggregate capital accumulation
  • In the advanced economies capital intensity the
    roles of agriculture and manufacturing have been
    reversed. Capital intensity in the small sector
    of agriculture is much higher than in
    manufacturing. This has to do with the
    industrialisation of agriculture. In the
    advanced economies the share of agricultural
    labour and value added has declined enormously,
    but agriculture has become much more productive
    due to the application of very capital intensive

4. Capital Accumulation
  • In economic growth accounting studies, the
    contribution of growth of physical capital to
    growth of output in post-war advanced economies
    turns out to be less important than previously
    thought. Other factors such as growth of
    employment, growth of human capital and
    disembodied technological change are very
    important as well.
  • However, for developing countries, physical
    capital accumulation still seems to be of great
    importance, because they start with so much less
    capital per worker

5. Opportunities for scale economies
  • Economies of scale Average costs of production
    fall as output increases.
  • Historically the industrial sector (including
    mining, manufacturing, construction and
    utilities) profited in particular from economies
    of scale, compared to service sectors and
    agriculture. This is partly due to the nature of
    technologies which are most productively applied
    in large scale production
  • It also has to do with learning by doing.
    Expansion of production expands the scope for
    learning. Thus, the rate of growth of
    productivity in manufacturing depends positively
    on the rate of growth of output (Verdoorn, 1949
  • Learning by doing Each new input is used more
    effectively than the old ones, holding capital
    stock and technology constant

5. Opportunities for scale economies
  • With the rise of ICT technologies this has may
    have changed from the 1990s onwards. In certain
    service sectors, scale effects have become
    overwhelmingly important, as the marginal costs
    of providing an additional unit of service have
    come close to zero. The question is justified
    whether the role of manufacturing in future
    growth may become less important than in the past
    sixty years. The service sector might become the
    new engine of growth. It is too early to say
    whether this is indeed the case

6. Technological Change
  • The manufacturing sector offers special
    opportunities for both embodied and disembodied
    technological progress.
  • Rapid capital accumulation is associated with
    embodied technological progress, as new
    generations of capital goods embody the latest
    state of the art of technology.
  • Disembodied technological progress refers to
    changes in the knowledge of product and process
    technologies in firms and in the economy as a
  • Since, the industrial revolution, technological
    advance has been concentrated in the
    manufacturing sector and diffuses from there to
    other economic sectors such as the service
    sector. Cornwall (1977) in particular has argued
    that manufacturing is the locus of technological

6. Technological Change
  • Embodied Technological change the shift over
    time from technologically less sophisticated to
    technologically more advanced capital goods
  • In the course of economic development, output per
    unit of input (total factor productivity) can
    increase due to various factors, among which
    shifts from one economic sector to another,
    economies of scale and more efficient allocation
    of resources within sectors. One of the most
    important factors, which can cause increases in
    output per unit of input, is so-called
    disembodied technological change
  • Disembodied technological change refers to
    general advances in science, technology and the
    state of knowledge, changes in the stocks of
    knowledge available to firms, sectors or
    countries improvements in the level of knowledge
    absorbed by employees and managers in educational
    institutions and on the job (Maddison, 1987, p.
    662), learning by doing by workers and managers
    on the job, improvements in the collective
    technological capabilities of firms or the social
    capabilities of countries and finally positive
    external effects of investment in knowledge and
    new technologies, through spill-overs from firm
    to firm or from country to country.

7. Linkages and Spillovers
  • Linkage effects refer to the direct backward and
    forward linkages between different sectors.
    Linkages are direct physical relations of
    inter-sectoral supply and demand. The positive
    external effect of linkages is that they can
    create economies of scale in the domestic
  • Spillover effects refer to the disembodied
    knowledge and technology flows between economic
    actors and economic sectors. Actors learn from
    each other, so that investment in technological
    knowledge or increased efficiency in one firm has
    positive external effects in the economy as a
  • Intersectoral backward and forward linkages in
    manufacturing are perceived to be much stronger
    than in mining or agriculture which are typically
    characterised by weak linkages (Hirschman, 1958,
    Cornwall, 1977 Myint, 1980). Investment in one
    branch of manufacturing can have strong positive
    external effects on other sectors.
  • Spillover effects between manufacturing and other
    sectors are also very powerful. The manufacturing
    sector is one of the primary sources of
    technological advance in the economy as a whole.
    It is here that most product and process
    technologies are developed. One of the important
    spillover effects in modern economies is that
    from the industrial sector to other sectors, such
    as the service sector. Thus, advances in ICT
    hardware technologies produced in the
    manufacturing sector (silicon chips, glass fibre
    cables) fuel technological change in the software
    producing and software using service sectors

8. The Engel Law
  • The lower the per capita income of a country, the
    larger the proportion of that income will be
    spent on basic agricultural foodstuffs. This is
    the famous Engel law (Engel, 1857). As per capita
    incomes increase, the demand for agricultural
    products will decline and the demand for
    industrial products will tend to increase.
  • Economic development creates a mass market for
    industrial products. This creates dynamic
    opportunities for manufacturing. If a country
    remains in agriculture and fails to develop its
    domestic manufacturing industry, it will have to
    import increasing amounts of manufactured goods

  • Prebisch-Singer Hypothesis (1950)
  • The Prebisch-Singer hypothesis normally refers to
    the claim that the relative price of primary
    commodities in terms of manufactures shows a
    downward trend. Prebisch and Singer based this
    conclusion on a visual inspection of the net
    barter terms of tradethe relative price of
    exports to importsof the United Kingdom from
    1876 to 1947. The inverse of this was taken to be
    a proxy for the relative price of primary
    commodities to manufactures
  • Why? Singer for example argued that the demand
    for primary commodities showed relatively low
    income elasticity, so income growth tended to
    lower the relative demand for, and hence relative
    price of, primary commodities.
  • Moreover, he argued that technical progress in
    manufacturing tended to be raw-material saving
    (e.g., synthetics), thereby causing the demand
    for primary products to grow slower than for
  • Does PS still holds? Harvey et al (2010). Their
    data set comprises 25 commodities and provides a
    new historical perspective, spanning the
    seventeenth to the twenty-first centuries. Their
    estimation results show that eleven price series
    present a significant and downward trend over all
    or some fraction of the sample period. In the
    very long run, a secular, deteriorating trend is
    a relevant phenomenon for a significant
    proportion of primary commodities.
  • But Kaplinsky (2006) In the short-run, that is
    from the 1990s for the case of manufactures and
    from around 1999 for the case of commodities,
    there has been an observed change in historic
    price trends for both commodities and
    manufactures. IMPACT OF CHINA AND INDIA???

C- Some Econometric Evidence
  • Szirmai (2009) In the more recent literature one
    finds, that manufacturing tends to be more
    important as an engine of growth in developing
    countries than in advanced economies and also
    more important in the period 1950-1973 than in
    the period after 1973.

C- Some Econometric Evidence
  • Fagerberg and Verspagen (1999)regress real
    growth rates on growth rates of manufacturing. If
    the coefficient of manufacturing growth is higher
    than the share of manufacturing in GDP, this is
    interpreted as supporting the engine of growth
    hypothesis. Fagerberg and Verspagen find that
    manufacturing was typically an engine of growth
    in developing countries in East Asia and Latin
    America, but that there was no significant effect
    of manufacturing in the advanced economies.
  • Fagersberg and Verspagen (2002) they examine the
    impact of shares of manufacturing and services in
    three periods 1966-72, 1973-83 and 1984-95 for a
    sample of 76 countries. They find that
    manufacturing has much more positive
    contributions before 1973 than after.
  • The interpretation in both papers is that the
    period 1950- 1973 offered special opportunities
    for catch up through the absorption of mass
    production techniques in manufacturing from the
    USA. After 1973, ICT technologies started to
    become more important as a source of productivity
    growth, especially in the nineties. These
    technologies are no longer within the exclusive
    domain of manufacturing, but operate in the
    service sector

C-Some Econometric Evidence
  • Timmer and de Vries (2007) also confirms the
    increasing importance of the service sector.
    Using growth accounting techniques, they examine
    the contributions of different sectors in periods
    of growth accelerations, in periods of normal
    growth and in periods of deceleration. In periods
    of normal growth they find that manufacturing
    contributes most. In periods of acceleration,
    this leading role is taken over by the service
    sector, though manufacturing continues to have an
    important positive contribution
  • Tregenna (2008) Her study examines the linkages
    between the manufacturing and services sectors in
    South Africa, and between each of them and the
    rest of the domestic economy, based on analysis
    of input-output tables and employment trends. The
    study reveals that manufacturing is particularly
    important as a source of demand for the services
    sector as well as the rest of the economy through
    its strong backward linkages, which suggests that
    in this respect a decline in manufacturing could
    negatively affect future growth. Services are
    especially important in terms of employment
    creation, both direct and indirect.

C-Some Econometric Evidence
  • Szirmai and Verspagen (2010)
  • Analyse a dataset of 90 countries, including 21
    advanced economies and 69 developing countries,
    covering the period 1950- 2005. The focus of the
    analysis is on the Engine of Growth Hypothesis
    which posits that manufacturing is the key sector
    in economic development.
  • 6 Hypotheses/research questions
  • Is there a positive relationship between the
    value added share of manufacturing and growth of
    GDP per capita? Their hypothesis is that there is
    a positive relationship for the 90 countries in
    the period 1950-2005.
  • Is the relationship between the value added share
    of manufacturing and per capita GDP growth
    stronger than that between the value added share
    of services and growth of per capita GDP? Their
    hypothesis is that the relationship between
    manufacturing and growth is stronger than between
    services and growth.
  • Does the relationship between the share of
    manufacturing and growth of GDP per capita become
    weaker over time? Their working hypothesis is
    that the relationship between manufacturing and
    growth will be stronger in the period 1950-75
    than in the period 1975-2005.

C-Some Econometric Evidence
  • Is there a positive relationship between the
    share of manufacturing and the rate of growth
    during growth accelerations? Their working
    hypothesis is that the impact of manufacturing on
    growth is stronger during growth accelerations.
  • Is the relationship between the share of
    manufacturing and growth during growth
    accelerations stronger or weaker than that
    between the share of services and growth? Their
    working hypothesis is that the coefficient of
    manufacturing share is higher than that of
    services in general and that the difference
    between the coefficients is greater in
    acceleration periods than in non-acceleration
  • Are there systematic differences between the role
    of manufacturing in countries with different
    characteristics (e.g. level of GDP per capita,
    human capital and region)?
  • Their working hypotheses/expectations are the
  • a. the relationship between share of
    manufacturing and growth is weaker at higher
    levels of GDP per capita than at lower levels.
    (i.e. more advanced economies are less dependent
    on manufacturing for their growth)
  • b. the relationship between the share
    manufacturing and growth will be stronger in
    countries with high levels of human capital.

  • Results
  • The results of the empirical analysis in their
    paper are in line with the engine of growth
    hypothesis. For the whole sample, the share of
    manufacturing is positively related to economic
    growth and this effect is more pronounced for the
    poorer countries. No such effects were found for
    services. These results are consistent with their
    first two hypotheses concerning the importance of
  • They distinguish across three periods 1950-1970,
    1970-1990 and 1990-2005. Their expectation that
    the role of manufacturing becomes less important
    over time is not confirmed. The impact of
    manufacturing is more important in the middle
    period than in the early period and then becomes
    less important in the final period. With regard
    to services, they find significant effects in the
    first two periods and hardly any effects in the
    final period. This runs counter to predictions
    concerning the increasing importance of
    service-led growth.
  • They broke down their sample into four groups of
    countries Asia, Latin America, Africa and
    advanced economies. There are interesting
    differences between country groups Effects of
    average shares of manufacturing on average rates
    of growth are important in Latin America, but not
    in the other groupings. Manufacturing continues
    to be important in the advanced economies, but
    its effect decreases as advanced countries come
    closer to US income levels, while the effects of
    services increase. For Africa, no significant
    relationships are found.
  • They find that the effects of manufacturing are
    particularly pronounced in periods of growth
    acceleration. The tentative conclusion is that
    manufacturing is especially important in periods
    of accelerated growth. Services also play a role
    in growth accelerations, but are less important
    than manufacturing.

C-Some Econometric Evidence
  • McMillan and Rodrik (2011)
  • Developing economies are characterized by large
    productivity gaps between different parts of the
    economy. Dual economy models à la W. Arthur Lewis
    have typically emphasized productivity
    differentials between broad sectors of the
    economy, such as the traditional (rural) and
    modern (urban) sectors. More recent research has
    identified significant differentials within
    modern, manufacturing activities as well. Large
    productivity gaps can exist even among firms and
    plants within the same industry. Whether between
    plants or across sectors, these gaps tend to be
    much larger in developing countries than in
    advanced economies. They are indicative of the
    allocative inefficiencies that reduce overall
    labor productivity.
  • The upside of these allocative inefficiencies is
    that they can potentially be an important engine
    of growth. When labor and other resources move
    from less productive to more productive
    activities, the economy grows even if there is no
    productivity growth within sectors.
  • This kind of growth-enhancing structural change
    can be an important contributor to overall
    economic growth. High-growth countries are
    typically those that have experienced substantial
    growth-enhancing structural change.

C-Some Econometric Evidence
  • McMillan and Rodrik (2011)
  • Data base consists of sectoral and aggregate
    labor productivity statistics for 38 countries,
    covering the period 1990 up to 2005 -29 are
    developing countries (9 African countries) and 9
    are high-income countries.
  • All developing countries in the sample have
    become more globalized during the time period
    under consideration. They have phased out
    remaining quantitative restrictions on imports,
    slashed tariffs, encouraged direct foreign
    investment and exports, and, in many cases,
    opened up to cross-border financial flows.
  • Labor productivity gaps between different sectors
    are typically very large in developing countries.
    This is particularly true for poor countries with
    mining enclaves, where few people tend to be
    employed at very high labor productivity. In
    Malawi, for example, labor productivity in mining
    is 136 times larger than that in agriculture!
  • The average manufactures-agriculture productivity
    ratio is 2.3 in Africa, 2.8 in Latin America, and
    3.9 in Asia.
  • Inter-sectoral productivity gaps are clearly a
    feature of underdevelopment - The movement of
    labor from low-productivity to high-productivity
    activities raises economy-wide labor

C- Some Econometric Evidence
  • McMillan and Rodrik (2011)
  • 2 sources of labor productivity growth
  • First, productivity can grow within economic
    sectors through capital accumulation,
    technological change, or reduction of
    misallocation across plants (within component of
    productivity growth).
  • Second, labor can move across sectors, from
    low-productivity sectors to high-productivity
    sectors, increasing overall labor productivity in
    the economy (structural change).
  • Structural change has made very little
    contribution (positive or negative) to the
    overall growth in labor productivity in the
    high-income countries in their sample.
  • Structural change has played an important role in
    all three regions. But most striking of all is
    the differences among the regions. In both Latin
    America and Africa, structural change has made a
    sizable negative contribution to overall growth,
    while Asia is the only region where the
    contribution of structural change is positive.

C- Some Econometric Evidence
  • Examples Zambia and Nigeria
  • In both countries, the employment share of
    agriculture has increased significantly
    (alongside with community and government services
    in Nigeria). By contrast, manufacturing and
    relatively productive tradable services have
    experienced a contraction
  • The expansion of agricultural employment in
    Zambia is particularly large more than 20
    percentage points of total employment between
    1990 and 2005, if the numbers are to be believed.
    These figures indicate a veritable exodus from
    the rest of the economy back to agriculture,
    where labor productivity is roughly half of what
    it is elsewhere. Thurlow and Wobst describe how
    the decline of formal employment in Zambian
    manufacturing during the 1990s as a result of
    import liberalization led to many low-skilled
    workers ending up in agriculture.
  • Ghana, Ethiopia and Malawi are three countries
    that have experienced growth-enhancing structural
    change. In all three cases, the share of
    employment in the agricultural sector has
    declined while the share of employment in the
    manufacturing sector has increased. However,
    labor productivity in manufacturing remains
    notably low in both Ghana and Ethiopia.

C- Some Econometric Evidence
  • McMillan and Rodrik (2011)
  • Globalization has facilitated technology transfer
    and contributed to efficiencies in production.
    Yet the very diverse outcomes we observe among
    developing countries suggest that the
    consequences of globalization depend on the
    manner in which countries integrate into the
    global economy.
  • In several cases most notably China, India, and
    some other Asian countries globalizations
    promise has been fulfilled. High-productivity
    employment opportunities have expanded and
    structural change has contributed to overall
    growth. But in many other cases in Latin
    America and Sub-Saharan Africa globalization
    appears not to have fostered the desirable kind
    of structural change. Labor has moved in the
    wrong direction, from more productive to less
    productive activities, including, most notably,
  • Import competition has caused many industries to
    contract and release labor to less productive
    activities, such as agriculture and informality.
    One important difference among countries may be
    the degree to which they are able to manage such

C- Some Econometric Evidence
  • McMillan and Rodrik (2011)
  • In their empirical work, they identify three
    factors that help determine whether (and the
    extent to which) structural change goes in the
    right direction and contributes to overall
    productivity growth.
  • First, economies with a revealed comparative
    advantage in primary products are at a
    disadvantage. The larger the share of natural
    resources in exports, the smaller the scope of
    productivity-enhancing structural change. The key
    here is that minerals and natural resources do
    not generate much employment, unlike
    manufacturing industries and related services.
    Even though these enclave sectors typically
    operate at very high productivity, they cannot
    absorb the surplus labor from agriculture.
  • Globalization promotes specialization according
    to comparative advantage. Here there is another
    potentially important difference among countries.
    Some countries many in Latin America and Africa
    are well-endowed with natural resources and
    primary products. In these economies, opening up
    to the world economy reduces incentives to
    diversify towards modern manufactures and
    reinforces traditional specialization patterns.
    Some primary sectors such as minerals do operate
    at very high levels of labor productivity. The
    problem with such activities, however, is that
    they have a very limited capacity to generate
    substantial employment. So in economies with a
    comparative advantage in natural resources, we
    expect the positive contribution of structural
    change associated with participation in
    international markets to be limited. Asian
    countries, most of which are well endowed with
    labor but not natural resources, have a natural
    advantage here.

C-Some Econometric Evidence
  • Second, they find that countries that maintain
    competitive or undervalued currencies tend to
    experience more growth-enhancing structural
    change. Undervaluation acts as a subsidy on those
    industries and facilitates their expansion.
  • Finally, they also find evidence that countries
    with more flexible labor markets experience
    greater growth-enhancing structural change. This
    also stands to reason, as rapid structural change
    is facilitated when labor can flow easily across
    firms and sectors. By contrast, they do not find
    that other institutional indicators, such as
    measures of corruption or the rule of law, play a
    significant role.
  • Countries that do well are those that start out
    with a lot of workers in agriculture but do not
    have a strong comparative advantage in primary
    products. That most Asian countries fit this
    characterization explains the Asian difference.

C-Some Econometric Evidence-Rodrik on structural
change and globalization
  • A key promise of globalization was that access
    to global markets and increased competition would
    drive an economys resources toward more
    productive uses and enhance allocative
    efficiency. It is certainly true that firms that
    are exposed to foreign competition have had no
    choice but to either become more productive or
    shut down. As trade barriers have come down,
    industries have rationalized, upgraded and become
    more efficient. But an economys overall
    productivity depends not only on whats happening
    within industries, but also on the reallocation
    of resources across sectors. This is where
    globalization has produced a highly uneven
    result. Our empirical work shows that countries
    with a comparative advantage in natural resources
    run the risk of stunting their process of
    structural transformation. The risks are
    aggravated by policies that allow the currency to
    become overvalued and place large costs on firms
    when they hire or fire workers.
  • Structural change, like economic growth itself,
    is not an automatic process. It needs a nudge in
    the appropriate direction, especially when a
    country has a strong comparative advantage in
    natural resources. Globalization does not alter
    this underlying reality. But it does increase the
    costs of getting the policies wrong, just as it
    increases the benefits of getting them right.

D- Challenges and Opportunitiesfrom globalization
  • Need for economic diversification
  • Increased vulnerability to economic shocks
  • Haddad et al (2009) trade openness reduces
    volatility when countries are well diversified
    -panel of 77 developing and developed economies
    over the period 1976-2005.
  • The effect of trade openness on growth volatility
    is positive on average, there is strong evidence
    pointing to the important role that export
    diversification plays in reducing the
    vulnerability of countries to global shocks. In
    addition, they find that product diversification
    clearly moderates the effect of trade openness on
    growth volatility, while the market
    diversification measures yield much more mixed
  • They were able to identify positive thresholds in
    terms of their product diversification indicators
    at which the effect of openness on volatility
    changes sign.
  • The relationship completely breaks down when they
    exclude low-income economies from the analysis,
    and this is irrespective of the diversification
    indicator employed This suggests that much of the
    action indeed lies with low- and middle-income
    economies, for which export diversification
    matters more in shielding their economies from
    external shocks.
  • One possible explanation for this outcome is that
    developed economies possess other means of
    insuring their economies against shocks, whereas
    developing countries depend more strongly on
    implicit insurance as represented by a more
    diversified export basket.

D- Challenges and Opportunitiesfrom globalization
  • Imbs and Wacziarg (2003)- characterizes the
    pattern of sectoral diversification along the
    development path. Using data on sector-level
    employment and value added, covering a wide cross
    section of countries at various levels of
    disaggregation, they provide new and robust
    evidence that economies grow through two stages
    of diversification. At first, sectoral
    diversification increases, but there exists a
    level of per capita income beyond which the
    sectoral distribution of economic activity starts
    concentrating again. In other words, sectoral
    concentration follows a U-shaped pattern in
    relation to per capita income.
  • The estimated turnaround point occurs quite late
    in the development process and at a surprisingly
    robust level of income per capita. Thus,
    increased sectoral specialization, although a
    significant development, applies only to
    high-income economies. Countries diversify over
    most of their development path
  • Portfolio motive v/s comparative advantage

D- Challenges and Opportunitiesfrom globalization
  • Important roles for agriculture and services
  • Rattso and Torvik (2003) show that
    discrimination against the agriculture sector
    could lead to the contraction of industry,
    through trade linkages.
  • De Janvry and Sadoulet (2010) stress the need
    for complementarity between agriculture and
    industry. They also argue that agricultural
    development can contribute to the creation of
    competitive advantage in industry. Furthermore,
    in the short-to-medium term the agriculture
    sector will continue to be an important source of
    foreign exchange required to import intermediate
    inputs needed by domestic industries.
  • It is also important to recognize that the
    provision of producer services also matters for
    the competitiveness of the manufacturing sector.
    In this context, the challenge for policymakers
    is how to create mutually supportive linkages
    between the industrial and non-industrial sectors
    of the economy.

D- Challenges and Opportunitiesfrom globalization
  • Challenges and opportunities on how to
    indsutrtialize? Just 3 examples
  • (i) New multilateral trade rules are slowly
    shrinking the policy space available to African
    countries for promoting industrial development.
    For example, the rules of the World Trade
    Organization (WTO) prohibit the use of industrial
    policy instruments such as quotas and local
    content requirements. The use of export subsidies
    have also been banned, except for the Least
    Developed Countries.
  • Furthermore, as a result of the Economic
    Partnership Agreements (EPAs) African countries
    are under increasing pressure to abandon the use
    of tariffs as a measure of protection.
    Consequently, African industrialisation will have
    to take place in an environment in which the use
    of some industrial policy instruments applied by
    the developed and emerging economies are either
    banned or regulated

D- Challenges and Opportunitiesfrom globalization
  • Just 3 examples
  • (ii) The global environment in which
    manufacturing production takes place is changing
    in the sense that firms are increasingly facing
    stiff competition in global export markets due to
    the reduction in tariff and non-tariff barriers
    to trade in industrial products coupled with the
    significant decrease in transport costs and
    improvements in information and communication
  • For African countries, the new environment is
  • because of the rise and growing role of large
  • countries such as China, India and Brazil in
  • manufactures (Kaplinsky 2007). These new
  • pressures imply that an effective response to
    competition is no
  • longer just about selling products at lower cost.
    It is also about
  • producing better products and getting them to
    consumers in a timely manner.

D- Challenges and Opportunitiesfrom globalization
  • Just 3 examples
  • (iii) Third, increasing concerns over climate
    change is forcing firms to adopt or switch to new
    technologies and methods of production. In
    particular, manufacturers are under increasing
    pressure to adopt climate-friendly technologies
    and methods of production.
  • Consequently, if African industrialisation is to
    be sustainable it cannot rely on the old
    technologies and methods of production used by
    the developed countries when they were at a
    similar stage of development.

E-African Initiatives for Industrialization
  • Lagos Plan of Action for the economic development
    of Africa
  • From the concepts and objectives of the Lagos
    Plan of Action emerged the idea of a decade
    specifically devoted to translate the goals of
    the Lagos Plan of Action into industrial
    programmes and projects. Proposals for an
    Industrial Development Decade for Africa (IDDA),
    1980-1990 were adopted at the Sixth Conference of
    African Ministers of Industry, held at Addis
    Ababa, Ethiopia in November 1981. UNIDO IDDA
    Support Programme
  • The Alliance for Africa's Industrialisation
    (1996)initiated by UNIDO in cooperation with the
    Economic Commission for Africa and the
    Organisation of African Unity, and launched in
    Cote d'Ivoire, yet another initiative aiming at
    revitalizing African economies. Intended to
    provide a mechanism for African leaders to define
    appropriate industrial development strategies and
    commit political will and resources to their
    achievement. It is also an effort to draw the
    attention of African decision makers and the
    international community to Africa's industrial
    development potential and the need to fully
    realise this potential.
  • New Partnership for Africa's Development (NEPAD)
    adopted by African Leaders in 2001 identified
    economic transformation through industrialisation
    as a critical vehicle for growth and poverty
    reduction in the region. Trade, Industry, Market
    Access and Private sector development as one of
    the 9 priority sectors in AU/NEPAD African Action
    Plan 2010-2015
  • In February 2008, African Heads of State adopted
    a Plan of Action for the Accelerated Industrial
    Development of Africa (PIDA). Implementation
    strategies for the Plan were subsequently
    endorsed by African Ministers at the 2008
    Conference of African Ministers of Industry