Module 1 The structural transformation process: trends, theory, and empirical findings 1 module vity levels. more homogenousproducti- which ischaracterized by the agriculturalin sector, services, losesimportance but and suchasindustry sectors sential invery heterogeneous industries, and branches is es- betweensectors,distinction machinery, andsoon. The textiles, chemicals, metals, food processing, garments, distinguish branches suchas manufacturing, onecan branches. For example, within distinguish to further these industries, ispossible it industries). of Within most called non-manufacturing three are(the latter also utilities, andconstruction tries: manufacturing, mining, the followingincludes indus - example, the industrial sector gregated into “industries”. For disag- canbefurther sectors sectors.tertiary three These the primary, secondary, and them,referto respectively, as services. Someauthorsalso to agriculture, industry, and the word use “sector”to refer registry/regcst.asp?Cl=27), we unstats.un.org/unsd/cr/ tion (ISIC), Revision 4(http:// Standard Industrial Classifica- 1 The structural transformation process: trends, theory, and empirical findings Followingthe International 4 of structural transformation. It then examines the patterns recent and historical both from emerge that facts stylized the on based transformation, structural of analysis the for framework ceptual a con- defines first them.It understand to ments readers with the theoretical and empirical - instru provide transformationand structural of process This module aims to present the mechanics of the these phenomena.to explain tries and studies literature empirical and theoretical able to overall tributes productivity growth. Consider con- turn transformationsectors.in ductive This pro- more other to move then labour,can which frees sector one in growth productivity Labour simultaneously. work mechanisms two these if – development socio-economic to lead therefore and – sustainable be only however,can growth, transformation.Economic structural to and tors sec- within growth productivity to linked cably - inextri therefore is growth economic Sustained been definedasstructural transformation. the process of modern economic growth and has accompanies activities economic across sources of reallocation of labour and other productive re- process today.gradual challenge The velopment region’sde- that of core the at is thus force,and labour the of cent per 63 for accounting Africa, sub-Saharan in role central a plays still riculture low and middle levels of income. For example, ag- ductive structures and have remained trapped at pro - their of transformation similar a achieve to failed have advanced less considered are today that countries contrast, By incomes. and tivity producoverall- in increases in services, and resulting manufacturing into shifted progressively capital agriculture,and in labour enhancements productivity to Thanks textiles). and garments, beverages, and food (e.g. goods manufactured traditional of production the and natu- resources, ral agriculture, from away all diversify were to advancedable considered are today that economies the take-off, economic their During high-income levels? towards converge to struggling economies from economies high-achieving distinguishes What development? achieve to take it does it. What to closer get to goal,this achieveto least vised at or undertaken, policies are designed, and elaborate plans are are de- investments disbursed, is aid year,today.Every scientists social and icymakers therefore one of the crucial challenges facing pol- ple’s well-being and socio-economic conditions is the primary objectives of nations. Improving peo- among is development economic for quest The Introduction 1 - t h ed f h mdl, tdns hud be should to: able students module, the of end the At questionsfordiscussion students. Goals (MDGs). Development The module concludes with exercises Millennium and the in flected re- as development, human and transformation structural between relationship the on analysis poverty, and inequality. It also provides an original between structural transformation, employment, cusses the empirical literature on the relationship dis- It development. human and social in mation the of module focusesthe role on of structuraltransfor part last The development. and growth economic of process overall the on impact its on cal components of structuraltransformation and - criti the on literature empirical the of review a by complemented is literature theoretical the of of some of its main schools of thought. The review transformationstructuraloffers and overview an evolution of development thinking with regard to structural heterogeneity – that is, the combina- the is, that – heterogeneity structural particularly beneficial for developing their countries because be can transformation Structural activities. economic high-productivity to tivity and other productive resources from low-produc- structural transformation change, refers to the movement of labour structural as denoted Also 2.1 trends countries have followed. measure it, and what structural transformation to how entails, it what happens, it how dis- cusses and transformation structural defines it end, this To growth. economic modern panied accom- have that transformation structural of processes pervasive the analyse to framework conceptual a developing at aims section This ofstructural Conceptual framework and 2 • • • • • Definitions andkey concepts ment. develop- socio-economic and transformation structural between relationship the Analyse growth;and employment and productivity labour of sources main Identify them;to calculate ods meth- empirical different use and formation trans- structural of indicators main Describe nomic development; role of structural transformation in socio-eco- the on theories main compare and Describe have evolved overtime; regions and countries developing in mation transfor structural of patterns how Explain transformation trends - - The structural transformation process: trends, theory, and empirical findings 1 tion of significant inter-sectoral productivity omy. To get figures by income, average (weighted) gaps in which high-productivity activities are few labour productivity is computed for all countries module and isolated from the rest of the economy – slows in the same income group. As the figure shows, down their development.1 productivity gaps are highest at low-income lev- els. In particular, non-manufacturing industries Structural heterogeneity in developing econo- (i.e. utilities, construction, and mining) are the mies is well illustrated in Figure 1 which shows most productive activities: due to their high capi- relative labour productivities in agriculture, in- tal intensity, labour productivity tends to be very dustry (manufacturing and non-manufacturing high. At higher-income levels, manufacturing industries), and services averaged over the period becomes increasingly more productive, reaching from 1991 to 2010 and measured against income the productivity levels of non-manufacturing in- levels in 2005. Relative labour productivity is com- dustries. With development, productivity levels puted as the output-labour ratio (labour produc- tend to converge. tivity) of each sector and that of the whole econ-
Figure 1 Relative labour productivity by sector, 1991–2010
Low- and lower- Upper-middle High-income middle income income 4 Non-manufacturing indutries age = 1) er 3 Manufacturing av total Services
2 Agriculture
oducctivity (index, 1 Labour pr 0 0 5000 10000 15000 20000 25000
Income level (in 2005 PPP dollars)
Source: UNIDO (2013: 26). Note: Pooled data for 108 countries, excluding natural-resource-rich countries. PPP: purchasing power parity.
Economic activities also differ in terms of the negative relationship between differences in in- strength of their linkages with the rest of the ter-sectoral productivity and average labour pro- economy. In developing economies, the weak ductivity has recently been demonstrated by Mc- linkages between high- and low-productivity Millan and Rodrik (2011). Their evidence, reported activities that make up the bulk of the economy in Figure 2, suggests that a decline in structural reduce the chances of structural transformation heterogeneity is usually associated with a rise in and technological change. The existence of a average productivity.
5 1 module and social work. defense, education, health, are public administration and services. services Non-market munity, social andpersonal restaurants, andothercom- trade,and retail hotelsand includewholesale services estate activities. Non-tradable cial intermediation, andreal and communications, finan- transport,referto storage (Revision 3). Tradable services followthe ISIC services ket non-tradable, andnon-mar 3 2 The structural transformation process: trends, theory, and empirical findings (see Section 3.1.3.5). (see Section anddevelopment growth to sustainedeconomic lead canstill based industries extractive and other resource- transformation infavour of structural versthat believe In spite of this,In spiteof someobser The definitions of tradable, definitionsof The 6 - - mrig economies. emerging 14 for ser productivity labour relative against non-market vices and non-tradable, tradable, and manufacturing, industries, manufacturing non- agriculture, in employment of shares the depicts 3 Figure workers. absorb to to capacity the respect with differ also activities Economic and higher-productivity jobs. formal, more better-remunerated, more, creating thereby sectors, higher-productivity to lower- from labour of shifts and sectors within growth productivity generates that simultaneously process transformation structural the as ductive structural transformation can be defined capabilities. accumulating and technologies Pro - better to access having workers from result that externalities positive and upgrading skill to due are time, over follow which gains, Dynamic tors. sec- productive as more in employed productivity are workers labour economy-wide in rise the is gain static The gains. both dynamic and static generate can transformation Structural production ofaggregate output). dollars) produced ofall final goodsandservices in2005, andeconomy-wide the (thenumberofpersonsengagedin employment tal axis, iseconomy-wide labour productivity. Average labourthe ratio productivitythe value iscalculated as of (in2000PPPUS mentioned above)to unweighted average labour productivity. Average labour productivity,the variablethe horizon whichis - on oflabourthe distribution productivity isspreadto which the nineactivities across the extent deviation (abasicmeasure of coefficientThe of measuresvariation howmuch thedata. in variability isobserved the thestandard iscalculated as ratio of It government services. Labourthe ratio productivity iscomputed as betweenindustries’ value-added levels. and employment andcommunication;transport finance, insurance, real estate; andbusinessservices; and community, social, personal, and labour productivity across nineactivities: agriculture; mining; manufacturing; utilities; construction; wholesaletrade; andretail Note: productivityThe gap,the variable axis,the vertical whichis on the coefficient ismeasured by of thelogof of variation Source: andRodrik McMillan (2011: 57). and communications technology (ICT), but they but (ICT), technology communications and informationas such technologies modern of use their and element tradable their to due portant im- very becoming are services Tradablesector). services the to reference special with measures productivity of discussion a for 1 Box (see force in- dustries, the shares employ smallest the of work non-manufacturing and services namely productivity, tradable labour highest the with industries the First, figure. this from drawn be Figure 2 Relationship between inter-sectoral productivity gaps andaverage labour productivity,
Coefficient of variation in sector labour productivity within countries 0 0 0 0 0 .20 .25 .10 .05 .15 2 eea cnlsos can conclusions Several 78 MW I ET H ZM B GHA Log of KEN SEN NG av A er - - IND 91 age labourpr BO L evcs r caatrzd y ih informality rates and high job vulnerability. high Hence, structural by characterized are services addition,non-tradablemodule.In this in scribed de- change structural of processes virtuous the stimulate to order in jobs those of out move to position a in put be should industries these in skills.Workers of accumulation and learning for reflected in low wages and limited opportunities is however, productivity, labour low Their mies. econo- emerging these in jobs of sources the main are agriculture and services Non-tradable ties that they tend to produce. tend they that ties inequali- political and social,economic, the and commodities of prices international volatile the generate to due patterns growth economicunsustainable can they Moreover, economy. the of rest the from isolated be to tend but growth, ity manufacturingrapid enjoy industries productiv large) (Ray,population Indian part,non- 2015).their For (very the for growth economic of driver a become not has India in industry service ICT the successful, if why,even explains This lation. popu- the of majority vast the for opportunities employment enough generate not might vices ser tradable towards transformation structural the services,tradable in employed of be can workforce fraction tiny a only services. because these Moreover, for needed labour high-skilled the lack economies developing many nities), but - opportu learning and salaries high (with ment employ high-quality generate therefore might services these in Specializing skill-intensive. are PH L ID CH N N BR PER A TH oductivit CO A L 01 CRI ME X VEN y TU KO R MU CH R SGP L S KO ZA TWN DN R ESP F K SW 1 E UK JA IT NL P M A D FR A SGP HK US 3 G A 2005 - - - The structural transformation process: trends, theory, and empirical findings 1 transformation towards these services might fail tradable services, as it is less productive but em- to generate quality employment and widespread ploys more workers than tradable services and is module prosperity (Szirmai et al., 2013). more productive but employs fewer workers than non-tradable services. Structural transformation In terms of productivity and employment, manu- towards manufacturing has been referred to as facturing is situated between tradable and non- industrialization.
Figure 3 Share of employment and labour productivity by industry, 14 emerging economies, 2005 5 Tradable services 4 Non-manufacturing industies age = 1) Manufacturing er 3
av Non-market services oductivity 2 Non-tradable services t otal Agriculture Labour pr
(index, 1
0 0 25 50 75 100 Share in total employment (percent)
Source: UNIDO (2013: 27). Note: Emerging economies included are Brazil, Bulgaria, People's Republic of China, Cyprus, India, Indonesia, Latvia, Lithuania, Malta, Mexico, Romania, Russian Federation, Taiwan Province of China, and Turkey.
Box 1 Measures of productivity and the meaning of productivity in the services sector Broadly defined, productivity is a ratio of a measure of output to a measure of input. Researchers use the concept of productivity to measure technical efficiency, benchmark production processes, and trace technical change. There are several productivity measures among which researchers can choose, based on the objec- tives of their research and often on the availability of data. Productivity measures can be single factor meas- ures, relating a measure of output to one measure of input (e.g. labour productivity) or multifactor measures, relating a measure of output to multiple measures of input (e.g. total factor productivity – TFP). Labour pro- ductivity is the most frequently used productivity statistic. It is computed as the ratio between value added and total number of hours worked. It measures how productively labour can generate output. Given how it is measured, changes in labour productivity also reflect changes in capital: if an industry is characterized by high labour productivity, this might be due to low labour intensity and high capital intensity, which cor- responds to high value added with limited use of labour (e.g. mining). TFP represents the amount of output not accounted for by changes in quantity of labour and capital. Formally, it can be defined as the difference between the growth of output and the growth of inputs (the latter weighted by their factor shares).
TFP is a more comprehensive indicator of productivity than labour productivity because it accounts for a larger number of inputs. However, it is entirely based on two very specific assumptions that characterize the standard neoclassical theoretical framework: (a) a production function with constant returns to scale, and (b) perfect competition, so that each factor of production is paid its marginal product (see Section 3.1.1). Together they imply that growth can be decomposed into a part contributed by factor accumulation and a part contributed by increased productivity (TFP). The contribution of a factor to growth is its rate of growth weighted by the share of the gross domestic product (GDP) accruing to that factor. TFP is measured as the residual between the observed growth and the fraction explained by factor accumulation. Given their speci- ficity, these assumptions have been subject to several criticisms. In the real world, in fact, firms and industries often employ different production technologies, and markets are very often not in perfect competition (for more details on the critiques of the TFP concept, see Felipe and McCombie, 2003).
As a concept, productivity was conceived for industrial production. Therefore, for a number of reasons, it seems ill-suited to measure productivity in the services sector. First, as Baumol (1967) notes, services suffer from a “cost disease”: due to their nature, productivity enhancements in services are less likely than in manu- facturing (see Section 3.1.2). For example, Baumol and Bowen (1966) look at the performing arts industry, noting that services such as orchestras experience little or no labour-saving technological change of the sort occurring in manufacturing, because a symphony that is meant to be performed by 30 musicians and to last
7 1 module The The structural transformation process: trends, theory, and empirical findings 8 Source: Imbsand Wacziarg (2003: 69). neider, 2015). (Sch- economies middle-income in particularly transformation, structural to obstacle major be a can discordance institutional and process, automatic an not is this material, teaching this of 2 Module in see will accordingly.evolvewe As therefore should that infrastructure and tutions insti- different require structures industrial ent industry.each within producedDiffer goods the of upgrade an and base production the of tion diversifica- progressive a both involves This ods. meth- production and goods moresophisticated and more to upgrade to it leads change logical techno- as changes continuously economy the of structure The services. and manufacturing to the lion’s share of production and labour accrues economy,high-income a agriculture,to in where concentratedare labour and output the of most fromlow-incomeum a agrarian economy, where nomic development is a point along the continu - mation is a continuous process. Each level of eco - transfor structural that noted be also should It that is are acterized Nevertheless, accurately islessstraightforward productivity inservices measuring half Source: Authors. national the cannot consideration (foradded ofaservice example in Box 1 Figure 4 not the implications
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- The structural transformation process: trends, theory, and empirical findings 1 Another way in which structural transforma- and some key measures of countries’ endow- tion materializes is through the production of ments, such as human capital or institutional module increasingly sophisticated goods. Industrial up- quality (Rodrik, 2006).4 While the evolution of a 4 Institutional quality is grading, which can take place at the firm and the country’s productive structure does not entirely usually measured using a country level, is the gradual process of moving to- rely on its endowments, neither is it entirely ran- variable called the “rule of law”. The most commonly wards higher value-added and more productive dom or the product of political decisions. Most used source of data on res- activities. Empirical evidence has demonstrated of today’s developing economies are unlikely to pect for the rule of law is the that countries that have managed to upgrade engage in the production of highly sophisticated International Country Risk their productive structures and export more so- products like airplanes, given their skill and capi- Guide (ICRG), which provides phisticated goods have grown faster. Section 3.2.4 tal endowments, the size and sophistication of quantitative assessments by unidentified experts of will delve deeper into this literature. their enterprises, and their wider institutional the strength of the tradition structures. of law and order in various What determines whether and in which direc- countries. The ICRG dataset tion a country transforms its production struc- Structural transformation involves large-scale can be purchased from ture is country-specific and often difficult to changes, as new and leading sectors emerge as http://www.prsgroup.com/ about-us/our-two-metho- identify even ex-post. Among the many variables drivers of employment creation and technologi- dologies/icrg. Alternatively, that influence the outcome of this process, factor cal upgrading. It also involves constant improve- a comprehensive dataset endowments and public policies have received ment of tangible and intangible infrastructure collecting various indicators particular attention in academic and policy de- that should fit the needs of the emerging indus- of institutions is available bates. tries. Such a constantly evolving scenario requires at http://qog.pol.gu.se/data/ datadownloads/qogbasicdata. inherent coordination, with large externalities to Factor endowments influence the direction of firms’ transaction costs and returns to capital in- structural transformation by determining coun- vestment. In this context, the market alone can- tries’ comparative advantages (see Box 2). As we not be expected to allocate resources efficiently. will explain in Section 3, the literature has iden- As a matter of fact, successful economies of the tified abundance of natural resources as one of past have always made use of some forms of in- the factors behind slow industrialization. Recent dustrial policy to push the limits of their static empirical evidence, however, demonstrates that comparative advantage and diversify into new after controlling for GDP per capita there is only a and more sophisticated activities. This topic is weak association between export sophistication the focus of Module 2 of this teaching material.
Box 2 The concept of comparative advantage Is international trade beneficial to all economies, or only to some? Ever since Adam Smith, economists have debated this question. The point of entry in this debate has been the source of advantage on global markets. The principle of “absolute advantage”, introduced by Adam Smith in The Wealth of Nations in 1776, states that an economy holds an advantage over its competitors in producing a particular good if it can produce it with less resources (primarily labour) per unit of output. In other words, the principle of absolute advantage is based on a comparison of productivity between economies. Based on absolute advantage, it is possible to justify a situation in which one country produces all goods in the economy, while another (e.g. a developing economy) would be in absolute disadvantage in any good, thereby eliminating every possibility of trade.
In his 1817 book On the Principles of Political Economy and Taxation, David Ricardo outlined his theory of “com- parative advantage”, according to which a country’s welfare is maximized under free trade as long as the economy specializes in goods it can produce at a lower opportunity cost compared to its trade partners. Op- portunity cost refers to the unit of a good that a country has to give up to produce a unit of another good. Therefore, the principle of comparative advantage is based on a comparison of relative productivity. When one brings opportunity cost into the picture, international trade becomes beneficial because an economy can trade goods in which it has a comparative advantage for goods that would be relatively more costly to produce, given its resource endowment and technology. This holds regardless of the labour productivity of the other country, meaning that even if a country is absolutely better at producing every good, it would still be better off by specializing in the production of the good in which it has a comparative advantage and importing the others. If we think again about the situation of developing countries, the theory of comparative advantage justifies trade between a developed and a developing economy, on the basis of lower opportunity costs. Building on Ricardo’s theory of comparative advantage, Eli Heckscher and Bertil Ohlin developed a model of international trade, the Heckscher-Ohlin model. In this model, international trade is driven by the differences in countries’ resource endowments and, more precisely, by the interplay between the proportions in which different factors of production are available in a country and the proportions in which factors are used in producing different
9 1 module exports inGDP.exports theshare of GDP andinflate tion,the value decrease of towards domesticconsump- directed chains andnot consequence ofglobal value imports, sohigherimports, a minus spending, andexport investment, government the sumofconsumption,is task.their complishing GDP after ac- they re-export that intermediary goods import stage ofproduction firms in imports, becauseineach withanincreaseassociated be might increase inexports 3.1.3.4), an chains (seeSection emergence ofglobal value the misleading.to Due 5 The structural transformation process: trends, theory, and empirical findings This measureThis be might 10 - pric current in expressed commonly are shares sector.Value-addedby worked hours or workers of number the using calculated are shares ment availability).data and researchquestion Employ the on depends disaggregation data of degree the (where added value total and employment sharesvalue-addedand total employment in shares sectors of measures are used) transformation structural (and of evident most two The ofstructural 2.2 Measures become in from advantage they Somewhat and exploit economy gain implications. competitiveness Government tural interventions, that tations, comparative my dynamic economies should vantage resulted technologies, structural of Many whose production isintensive in time, goods. Source: Authors. Box 2 authors various produces
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Box 3 1 Sectoral composition of employment and output The structure of an economy consists of many components and is therefore described by many variables. To module get an initial idea of the structural characteristics of a particular economy, researchers begin by examining the distribution of employment and output, or value added, across sectors. To this end, they compute the share of employment and value added for each sector of the economy. The level of disaggregation (i.e. the number of sectors included in the analysis) depends on the research question being asked as well as on the availability of data.
Assume that the researcher is interested in a level of disaggregation that divides the economy into n sectors. Total employment and output can then be calculated by summing up the number of workers in each sec- tor. Similarly, total nominal value added is calculated by summing up the nominal value added created in n n each sector. Formally we write total employment, L, and total value added, X, as: L = i= 1 L iand X = i= 1 Xwherei Li stands for employment or number of workers in sector i, and Xi stands for nominal value added in sector i. The distribution of employment and value added by sector is obtained by dividing these expressions by total employment and output, respectively:
n Li L1 L2 Li n ==i=1 + + … + = i=1 λ i (3.1) L L L L
n Xi X1 X2 Xi n = i=1 =++ … + = i=1 θi (3.2) X X X X
where λi and θi are the shares of sector i in total employment and value added. Note that the sum of the shares must add up to unity. This is what we expect, of course, since total employment, for example, is nothing else than the sum of its components.
The data needed to calculate the distribution of output and employment by sector and other structural indi- cators can be found at:
• The United Nations National Accounts website (http://unstats.un.org/unsd/snaama/Introduction.asp) which offers access to comprehensive datasets on GDP, also disaggregated by economic activities; and • The International Labour Organization (ILO)'s Key Indicators of Labour Market website (http://www. ilo.org/global/statistics-and-databases/WCMS_424979/lang--en/index.htm) which provides access to a comprehensive database on indicators such as employment by sector of the economy, labour pro- ductivity, and employment-to-population ratio, among others. Additionally, the supporting dataset of the Global Employment Trends (http://www.ilo.org/global/research/global-reports/global-employment- trends/2014/WCMS_234879/lang--en/index.htm) also provides data on employment by sector and gender. Source: Authors.
Employment and value-added shares also have tural transformation is a continuous process, we limitations as singular measures. Employment should examine changes for individual countries shares may not adequately reflect changes in over long periods of time, making use of long-time “true” labour input, for example because there data series. However, the scarcity of data restricts might be differences in hours worked or in hu- the set of countries that can be studied over the man capital per worker across sectors that vary long term to those that are currently fully devel- with the level of development. Value-added oped. This, in turn, leaves open an essential ques- shares do not distinguish between changes in tion: why should we expect economies that are quantities and prices. Finally, note that the secto- currently less advanced to present the same regu- ral composition of employment and output, and larities that developed economies displayed at a economy-wide and sectoral labour productivity, lower level of development a century or two ago? are closely interconnected. Labour productivity in Limiting attention to long-time data series has a sector with a share of employment larger than the additional disadvantage that these data typi- its share of total output is below the average la- cally are not of the same quality as the standard bour productivity in the economy and vice versa. datasets for recent years. In this teaching mate- rial, we will therefore document the regularities of 2.3 Global trends in structural transformation structural transformation employing both histori- cal data for developed economies and more recent This section presents some stylized facts on data that cover a much larger group of countries. structural transformation. Ideally, since struc-
11 1 module 6 The structural transformation process: trends, theory, and empirical findings in 1990. the UnitedStates in dollar the US powerof sing parity the samepurcha- has that hypothetical ofcurrency unit internationalThe isa dollar in international PPPvalues. valuesto convert method method.Khamis isa This the Geary– computed using international are dollars In the Maddisondatabase, In the Republic ofKorea 12 the UnitedKingdom the UnitedStates the Netherlands Belgium Sweden Finland France Japan Spain employment. In orderto illustratethis pattern of self-occupation declined in favour of formal wage into process,the informalactivities.In dynamic more agriculture from moved constantly have capital and labour Both services. and facturing manu- towards agriculture from away shift a by rent advanced economies has been characterized The pattern of economic development in the cur 2.3.1 evidence Historical for Source: al.(2013: et Herrendorf 10).
Share in total employment Share in total employment Share in total employment Figure 5 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. advanced economies 0. 0. 0. 0. 0. 0. 0 0 0 6 6 6 8 8 8 4 4 4 2 2 2 5 5 5 3 3 3 7 7 7 1 1 1 0 0 0 6 6 6 8 8 8 4 4 4 2 2 2 5 5 5 3 3 3 7 7 7 1 1 1 6.0 6.0 6.0 6.0 6.0 6.0 Log ofGDPpercapita(1990in Log ofGDPpercapita(1990in Log ofGDPpercapita(1990inter Log ofGDPpercapita(1990in Log ofGDPpercapita(1990in Log ofGDPpercapita(1990inter Sectoral shares ofemployment 6.5 6.5 6.5 6.5 6.5 6.5 7. 7. 7. 7. 7. 7. 0 0 0 0 0 0 7. 7. 7. 7. 7. 7. Manuf 5 58 58 Manuf 5 58 58 Employ Employ Agricultur Agricultur Services 8.0 Services 8.0 .0 .0 .0 .0 acturing acturing men men 8.5 8.5 8.5 8.5 8.5 8.5 today’s e e tV tV 9.0 9.0 9.0 9.0 9.0 9.0 ternational dollar ternational dollar ternational dollar ternational dollar national dollars national dollars 9.5 9.5 9.5 9.5 9.5 9.5 andvalue developed added–selected countries, 10 10 10 10 10 10 .0 .0 .0 .0 .0 .0 10 10 10 10 10 10 .5 .5 .5 .5 .5 .5 s) s) s) s) ) )
11.0 11.0 11.0 11.0 11.0 11.0 - dollars, inMaddison(2010). asreported international 1990 in capita per GDP of log the ing, and services. On the horizontal axes, there is manufacturagriculture, in panel) (right prices current in added value of share the and panel) cal axes represent the share of employment - verti (left The 5. Figure in reported are series time et Herrendorf economies by constructed developed ten for centuries 20th value-addedand ment and shares 19th the over transformation we use data on sectoral employ Share in value added (current prices) Share in value added (current prices) Share in value added (current prices) 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0 0 0 6 6 6 8 8 8 4 4 4 2 2 2 5 5 5 3 3 3 7 7 7 1 1 1 0 0 0 6 6 6 8 8 8 4 4 4 2 2 2 5 5 5 3 3 3 7 7 7 1 1 1 6.0 6.0 6.0 6.0 6.0 6.0 Log ofGDPpercapita(1990in Log ofGDPpercapita(1990in Log ofGDPpercapita(1990inter Log ofGDPpercapita(1990in Log ofGDPpercapita(1990in Log ofGDPpercapita(1990inter 6.5 6.5 6.5 6.5 6.5 6.5 7. 7. 7. 7. 7. 7. 0 0 0 0 0 0 7. 7. 7. 7. 7. 7. 5 5 5 5 5 5 Manuf Manuf 8.0 8.0 8.0 8.0 8.0 8.0 Agricultur Agricultur alue added alue added Services Services 8.5 8.5 8.5 8.5 8.5 8.5 acturing acturing 1800–2000 9.0 9.0 9.0 9.0 9.0 9.0 e ternational dollar ternational dollar e (2013). These These (2013). al. ternational dollar ternational dollar national dollars national dollars 9.5 9.5 9.5 9.5 9.5 9.5 10 10 10 10 10 10 6 .0 .0 .0 .0 .0 .0 10 10 10 10 10 10 .5 .5 .5 .5 .5 .5 s) s) s) s) ) )
- - 11.0 11.0 11.0 11.0 11.0 11.0 The structural transformation process: trends, theory, and empirical findings 1 Over the last two centuries, economic growth veloping economies. Figure 6 plots the sectoral has been associated with declining employment employment shares from the WDI against the module and nominal value-added shares of agriculture log of income per capita. The plots confirm the offset by the rise of services. Employment and regularities discussed above: first, agricultural valued-added shares of manufacturing followed employment shares decrease with income, while a hump shape, that is, they increased at lower employment in services monotonically increases; levels of GDP per capita, reached a peak at medi- and second, manufacturing shares of employ- um levels of GDP per capita, and decreased there- ment follow an inverse U-shaped pattern.7 The 7 Rodrik (2009) also finds an after. Figure 5 reveals two additional empirical decline in agricultural employment has many inverted-U relation between regularities. First, at low income levels, the em- implications for an economy, two of which are the share of the manu- facturing sector in overall ployment share of agriculture remains consider- relevant to this discussion. First, as labour moves output and employment ably above the value-added share of the sector. from low-productivity agriculture to higher-pro- and income per capita (see This means that poor countries tend to display ductivity activities, average productivity in the Section 3.2.1). an employment structure biased towards agri- economy increases. Second, the higher incomes culture despite its low productivity. Second, both that are a by-product of this structural trans- employment and nominal value-added shares of formation create additional demand for both the services sector remain significantly far from manufactured goods and services. This demand zero all along the development process. There is, provides scope for the expansion of manufactur- however, an acceleration in the rate of increase ing and services. of the value-added share of services at a GDP per capita of approximately $8,100. Interestingly, the Figure 6 also confirms that the employment value-added share for manufacturing peaks at share of manufacturing increases until it reaches around the same income level, suggesting that a certain threshold of about 30 per cent of total the services sector progressively replaces manu- employment. From there it flattens out and then facturing as the main engine of growth at mid- begins to decrease. While this is consistent with dle-income levels. the pattern described previously, the downward sloping part is less pronounced in Figure 6 than 2.3.2 Recent evidence for developed in Figure 5. The relatively lower peak of 30 per and developing economies cent, compared to the previous 40 per cent for industrialized countries (see Figure 5), indicates As mentioned earlier, using historical data lim- a shift in recent patterns of industrialization its the analysis to industrialized economies. We for both developed and developing countries therefore need to verify whether the structural towards lower peaks of manufacturing employ- transformation regularities described above can ment in total employment. This observation has be extended to developing countries. Herrendorf led some to question the role of manufacturing et al. (2013) use the World Bank’s World Develop- as a modern engine of economic growth in devel- ment Indicators (WDI) for employment by sector, oping countries (see Section 3.3). Indeed, Figure 6 and the national accounts of the United Nations also shows the existence of a strong positive re- Statistics Division for value added by sector. The lationship between the share of employment in coverage of these two datasets is large: they services and per capita income. both include most of today’s developed and de-
13 1 module The The structural transformation process: trends, theory, and empirical findings 14 2000 1990 1980 Source: al.(2013: et Herrendorf 10). auatrn vle de pas t h same the at peaks added of value manufacturing share the and steeper becomes share vices ser the of trend the representing line the ond, Sec- transformation. structural of measure a as used is added value when clearly more emerges in- manufacturing for shape interesting hump the sights.First, few a adds and above mented - docu patterns same the confirms It capita. per GDP against services and manufacturing, - agricul ture, in shares value-added shows 7 Figure Figure 6 Sectoral shares ofemployment
Share in total employment Share in total employment Share in total employment 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0 0 0 6 6 6 8 8 8 4 4 4 2 2 2 5 5 5 3 3 3 7 7 7 1 1 1 6.0 6.0 6.0 Log ofGDPpercapita(1990inter Log ofGDPpercapita(1990inter Log ofGDPpercapita(1990inter 6.5 6.5 6.5 developed –selected anddeveloping countries, 7. 7. 7. 0 0 0 7. 7. 7. 58 58 58 Manuf Agricultur .0 .0 .0 - Services 8.5 8.5 8.5 acturing Figure 5. in shown countries industrialized of experience creasingly important. This matches the historical in - be to out turn services and smaller becomes employment and output to manufacturing of contribution relative the capita, per level income of this Beyond $8,100. approximately of ita cap- per GDP a at i.e. 9, around value threshold a reaches capita per GDP of log the when time, 9.0 9.0 9.0 e national dollars national dollars national dollars 9.5 9.5 9.5 10 10 10 .0 .0 .0 10 10 10 .5 .5 .5 ) ) ) 11.0 11.0 11.0 1980–2000 The structural transformation process: trends, theory, and empirical findings
Figure 7 1 Sectoral shares of nominal value added – selected developed and developing countries, 1980–2000
Agriculture module Actual data points 0.8 Predicted values
nt 0.7 0.6 0.5 0.4 total employme 0.3 Agriculture 0.2 Share in 0.1 0.0 6.0 6.5 7.0 7.58.0 8.5 9.0 9.5 10.0 10.5 11.0 Log of GDP per capita (1990 international dollars)
Manufacturing
0.8
nt 0.7 0.6 0.5 0.4
total employme 0.3 0.2 Share in 0.1 0.0 6.0 6.5 7.0 7.58.0 8.5 9.0 9.5 10.0 10.5 11.0 Log of GDP per capita (1990 international dollars)
Services
0.8
nt 0.7 0.6 0.5 0.4
total employme 0.3 0.2 Share in 0.1 0.0 6.0 6.5 7.0 7.58.0 8.5 9.0 9.5 10.0 10.5 11.0 Log of GDP per capita (1990 international dollars)
Source: Herrendorf et al. (2013: 10).
2.3.3 Trends of deindustrialization 2.3. Figure 8 shows the evolution of the share of and premature deindustrialization manufacturing value added in GDP from 1962 to 2012 as the world average, the average for ad- Following what we have explained so far, we vanced countries, and the average for developing would expect countries to deindustrialize (i.e. countries. Data show that as a whole, the world to see their shares of manufacturing in employ- deindustrialized over these five decades. This was ment and value added decrease) after they reach driven not only by the advanced nations but by a certain level of income per capita. This sec- developing countries that also deindustrialized, tion provides further empirical evidence on the especially since the 1990s. deindustrialization trends described in Section
15 1 module also UNCTAD (2011a). 8 The structural transformation process: trends, theory, and empirical findings Forthe African case, see Colombia Chile Brazil Argentina Turkey Thailand Taiwan Province ofChina Philippines Sri LankaSri Republic ofKorea Pakistan Malaysia People's Republic ofChina Indonesia India Bangladesh Table 1 16 d Developing Advanced World Value-added shares ofagriculture, Source: Lavopa (2015: andSzirmai 13). to hd hne daaial: ot f these of most dramatically: changed had ation Tanzania and Zambia. By 2005, however, the situ- of Republic United the as such economies other by joined were and their industries, expanded manufacturing further had economies these of most 1980, By Korea. of Republic the as such economies in than higher were GDP in facturing manu- of shares Their world. developing the in economies industrialized most the among were Morocco,and Africa South as such countries can Afri- some with together economies, American Latin other and Brazil, Argentina, 1950, In ades. dec- six last the in trends industrialization the characterize to examples illustrative few a take for 29developing economies.there, From wecan GDP in services and industry), in included also is (which manufacturing industry, agriculture, of shares value-added on data presents 1 Table Figure 8 AG 40 46 48 49 34 24 42 58 47 35 16 61 61 55 51 15 IND 26 24 22 33 16 19 14 21 13 12 17 15 17 1950 9 7 7 MAN 20 30 a 25 10 15 0 5 23 10 19 14 13 12 17 15 11 11 9 8 4 7 7 7 Manufacturing shares ofvalue addedinGDP, 1962 SERV 48 29 59 42 33 32 45 32 52 52 37 35 41 41 41 31 industry, 1967 AG 46 29 36 39 26 42 43 32 32 35 35 57 21 12 51 17 manufacturing, 1972 IND 39 20 20 20 28 23 22 32 37 27 19 16 16 41 15 1960 7 MAN 1977 b 27 30 20 32 25 10 16 19 14 13 13 12 15 9 8 5 SERV 1982 29 46 46 44 44 48 48 36 36 38 38 42 33 45 47 47 andservices, perienced byadvancedperienced economies. ex those to similar process deindustrialization a on embarked countries African and American added decades,recentover increased consistently Latin value in manufacturing of shares tries coun- Asian in while that show averages These veloping economies, and 16 advanced economies. report averages for Africa, Asia, Latin America, de- of Tablebottom 1,we the economies.At selected Brazil. These trends do not only apply to all the 29 cent in South Africa, and from 45 to 64 per cent in per 67 to 45 from growing added value in share its process, with this from benefited sector vices ser The deindustrialized. had economies these dustrialization levels of the 1950s. In other words, in- the to back gone had 1980 and 1950 between hadbecome morethat industrializedeconomies 1987 AG 30 20 30 36 28 23 24 23 32 25 27 16 11 6 8 7 IND 1992 46 44 49 30 29 20 39 42 32 25 37 25 37 (percent) 1950–2005 41 41 21 (percent) 1962–2012 1980 MAN 1997 40 29 36 26 24 24 22 22 22 33 16 18 14 13 17 17 SERV 2002 40 46 46 48 48 48 36 36 34 54 43 45 47 52 55 21 AG 2007 20 10 14 18 21 12 13 13 17 11 9 6 4 8 3 2 IND 2012 40 44 48 30 36 34 26 50 28 42 32 47 27 27 27 27 2005 8 MAN c 30 34 28 28 23 23 22 22 35 16 16 19 16 18 15 17 SERV 64 40 46 63 29 56 56 54 54 42 53 53 72 53 55 51 - - The structural transformation process: trends, theory, and empirical findings
Table 1 1 Value-added shares of agriculture, industry, manufacturing, and services, 1950–2005 (per cent) 1950a 1960b 1980 2005c module AG IND MAN SERV AG IND MAN SERV AG IND MAN SERV AG IND MAN SERV
Mexico 20 21 17 59 16 21 15 64 9 34 22 57 4 26 18 70
Peru 37 28 15 35 21 32 20 47 12 43 20 45 7 35 16 58
Bolivarian Republic of Venezuela 8 48 11 45 7 43 11 50 6 46 16 49 4 55 18 40
Congo, Dem. Rep. 31 34 9 35 27 35 15 38 46 27 7 28
Côte d’Ivoire 48 13 39 48 13 39 26 20 13 54 23 26 19 51
Egypt 44 12 8 44 30 24 14 46 18 37 12 45 15 36 17 49
Ghana 41 10 49 41 10 49 58 12 8 30 37 25 9 37
Kenya 44 17 11 39 38 18 9 44 33 21 13 47 27 19 12 54
Morocco 37 30 15 33 32 26 13 42 18 31 17 50 13 29 17 58
Nigeria 68 10 2 22 64 8 4 28 21 46 8 34 23 57 4 20
South Africa 19 35 16 47 11 38 20 51 6 48 22 45 3 31 19 67
United Republic of Tanzania 62 9 3 20 61 9 4 30 12 46 17 7 37
Zambia 9 71 3 19 12 67 4 21 15 42 19 43 23 30 11 47
Averages
Asia 49 14 10 36 39 20 14 41 25 33 22 42 13 35 24 52
Latin America 22 28 16 50 18 34 21 48 10 40 24 50 7 37 18 56
Africa 44 19 9 36 37 24 10 39 25 32 14 43 26 30 12 45
Developing countries 41 19 11 40 33 25 15 42 21 35 20 44 16 34 18 51
16 advanced economiese 15 42 31 43 10 42 30 48 4 36 24 59 2 28 17 70
Source: Szirmai (2012: 409). Note: Figures are in current prices. Advanced economies include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States.
To conclude, while deindustrialization historical- against changes in employment in agriculture, ly happened after countries had fully developed, industry, and services, respectively. today economies deindustrialize at lower income levels. Various studies (Felipe et al., 2014; Palma, First, larger reductions in agricultural employ- 2005; Rodrik, 2016; UNCTAD, 2003a) show that in ment are associated with faster economic recent decades the shares of manufacturing em- growth. In East, South, and Southeast Asia, re- ployment and value added peaked and began to ductions of agricultural employment ranging decrease at lower levels of GDP per capita than in between 14 and 26 percentage points were asso- the past. In the literature, this phenomenon has ciated with rates of output growth of around 6 been referred to as “premature deindustrializa- per cent. By contrast, sub-Saharan and Northern tion”, an expression originally coined by UNCTAD African countries reduced their agricultural em- (2003a). Section 3.3 will delve deeper into the lit- ployment by less than five percentage points and erature on premature deindustrialization in rela- their incomes grew at rates between 3.6 and 4.4 tion to the rise of services as a new, or additional, per cent. engine of economic growth. Second, growing shares of industrial employ- 2.4 Structural transformation ment are associated with faster economic and economic growth growth. Confirming the empirical evidence pre- sented in Section 2.3.3, employment in industry As labour shifts from lower- to higher-productiv- increased the most in Asian countries, ranging ity sectors, value added increases (static gains) between 8.5 and 6.3 percentage points. Econo- and rapid technological change further boosts mies in Latin America and Northern and sub- economic growth (dynamic gains). This explains Saharan Africa, on the other hand, experienced why structural transformation is associated with little structural transformation towards industry. faster economic growth. This section explores the Advanced economies and former Soviet Union relationship between GDP growth and changes countries deindustrialized, with modest rates of in employment shares of agriculture, industry, GDP growth. This possibly reflects the tendency and services. Figures 9–11 present scatter plots of high-income economies to deindustrialize (see of annual growth rates of value added per capita Section 2.3.1) and country-specific as well as glob-
17 1 module The The structural transformation process: trends, theory, and empirical findings 18 aue f h srie sco, opsd f low- of composed sector, services the heterogeneous of nature the to related be This might growth. result GDP and employment changes service between in relationship strong a be to Finally, as shown in Figure 11, there does not seem knowledgeservices. ofmodern the rise to crisis financial global the issues,from rangingal Africa; SSA: sub-Saharan Africa. Asia;East SEA:the Pacific; Asiaand Southeast SA: SouthAsia;LAC: the Caribbean; and Latin America ME: Middle East; NA: North Note: ADV: Advanced economies; CEA: Central Europe andSoutheastern (non-EU) andCommonwealth States; ofIndependent EA: World Bank’s World Development Indicators. Source: Authors'elaborationthe International basedon Labour Organization’s Global Employment Trends data(seeBox 3)and Africa; SSA: sub-Saharan Africa. Asia;East SEA:the Pacific; Asiaand Southeast SA: SouthAsia;LAC: the Caribbean; and LatinAmerica ME: Middle East; NA: North Note: ADV: Advanced economies; CEA: Central Europe andSoutheastern (non-EU)andCommonwealth States; ofIndependent EA: and World Bank’s World Development Indicators. Sources: Authors'elaborationthe International basedon Labour Organization’s Global Employment Trends (seeBox dataset 3) changesStructural in Figure 10 Figure 9 changesStructural in
GDP per capita growth GDP per capita growth 0 6 0 6 4 4 2 5 3 7 2 5 3 7 1 1 -3 -1 0- 0 AD the composition ofemployment V 8 EA the composition ofemployment per capita, -25 -6 CE (percent 1991–2012 A Change in Change in (percent 1991–2012 -4 -20 SE A the shar the shar -2 LA C andpercentage points) e ofemploymen e ofemploymen rates andannual growth inindustry ofGDP per capita, NA SS associated witheconomicassociated growth. economies since the 1990s – is likely developing to be weakly many in occurred has as – services of low-productivity rather than high-productivity favourin change Structural3. Figure in depicted as services), (tradable services high-productivity and services) (non-tradable services productivity -1 0 A 5- andpercentage points) rates andannual growth ofGDP inagriculture SA 28 t inagricultur t inindustry ME -1 ME 0 LA 4 CE C A e 6 SE SA SS A NA A 50 AD V EA 10
The structural transformation process: trends, theory, and empirical findings
Figure 11 1 Structural changes in the composition of employment in services and annual growth rates of GDP per capita, 1991–2012 (per cent and percentage points) module
7
SA SEA EA 6 ME
5 th ow 4 NA
SSA 3 LAC
GDP per capita gr 2 ADV CEA
1
0 02468110 12 4 16 18 20 Change in the share of employment in services
Source: Authors' elaboration based on the International Labour Organization’s Global Employment Trends data (see Box 3) and World Bank’s World Development Indicators. Note: ADV: Advanced economies; CEA: Central and Southeastern Europe (non-EU) and Commonwealth of Independent States; EA: East Asia; SEA: Southeast Asia and the Pacific; SA: South Asia; LAC: Latin America and the Caribbean; ME: Middle East; NA: North Africa; SSA: sub-Saharan Africa.
Because industry includes manufacturing, min- terms of manufacturing value-added growth. ing, utilities, and construction, which are very dif- Surprisingly, the correlation between the share ferent in terms of their labour productivity and of manufacturing in GDP and economic growth capacity to absorb labour (see Figure 3), we ana- is lower than the correlation between the share lyse more disaggregated data in order to look at of employment in industry and economic growth the relationship between economic growth and (0.59 versus 0.95). The literature has found that manufacturing. Data on manufacturing shares manufacturing employment is a much better in employment, however, are less widely available predictor of economic growth than manufactur- than data on manufacturing value-added shares; ing output (Felipe et al., 2014; Rodrik, 2016). This is we therefore use shares of manufacturing value because it is through employment creation that added in GDP. Figure 12 depicts the correlation manufacturing can spur economic growth (see between GDP per capita growth and growth of Sections 3.3 and 4.1 for a discussion). Following the share of manufacturing in value added. The this insight, we could expect a higher correlation figure clearly shows that increasing shares of between manufacturing employment and eco- manufacturing value added in GDP are associ- nomic growth than the one observed between ated with faster rates of GDP per capita growth, manufacturing output and economic growth. with South Asia and Southeast Asia leading in
19 1 module 9 The structural transformation process: trends, theory, and empirical findings this teaching material. this ofModule2 4.4.2 Section (1996), (2014), Studwell and economies, seeUNCTAD Asian newlyindustrialized first- andsecond-tier East differencesthe between Forthe of adiscussion 20 Africa; SSA: sub-Saharan Africa. Asia;East SEA:the Pacific; Asiaand Southeast SA: SouthAsia;LAC: the Caribbean; and LatinAmerica MENA: andNorth Middle East Note: ADV: Advanced economies; CEA: Central Europe andSoutheastern (non-EU)andCommonwealth States; ofIndependent EA: Source: Authors'elaboration basedon World Bank’s World Development Indicators. to be on a similar path. similar a on be to China,of Malaysia, seem Thailand,Nam and Viet 1980s.and Today,1970s the People’sthe Republic during Asia East in 1960s;and and 1950s the ing Finland, Greece, Ireland, Portugal, and Spain) dur Austria,(namely, countries European peripheral the growth:up,manufacturing in on based both catch- of waves two WorldWar, been have there Second the Since industrializing. by up caught European countries, the United States, and Japan other and Germany Kingdom, United the After manufacturing. of growth with associated been Industrial Revolution, rapid economic growth has in the previous section explain why, ever since the discussed manufacturing of characteristics The 3 ol b al t alct rsucs efficiently resources allocate to able be Markets would growth. economic sustained to achieve pursued be should economics laissez-faire century,20th early the that to believed up Smith tradition,Adam classical from the in economists Most Revolution. Industrial the to linked enon by phenom- a is progress technological continuous underpinned growth economic Sustained 3.1 structuraltransformation. re- literatureon empirical and theoretical the views section This today. until economists ment develop- early from scholars many of attention the attracted have them, behind is that process transformation structural the specifically more development Figure 12 Structural Review of Economic andchanges growth in
GDP per capita growth 0 6 4 2 5 3 7 1 -1 transformation in 2- the literature
theories CE 9 A These phenomena, and phenomena, These 10 Change in the share ofmanufacturing value addedinGDP, -8 and percentage points) the shar -6 e ofmanuf - when the first growth models based on aggregate only started in the second half of the 20th century, 1928; Schumpeter, 1934), but systematic modelling found in the work of classical economists (Ramsey, be can track first the of elements key the of Some 3.1.1 3.1.3.1).(see Section thought of schools two the reconciling at aimed economics”, alist and decade last the in emerged structur “new as known track, third A tradition. development theories related to the structuralist and tradition, neoclassical the to related mostly on proceed theories tracks:separate growth but They related two it. with deal to perspectives theoretical different propose and important shortcoming this eco- recognize of development study nomic the to approaches recent More economic (fast) fromgrowth pre-modern modern (slow)dynamics. distinguishes that change technological of process continuous the ing in sustaining economic growth. is preciselyIt upgrad- industrial and change technological of rolehowever,key the takeintoaccount not did it centuries.19th things,and 18th other the Among in framework intellectual dominant the sented repre- approach This returns. better offer that sectors productivemore to production of factors reallocate markets and expands economy the as automatically place take would transformation structural how,and and produced is what mine deter would framework,system this price the In potential. growth economy’s an maximize and MENA AD
acturing in models neoclassical growth The V EA -4 va lue adde -2 SS d A LA SE A C (percent 1991–2012 0 SA 2
- - The structural transformation process: trends, theory, and empirical findings 1 production functions were developed. Building With regard to development theories that fo- on the seminal work of Harrod (1939) and Domar cused directly on the specific economic challeng- module (1946), Robert Solow’s influential one-sector es facing poorer and more vulnerable economies, growth model gave rise to the first wave of growth structuralist economics was the first school of analysis in the neoclassical tradition (Solow, 1956). thought to propose a detailed analytical inves- tigation of the relationship between changes in These models rest on a number of critical as- the production structure and economic growth. sumptions: The next section delves deeper into this strand of the literature. • Production technologies are represented by aggregate production functions (see Box 1). 3.1.2 The structuralist approach Because production functions are aggregate, the implicit assumption of these models is The contribution of the structuralist school to that all firms and industries use the same development economics started in the 1940s and technology. 1950s. It builds on the idea that the virtuous circle • Production exhibits constant returns to of economic development depends on structural scale, i.e. economies of scale are considered transformation. As Kutznets (1979: 130) wrote: “It negligible. is impossible to attain high rates of growth of per • Markets are assumed to be perfectly competi- capita or per worker product without commen- tive. surate substantial shifts in the shares of various • Technological change is assumed to be “neu- sectors.” The seminal work of Rosenstein-Rodan tral”, meaning that technological change im- (1943) paved the way to a rich strand of research proves the productivity of labour and capital from Chang (1949) to Nurkse (1953), Lewis (1954), equally. Myrdal (1957), and Hirschman (1958) that came to be known as the structuralist approach to eco- Because of its minimalist structure, the Solow- nomic development. This approach is based on type, one-sector model necessarily abstracts the following key assumptions: from several features of the process of economic growth. One of these is the process of structural Economic growth is a path-dependent process: transformation. Another is that technological pro- The knowledge accumulated during the produc- gress is kept exogenous and outside of the model. tion process gives rise to dynamic economies of The more recent endogenous growth models pro- scale and externalities that lead to further eco- pose extensions of the one-sector framework that nomic growth and development. In this sense, are consistent with the stylized facts of structural initial production experiences have cumulative transformation and try to understand why tech- effects on the economy, as firms learn how to nological diffusion takes place in some countries produce better quality goods or how to produce but not in others, and how it generates changes goods at lower average costs.10 10 Emerging economies in in the shares of output and employment. In these East Asia are telling exam- models, the technological process is treated as a Developing economies are characterized by ples in this regard. Their success originates in a set of lottery in which the prize is a successful innova- structural heterogeneity: This means that in economic policies (see Modu- tion. More tickets of the lottery can be acquired these economies, modern economic activities le 2 of this teaching material) by investing more in research and development that are highly productive and use state-of-the- that in the long run have (R&D). Technology is considered a public good, art technologies coexist with traditional eco- allowed firms to accumulate which creates opportunities for technological nomic activities with low productivity and high experience in producing manufactures and engage in spillovers and ultimately leads to increasing re- informality. Models of dual economies illustrat- a circular process of learning turns to scale at the aggregate level (Acemoglu ed this situation, with the best examples being and rising competitiveness. et al. 2001; Aghion and Howitt, 1992; Glaeser and those of Lewis (1954) and Ranis and Fei (1961). In The opposite dynamics Shleifer, 2002; Jones, 1998; Romer, 1987, 1990). De- these models, it is the reallocation of labour from can also occur. According spite the advances that these models introduce traditional to modern activities that drives eco- to Easterly (2001), adverse 11 shocks that affect economic in terms of considering the complex processes of nomic growth. activity in the short run, such technological change, some scholars have criti- as the debt crises of 1980s cized them for not being realistic enough and not Modern economic activities are generally urban in Africa and Latin America, properly reflecting the complexity of the issues at manufacturing activities: A long tradition in the can have long-term negative stake (Dosi, 1982; Freeman and Louça, 2001; Maler- literature has seen manufacturing as an engine effects on the growth of an economy. ba et al., 1999; Nelson and Winter, 1982; Silverberg, of economic growth. In his seminal works, Nicho- 2001; Silverberg and Verspagen, 1994; see also Sec- las Kaldor (1957, 1966) identifies some empirical tion 3.1.3.3 in this module). regularities, later known as Kaldor’s laws, about 11 For a review of these mo- economic development and structural transfor- dels, see Temple (2005) and mation: Ranis (2012).
21 1 module 12 12 The structural transformation process: trends, theory, and empirical findings elasticity). changes(incomethe society the averageor as income in elasticity),changes (price asitsprice good (oraservice) the quantity ofdemandfor a respectively,the variation of ofdemandmeasure,cities Price andincomePrice elasti- 22 takes place in an economy (Chenery (Chenery economy an in place takes progress technological where is manufacturing intensity, capital higher its to Due progress. cal technologi - of locus the is manufacturingThird, towards beneficial. manufacturing particularly transformation structural of process agriculture, the making in than higher much is ufacturing man- in intensity countries,capital developing in 2000.to frommanufacturing1970 that shows He and agriculture in intensity capital on data lects ery ital-intensive than agriculture and services (Chen- capital accumulation. Manufacturing is more cap- Second, manufacturing provides opportunities for (Kaldor,economic growth 1957, overall 1966; Taylor, for 1991). condition necessary a becomes fore transformation. Strong growth of demand there- will be underutilized, which will hinder structural resources insufficient, existing is demand When demand. aggregate buoyant without sustained be cannot growth production that maintained which literature, structuralist the in important is dimension market The outset. the from scale large a on starts modernization be if thereforesustainable will development of process The 1928). (Young, adopted are techniques modern these which to extent the on however,depends itself, dimension market The 1943). stein-Rodan, (Rosen- ones traditional replace to production of methods modern for conditions the generate therefore and wages higher for compensate to productivity higher allow would market enough market: the size of the large a only and level firm the at scale of economies the between interaction on relies This 1949). (Verdoorn, growth productiv ity with related positively is output of growth that postulates that law Verdoorn the in formalized was returns increasing of role The 1949). Verdoorn, 1966; (Kaldor, efficiently more produce andwith to learn firms production of labour, accumulated division finer specialization a for costs, allows firms’ reduce scales tion produc- Large scale. dy to returns increasing namic and static generates manufacturing First, this question.to answers (complementary) several The provided has literature manufacturing? about special so is What • • • gate labour productivity. aggre- of rate growth the faster the output, manufacturing of rate growth the faster The productivity inmanufacturing; and labour of rate growth the faster the output, manufacturing of rate growth the faster The output, ratethe fasterthe growth ofGDP; manufacturing of rate growth the faster The , 1986; Hoffman, 1958). Szirmai (2012) col- (2012) Szirmai Hoffman,1958).1986;al., et , 1986;al., et - - elasticity advantages. elasticity income and price both has Fifth,manufacturing the economyto inspire industrial and policy. linkages have been used to identify key sectors in backwardforward and of indicators and notions dustry might add little valuethe to economy. The in- other this but linkage, another, strong a to constituting connected very be might industry example,linkages.an For the of importance and strength the economy.on depends however This whole the benefiting sectors, other to over spill logical advances that occur in manufacturing can Thanks to these linkages, knowledge and techno- industry). automobile an of emergence the late previous example, production of steel can stimu- the (using industry upstream the of output the use that industries downstream in investment induces industry an in investment when occur production of steel); and forward linkages, which the in investment proinduce - might cars (e.g. of duction economy the within sourced be can that needsinputs whenanindustry which occur linkages, backward of linkages: types two tifies iden- (1958) Hirschman Rosenstein-Rodan,1943). 1953; Nurkse, 1958; Hirschman, 1977; (Cornwall, industries various between linkages, or tarities, complemen- creating sectors, other the in used widely also but consumers final to sold only not the rest of the economy. Manufactured goods are to linkages stronger has manufacturing Fourth, oragriculture.than services on R&D added value its of more pointspercentage 6.5 to tensive industry in these economies, spending up manufacturing that R&D-in- wasthe show most utilities,and construction services).and data The mining, manufacturing, (agriculture, economy the in sectors major the between distinguishing expenditures in 2008 by 36 advanced economies, es). Lavopa and Szirmai (2012) collect data on R&D - servic in ICT of application the or agriculture in application of biotechnology and bioengineering the example,for(see, knowledge-based and sive capital-inten- more become have that riculture sector, as well as in some branches of modern ag- learning and innovation also occur in the services gress” (Szirmai, 2012). Today, pro- it can be argued that technological “disembodied as to referred been has This production. with knowledge late - accumu workers manufacturing, in generated scale to returns dynamic the to due Moreover, change”. technological “embodied term the of origin the is that characteristic a technologies, state-of-the-art latest the embody goods capital employed.These constantly are goods capital of generations new accumulation, capital of rates technologies:quirescapital modern rapidto due re- manufacturingCornwall, in 1977).Production 12 According to Engel’s law Engel’s to According The structural transformation process: trends, theory, and empirical findings 1 (Engel, 1857), the lower the per capita income of as an engine of economic growth. The growth a country, the larger the proportion of income rate of manufacturing output, in turn, depends module spent on agricultural products. As income in- on the growth rate of total output in the econo- creases, demand shifts from agricultural to my (Q) and income levels (q). A measure of back- manufactured goods, stimulating manufactur- wardness, income relative to the most developed ing production. In addition, the price and income economy (qr), is also introduced to account for elasticity of demand is relatively higher in manu- convergence. In order to account for countries’ ef- facturing than in other sectors, giving manufac- forts to import or develop technologies, the origi- turing an additional advantage. Higher demand nal Cornwall model also included investments for manufactured goods also creates demand for (I⁄Q)m. This model became the basis for a prolific the intermediate inputs and capital goods nec- empirical literature that tested the hypothesis essary to produce consumer goods, thus further that manufacturing is the engine of economic spurring output in manufacturing. If a country growth in an economy (see Section 3.2.1). successfully industrializes, the higher demand for manufactured goods can be satisfied do- Within the structuralist tradition, it is important mestically. However, if an economy does not in- to distinguish the Latin American structuralist dustrialize, it will need to import manufactured school, whose genesis can be found in the work goods. Given the high price and income elastic- of Raúl Prebisch (1950). Prebisch suggested that ity of manufacturing, imports of manufactured by specializing in commodities and resource- goods can lead to shortages of foreign exchange intensive industries where many of them have and balance of payment problems (Chenery et al., a comparative advantage, developing countries 1986; see also the insights about Latin American could lose their chances of industrializing. This structuralism presented later in this section). direction of structural transformation would in fact make their terms of trade decline, thereby What about the services sector? It was clear dat- exacerbating the balance-of-payments con- ing back to Kaldor (1968) that the services sector straint on economic growth.13 Such dependence 13 The same argument was is composed of two types of services: traditional would also lead their exchange rates to cyclically put forth by Singer (1950). services and services related to industrial activi- appreciate due to commodity prices booms. This ties. The latter complement manufacturing ac- situation would create debt crises and erode in- tivities and are therefore expected to grow as a dustrial competitiveness, ultimately destroying result of the expansion of these activities. It was domestic manufacturing industries. also noted that the development process is gen- erally accompanied by a shift of labour towards While these theories were inspired by the struc- services, where there are lower productivity gains tural change dynamics of Latin American coun- than in industry. This was referred to as cost dis- tries, the issues related to the abundance of nat- ease or the structural burden hypothesis (Bau- ural resources are relevant for countries in other mol, 1967, Baumol et al., 1985; see also Box 1). regions as well (see Section 3.1.3.5). Even if many developing countries would tend to specialize Observing these empirical regularities and tak- in resource-intensive industries because that is ing stock of this literature, Cornwall (1977) de- where their comparative advantage lies, compar- scribed the role of manufacturing in economic ative advantage is also partly the result of policy growth through a simple model. The Cornwall decisions and strategies, as discussed in Box 2. For model, also known as the engine of growth hy- example, Brazil experienced significant growth- pothesis model, assumes that the growth rate promoting structural change throughout the of manufacturing and that of the overall econ- 1970s, diversifying away from natural resources. omy are mutually reinforcing. This is expressed As defended in the structuralist and Latin Ameri- through the following equations: can structuralist literature, exchange rate, indus- trial, and trade policies play an important role in
Qm = go + g1Q + g2q + g3qr + g4 (I/Q)m (1) promoting productive structural transformation. These policies are the subject of Module 2 of this
Q = eo + e1Qm· (2) teaching material.
The first equation explains the growth rate of Today, due to the increased participation of de- output in manufacturing (Qm) and the second veloping countries in manufactured exports, the the growth rate of output in the economy (Q). debate over the terms of trade has shifted from Economic growth (i.e. the growth rate of output the comparison between developed and devel- in the economy) depends on the growth rate oping countries’ terms of trade to the compari- of output in the manufacturing industry (Qm), son between prices of manufacturing exports hence e1 measures the power of manufacturing from developing countries and prices of manu-
23 1 module Box 2). comparative advantage (see advantage definedaslatent ofcomparativeprinciple the versiona dynamic of structuralists often employ (2009). turalism, seeBielschowsky - struc new LatinAmerican 15 15 14 The structural transformation process: trends, theory, and empirical findings Forthe oldand areview of More specifically, new 24
3.1.3 technological change.ing and upgrad- of role increasing the emphasizes turn in Prebisch,which by the noted terms-of-tradeissue solve necessarily not does manufacturing towards strategy diversification export-oriented an that implies result This trade. of terms their high-tech, intohigh-skill-intensive manufactures could improve exports their upgrade to aged man- that those while trade, of terms declining low-tech,facedmanufactureslow-skill-intensive in specialized that economies cisely,developing pre- More 2002). Zhao, and Zheng 1991; Singer, Minford 2000; (Maizels, economies developed by duced pro- those to compared countries developing produced by manufactures of trade of terms the in trend downward a been has there mid-1970s, the since that showed research Empirical 2005). the of Prebischobject hypothesis (UNCTAD, 2002, the were disadvantagesthat commoditiesthe of the of some share economies developing by day to- exported goods manufacturing that of types noted the is it debate, this In labour. surplus of absence or presence the and institutions, ket mar labour capabilities, countries’ on goods depend of types The countries. developing and developed by produced goods of manufacturing types the on focuses debate the particular, In countries. developed from exports facturing ue eonzs h iprac o cags in changes of importance the recognizes litera - ture of the strand this of perspective, lines structuralist the Along new economics. the structural by revived been have traditions alist structur and neoclassical both in rooted Ideas 3.1.3.1 New structural economics literature dustrialization. in- resource-based on literature the (e) ture;and litera- chain value global the (d) ary,economics; evolution- or Schumpeterian, (c) structuralism; economics literature;the new Latin American (b) to the revival of this debate: (a) the new structural most contributed literature of strands new Five 2015).(Priewe, performance social and economic in- policies the of by spiredWashington terms Consensusin the of results mixed the to thanks 2000s, the topic has come back into the spotlight, issue).this However, of treatment early the since detailed more a for material teaching this of 2 the Module Washington(see to Consensus lated re- prescriptions and views of circles policy and academic both in prevalence the to 1990s,due mainly and 1980s the in diminished gressively pro- transformation structural in interest The
revivalThe of transformation since , 1997; Rowthorn, 1997; Sarkar and Sarkar 1997; Rowthorn, 1997; al., et the debate onstructural the mid-2000s - - et al .(2005) andAstorgaet (2014). er, as shown, for example,the work of in Ocampo oth- each contradict 2000).not do strands These Katz,2005; (Cimoli, poverty of out people lifting and growth economic shared spurring thereby competitive, more firms manufacturing made and accumulation of capabilities. This could have learning, change, technological slowed and tion industrializa- halted industries manufacturing favourof expense the at industries resource-based ing transformation and Structural productive advanced. less are industries facturing manu- whereas advanced, technologically and productive highly are industries resource-based heterogeneity; strong by characterized are mies econo- American Latin literature, of strand this development.specifically,Moreand to change according technological hampered decades cent re- in prevailed that transformation structural of direction the and heterogeneity productive how shows It progress. technological and tion and focuses the on role of structuraltransforma - the structuralist and Schumpeterian approaches Ocampo 2014; Ocampo, 2012; (Bresser-Pereira, rate exchange the Latin in American structuralist literature,the ing. emerg- strands two decades,recent with in vival re- a seen also has structuralism American Latin 3.1.3.2 endowments are inplace. strategic industries even beforethe “right” factor in activities productive new undertaking by i.e. capacity,of types new acquiring by achieved be can transformation structural that argue tion, tradi- structuralist the critics,from These mostly 2009). Chang, and (Lin potential development country’s a limit actually rather but upgrading, industrial and change structural to lead actually much to the current factor endowments may not too conforming literature, economics structural erty problems. According to the critics of the new pov serious with countries in slow excessively be however can approach parative-advantage (Ju structure industrial and endowment economy’sfactor overall the of upgrade an to lead would turn in products. This skill-intensive and capital- more in competitive more progressively become and ladder dustrial the in- up move would firms approach, this to Ln 21; i ad rihl 2014). Treichel, and Lin 2011; (Lin, endowments factor by determined advantages comparative with consistent industries in izing special - firms on rely should changes structural these that postulates also it models, trade sical neoclas- of tradition the with line in Morement. develop- economic for structure productive the 15 One focuses on a key development variable structuralism new Latin American The ., 2009). The other combines other The 2009). al., et 20) Ti com- This 2009). al., et 14 According - - The structural transformation process: trends, theory, and empirical findings 1 3.1.3.3 Schumpeterian, or evolutionary, GVCs means that production is increasingly tak- economics ing place within global production networks and module consequently is fragmented across countries, Another strand of literature that contributed to rather than occurring in a single country or a sin- the analysis of structural change is the Schum- gle firm as was previously the case.16 16 For a recent review of the peterian or evolutionary economics school. Au- GVC literature, see Gereffi thors in this tradition include Nelson and Winter Countries increasingly participate in internation- (2015). (1982) and Dosi et al. (2000) (see also Lall, 1992). al trade by specializing in one or a few tasks of a These authors focus on the role of innovation value chain, rather than specializing in produc- and analyse how capabilities affect learning ing one good. This means that instead of master- and development. The evolutionary approach ing a whole production process, countries need to structural change relies on the idea that the to master one or a few stages of production of a scope for technological change varies substan- certain product to be part of global trade (Bald- tially across industries, and that the speed of win, 2012). While some countries specialize in the technological progress thus crucially depends on design and prototype of the product, others pro- the dynamics of structural transformation in an duce inputs and components, while yet others economy (Dosi et al., 1990). In contrast to the new specialize in assembling the final product. These structural economics, the evolutionary school of activities are not all alike: for example, design thought argues that comparative advantages are is more skill- and R&D-intensive, while assem- not endowed but rather created. Production and bling is more labour-intensive. Because prices of endowment structures (and hence a country’s various types of labour and capital vary, tasks in comparative advantage) are shaped by learning which countries specialize define the share of val- and innovation. In the same vein as old structur- ue that countries add, and consequently the in- alists, evolutionary economists emphasize that come and employment generated through those successful economies that have relied on gov- tasks. Hence, whether a country supplies critical ernment interventions have managed to move high-tech components or is responsible for as- production structures towards more dynamic sembly makes a huge difference for structural activities, characterized by economies of scale, transformation and development (Milberg et al., steep learning curves, rapid technological pro- 2014; UNCTAD, 1996, 1999, 2002, 2006a, 2006b, gress, high productivity growth, and high wages 2013a, 2015a). (Salazar-Xirinachs et al., 2014). Given the pervasiveness of global value chains, 3.1.3.4 The value-chain literature it is worthwhile to look at structural transfor- mation and development in light of this new The debate on structural transformation has also phenomenon and reflect on the implications been revived by the observation that production such production fragmentation has for the pro- today is globally fragmented, giving rise to global cess of transformation and development. Table 2 value chains (GVCs). The concept of value chains highlights the implications of GVCs for five im- describes the full range of activities that firms pact areas relevant for developing countries: (a) and workers perform to bring a product from its local value capture; (b) upgrading and building conception to final use (Gereffi and Fernandez- long-term productive capabilities; (c) technol- Stark, 2011). The GVC of a final product can be ogy dissemination and skill-building; (d) social defined as “the value added of all activities that and environmental impact; and (e) job creation, are directly and indirectly needed to produce income generation, and quality of employment it” (Timmer et al., 2014a: 100). The emergence of (see Module 2 of this teaching material for the policy implications of this discussion).
25 1 module The The structural transformation process: trends, theory, and empirical findings 26 Source: Adaptedfrom UNCTAD (2013a: 149). employment quality employment Job creation, income generation, and andenvironmentalSocial impact building Technology dissemination andskill- productive capabilities Upgrading long-term andbuilding Local value capture Table 2 Impact areas Impact Impact ofglobal value chainsonstructural • • • • • • • • • • • • • • • also enhancecontinuity ofdemandandemployment. demand are reinforced along value chains, although relationships firm inGVCs can inGVCsStability ofemployment canberelatively in lowbecauseoscillations arefirms involved. levels skill The generated varythe value with inwhichforeign addedofactivities GVC employment.to increases andunskilled inbothskilled canlead participation goodsfor (e.g. assemblyofimported exports export). contents growth,dependsonimported employment in participation that even if GVCto jobcreation indevelopingto lead countriestends andhigher participation withcyclicalassociated changesindemand. comply withapplicable corporate social responsibility standards, andmitigaterisks they applyharmonized humanresourcetors when practices, useregular workers, conditionstransnational canbepositive within corporationstheir key contrac or - in countries withrelatively weak regulatory environments. Effects onworking ing GVCs have beenasource ofconcern whenGVCs are basedonlow-cost labour Working conditions andcompliance with applicable standards supply infirms products andprocesses. ing inGVCs. from canlearn Firms suchstandards,their improvingthe quality of standardsto comply andotherstandards whenparticipat need withwhichfirms and environmental efforts, e.g.throughthe useofcorporate social responsibility GVCstransferto as amechanism canserve international practices insocial best low-value-added) activities,to upgrade. beingable without to afewnities firms. Local canalso firms remain locked into low-technology (and GVCs forto learning asbarriers local firms, canalso act - opportu learning orlimit the firm’sto edge (e.g.technology sufficient engineerswhocanadapt context). the developing countryin to usesuchknowl- shouldhavethe capabilities inhouse alsoedge orskills affectsthe potential fortechnology dissemination. Lastly, the firm domestic context. transnationalthe corporationWhether to share knowl- iswilling (e.g. down), written the suchknowledgein to acquire may bedifficult andadapt it wantsto retrievetransnational the from corporation codified iscomplex andnot indevelopingthe firms countries.of Thus, the domesticfirm that the knowledge if ture ofinter-firm relationships andvalue chaingovernance, andabsorptive capacity GVCsthe complexitythe knowledgeinvolved, andcodifiability dependson of the na- transferKnowledge transnational from corporationsto local operating firms in inGVCsexpansion ofparticipation technological withincreasing sophistication. ipation inGVCsthe creation also ofhigherdomesticvalue but the gradual addedand the country level,At successfulGVC upgrading pathsinvolve- onlygrowing not partic moveto othervalue have that suchscope. chains operatethat invalue have firms that limitedscope chains for upgrading have will to relationships,firm absorptive capacity,the local businessenvironment. and is,That upgradethe value dependson they are engaged, chaininwhich the nature ofinter- to avoid oflocal capacity the potentialThe firms to suchdependencyand forthem involving withlimitedvalue activities added. to GVCstechnology baseandonaccess transnational governed by corporations and Some forms ofGVC dependencyonanarrow cancauselong-term participation withhighervalueupgradeto activities those chains. addedin GVCs canoffer longer-term to iflocal manage firms development opportunities orusedforsectors acountry’s general development. critical issuefor developing countries, assuchvalue bechanneledinto other cannot these effects cases. arethat limitedinmost More broadly,the leakage ofvalue isa ated, effects withpossible the balance ofpayments, on although evidenceshows transfer manipulation. price Also, ofaffiliatesthe earnings berepatri of will - part transnationalof corporations. value raisesThis that concerns canbeleaked, e.g. via ofGVCA largepart value addedindeveloping economies isgenerated byaffiliates ing, whichoftentakesthrough place non-equityrelationships. inGVCs,to participate firms generating additional valuethrough added local sourc- Transnational corporationstheir affiliates and canprovide for opportunities local the overallsmall of orlowervalue GVC part orend-product. contents areimported highandwhere ofexports GVCto a islimited participation the value-added that contributionConcerns ofGVCs exist isoften limitedwhere to developing countries activities withrelativelysource certain lowerlabour costs. previously becausefirms locatedinasinglecountry exist nowout opportunities the valueup chain(e.g. from raw coffeeto roasted coffeeto processed coffee). Such contributeto faster ifdeveloping countries GDPgrowth to gradually manage move Participation inaGVC cangenerate value addedindomesticeconomies and transformation indeveloping economies Highlights offindings - - - The structural transformation process: trends, theory, and empirical findings 1 As shown in Table 2, GVCs are typically led by • Chain upgrading. Firms use the capabilities transnational corporations and established acquired in a chain to enter another chain. module through equity holdings (foreign direct invest- ment) and non-equity modes.17 Through non- The potential for different forms of upgrading dif- 17 Non-equity modes are a equity modes, transnational corporations can re- fers across countries. According to Milberg et al. form of outsourcing through quire firms in developing countries to adopt new (2014), low-income and smaller countries usually a contractual relationship in which transnational corpora- procedures and new managerial and production seek to increase the domestic value added of their tions coordinate and control processes, working standards, and so on. In addi- exports by functional upgrading. Middle-income activities in the respective tion, transnational corporations might provide countries, on the other hand, aim to avoid the country, without owning a firms with concrete specifications related to the middle-income trap through product and pro- stake in the firm to which design and quality of the product or service to be cess upgrading, trying to establish their brands. activities are outsourced. Examples of non-equity mo- delivered, contributing to the learning process of des are contract manufac- the local firm. The use of non-equity modes has Some authors such as Banga (2013) have pointed turing, service outsourcing, increased rapidly over the last decade or so due out that global value chains emerged from re- franchising, and licensing. to their relatively lower capital requirements, gional value chains, with a case in point being the reduced risks, and greater flexibility. As we saw role of Japanese firms moving production and as- in Table 2, the development implications of non- sembly of their branded products to other Asian equity modes vary according to the industry, the countries. Regional value chains can be a vehicle specific activity performed, the contractual- ar for firms to become competitive in the global rangements, and the conditions and policies in market, as they can enable them to accumulate the developing country (UNCTAD, 2011b). capabilities and boost their competitiveness. This issue is particularly relevant for the least devel- Empirical research has also shown that there are oped and most-marginal economies like many only a handful of major lead firms in GVCs and sub-Saharan African countries (Banga et al., 2015). that they are mainly concentrated in the devel- oped world, and with few exceptions in the Peo- 3.1.3.5 The literature on resource-based ple's Republic of China (Gereffi, 2014; Starrs, 2014). industrialization This concentration of power in the hands of a few leading firms influences how these networks It has long been argued that resource-rich econ- are managed, with clear developmental implica- omies suffer from a resource curse, known as tions for developing countries. Concentration of Dutch disease, that penalizes the manufactur- power might lead these firms to somehow limit ing industry and ultimately leads to unsatisfac- the upgrading opportunities available to firms in tory outcomes for industrial development and the host developing countries. As a consequence, long-run economic growth (Auty, 1993; Collier, firms in developing countries might be locked 2007; Frankel, 2012; Sachs and Werner, 1995; van into low-value-added activities and face pres- der Ploeg, 2011).18 As the Dutch disease argument 18 The term “Dutch disease” sures to keep labour costs low. As a matter of fact, goes, the discovery of natural resources, as well comes from the 1960s econo- structural transformation within GVCs is achieved as commodity price booms, may cause the manu- mic crisis in the Netherlands that followed the discovery through upgrading, which can only be achieved facturing industry to shrink because: of gas reserves in the North through accumulation of productive and techno- Sea. logical capabilities (UNCTAD, 2006a, 2006c, 2014a; • Incentives to reallocate productive resources see also Section 5.2.1 of Module 2 of this teaching such as capital and labour to primary sectors material). lead to a rise in the production of commodi- ties and divert resources away from manufac- Firms can upgrade their standing in GVCs turing; and through four main channels (Humphrey, 2004; • An inflow of revenue leads to an exchange Humphrey and Schmitz, 2002; UNCTAD, 2013a): rate appreciation, making other economic activities, including manufacturing, less com- • Product upgrading. Firms move into more petitive. sophisticated product lines characterized by higher value added. Commodities are known to experience large • Process upgrading. Firms can introduce new swings in prices and long-run deterioration in technologies or organizational innovations to their terms of trade (Prebisch, 1950; Singer, 1950; produce more efficiently. for more recent evidence, see Erten and Ocam- • Functional upgrading. Firms can move into po, 2012; Ocampo and Parra, 2003; and UNCTAD, 19 This is especially the more sophisticated (and skill-intensive) tasks 1993, 2003a, 2008, 2013b, 2015b). Resource-rich case in African economies in the chain (e.g. from assembly and produc- developing countries that rely excessively on where industrialization has been weak and inconsistent tion of standardized inputs to production of commodities suffer the most from commod- (UNECA, 2013). high-tech components and design). ity price swings.19 In these contexts, commod-
27 1 module 21 21 20 The structural transformation process: trends, theory, and empirical findings annex). (2015b, Chapter1andits Chapter 5), andUNCTAD Chapter 2), UNCTAD (2011c, box 2.1), UNCTAD (2009, boom, seeUNCTAD (2008, the recent commodity price (AfDB al., et 2014). revenuestax total of per cent revenues) representing 46 natural-resource-related tax taxes” composed (largely of the category with “other to 2012, fromper cent 2000 in Africa increased by12.8 revenuetax total collected commodity boom, price 2003b).the recent to Due revenuesnment (UNCTAD, sharea significant ofgover revenues representexport countries,taxes leviedon On financial aspects of On financial aspects Especially inAfrican 28 - 2015b; Zhang and Balding, 2015). Balding, and Zhang 2015b; UNCTAD,2015;Zhu, and 2013b,2011c,2009,2008, (Tang trend upward this amplified options, and futures commodities by an in investment in upsurge driven speculation, financial increased (UNCTAD,Finally,boom 2008). price this to uted contrib- also reserves oil shrinking and change climate of challenges the to attention Growing UNCTAD,also 2005). see Farooki, 2011; and linsky (Kap- demand stable guaranteed that China, of Republic People's the primarily economies, ing develop- large of number a in industrialization and growth economic fast and economy global the of performance stable and strong the relatively - experi by driven boom, world price commodity the a enced recently, until 2002 From (Auty,ment 1990; develop- Gelb, 1988; Venables, for 2016). support sustained provide to gies strate - development resource-based of capacity the question into called traditionally have facts Humphreys 1958;and Hirschman, also (see 2.1 Section in described ity the of heterogene- structural rest economy,the reinforcing the from isolated be to tends it i.e. activity,enclave an remain to tends production counts (UNCTAD,2008). counts inflation,current account balances, andfiscal ac- on pressures and uncertainty creating stability, macroeconomic and revenues government for consequences important has volatility price ity Following Source: Kaplinsky (2011). • are relevant • • Box 4 arise that, Backward commodity tasks indifferent a to from logging can arise Forward dustries Horizontal production. andfurniture and sawmilling Forward supplier strong
and from Hirschman’s that linkages linkages growth subsequently in linkages of the linkages industry.
the context process inputs adaptation production processes. of capture are capture the refer or
et al.,stylized2007). These et commodities. theory Backward strong to loggingequipment 20 a industries uses ofcommodities –backward, user to Moreover,commodity the of the the of when such logging effect of Types andexamples ofproduction linkages linkages, process flow linkages outputs 21 capabilities that Several devel- Several the
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example growth supply in intermediate
Kaplinsky are of which commodity the strong andfrom loggingequipment the in of of commodity an
other the to commodity forward (2011) industry when cane forward, commodity goods the context ofcommodities. in linkages production of nature the describes 4 Box industrialization. of engine potential a ties of commodity production and making commodi - the economy, of rest the enclavereducing nature the and industries commodity between exist es linkag- production believed,strong commonly is what that,to contraryargued literaturehas This mining equipment in South Africa (Kaplan, 2012). of production or (UNCTAD, 2006d) Chile in ing farmsalmon- of cases the intensive,in shown as R&D- and dynamic increasingly becoming activities are manufacturing resource-based that trialization.strandthis literature,of In noted is it dustrial development strategy and lead to indus- in- an for basis the form can resources natural Czelusta, 2004, 2007). According to these authors, rooki,2012;Perez, 2008;2013;UNECA, and Wright et al., 2013; Andersen (AfDB industrialization resource-based of favour in argued have authors Some re-opened. been has strategies de- industrialization commodity-based and velopment about debate the that surprise no is it developments, these of light In trade.of terms favourable of advantage take to order in production commodity to resources significant allocated have others and fuel, and minerals of oping countries have recently discovered reserves industry industries. discusses growing, the linkages or industry), creates industry. below: andhorizontal –asdescribed growth inputs on industry
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from of the develops
For the types use leads example,
to engineering. supplying between commodity that et et al., 2015; Kaplinsky and Fa- of and of
horizontal capabilities to equipment
production process strong forward
backward timber industries industry commodities. growth linkages linkages
because for industries linkages linkages similar to of leads can the (as in- of that
The structural transformation process: trends, theory, and empirical findings 1 Apart from production linkages, commodities nomic growth. The simple existence of a strong generate two additional types of linkages: fiscal correlation between these two processes, how- module linkages and consumption linkages. With respect ever, does not prove that structural change fos- to the former, governments can channel rev- ters economic growth. Several econometric stud- enues from natural resources into other indus- ies examined the impact of economic structures tries or into broader development programmes, and structural change on economic or productiv- thus exploiting the fiscal linkages of commodi- ity growth. We can identify four strands of litera- ties. In this regard, UNCTAD (2008) cautions that ture in this field of research: (a) studies on manu- whether these fiscal linkages can be realized facturing as an engine of economic growth; (b) largely depends on the distribution of commod- studies that disentangle the role of structural ity export earnings between domestic and for- change in labour productivity growth; (c) studies eign stakeholders. Countries where state-owned that look at structural change within manufac- enterprises are in charge of the extraction and turing; and (d) studies on industrial upgrading. production of natural resources can appropriate most or all of the gains from favourable terms of 3.2.1 Is manufacturing the engine of economic trade. Otherwise, well-designed taxation and roy- growth? alty systems can help improve the distribution of rents between domestic actors and foreign in- According to structuralist economists, there is vestors (see also Section 5.1.2 of Module 2 of this something special about manufacturing that teaching material). Consumption linkages can makes it the engine of economic growth in the also spur industrialization, as higher incomes economy. Early econometric studies tested this earned in the commodity industry can spur de- idea and confirmed its validity (Cornwall, 1977; mand in other sectors (Andersen et al., 2015; Kap- Cripps and Tarling, 1973; Kaldor, 1967). More re- linsky, 2011; Kaplinsky and Farooki, 2012). cently, using a large sample of countries between 1960 and 2004, Rodrik (2009) shows that the In spite of this optimistic view of the possibilities shares of industry in GDP and employment are as- for industrialization opened up by the recent com- sociated with higher economic growth, with the modity price boom, it has also been noted that results holding when the sample is split between it is misleading to think of developing countries advanced and developing economies. Other stud- only as commodity exporters, as they also import ies in this strand of literature focus on world re- commodities. The actual effect of commodity price gions or states in federal countries and confirmed booms on the terms of trade depends on trade that manufacturing is the engine of growth in structures and price trends of the commodities the economy – i.e. that higher rates of growth of imported and exported. The evolution of prices manufacturing output are associated with faster also affects the distribution of income within economic growth (see Felipe, 1998, for Southeast countries, as the social and economic groups that Asia, and Tregenna, 2007, for South Africa). Even benefit from higher prices of exported commodi- for countries like India, where the share of services ties are not necessarily the same as those bearing in GDP and employment is on the increase and the costs of higher import prices (UNCTAD, 2005, where many observers talk of services as the en- 2008). Moreover, developing countries that have gine of economic growth, Kathuria and Raj (2009) benefited the most from the recent commod- show that manufacturing is the engine of growth ity price boom have often become net capital ex- in Indian states. These results are supported by porters, and capital has generally moved towards other studies showing that, even though the Indi- richer economies. Empirical research shows that an experience suggests that specialization in ser- these current account reversals are associated vices with high value added and based on skilled with terms-of-trade shocks and characteristics of labour can spur economic growth, manufacturing the exchange rate regimes. In particular, countries remains extremely important (Chandrasekhar, that experience a current account reversal also ex- 2007; Kathuria and Raj, 2009; Ray, 2015). perience a positive shock in their terms of trade, and countries with a fixed exchange rate are more Fagerberg and Verspagen (2002) and Szirmai and likely to improve their current accounts than coun- Verspagen (2015) propose a Schumpeterian view tries with a floating exchange rate (UNCTAD, 2008). on this topic by investigating the role of techno- 22 Apart from European logical change in manufacturing growth. Fager- countries, the economies 3.2 Empirical literature on structural berg and Verspagen (2002) use data for 29 (mostly examined included the Uni- 22 ted States, Australia, Canada, transformation advanced) economies for the period 1966–1995. New Zealand, Japan, Hong In their econometric model, they include variables Kong (China), Malaysia, Phi- The descriptive analysis presented in Section 2.4 typical of empirical studies related to the evolution- lippines, Singapore, Republic offered some insights on the relationship be- ary economics school (e.g. number of patents) and of Korea, Taiwan Province of tween changes in productive structures and eco- structural variables, namely the shares in GDP of China, Thailand, and Turkey.
29 1 module vehicles, etc.). chemical products, motor beverages, chemicals and ISIC Revision 3(e.g. food and the levels of two-digit at 23 23 The structural transformation process: trends, theory, and empirical findings Data are disaggregated 30 in humancapital becomes paramount. economic growth than in the past, as investment to route difficult more a is today dustrialization this,in- to countries.Due industrializing in skills more requires industrialization modern vealing: workforce.educated re - particularly is result This more a with countries in especially growth, ing growth is positively associated with manufactur economic that indicating growth, economic and term interaction this between relationship cant manu- GDP.in facturing signifi- of and positive a find They share the and age) of years 15 above population the capabilities for schooling of of years (average accumulation of indicator an between effects interaction model Cornwall the of estimations the to adding by growth nomic eco- and industrialization in capabilities of tion - accumula the of role the analyse also authors impact. The same the have not do services while manufacturing is an engine of economic growth, that find authors The 2005. to 1950 from period the for countries developing and developed of sample large fora data using hypothesis growth of engine the test (2015) Verspagenand Szirmai infavour shrink tries sector.the services of economiesdevelop,as manufacturingtheir indus - showed, 2.3 Section as analysis: the for of econo- used mies sample specific the of byproduct a be might periods.finding time interesting,this While all in growth GDP with associated positively were services from GDP in added value of shares higher nounced role before 1973 more pro- than after that year, much while a had manufacturing that find They services. and manufacturing by added value Source: Rodrik (2013b: 13). Figure 13
Subsequent growth (controling for dummies) -2 -1 0 2 1 Convergence inmanufacturing labour productivity, -2 Initial labourpr -1 oductivity (con - 03 hc dt ae available. are data which a manufacturing branch for the ten last years for (on the vertical axis). Each observation represents decade subsequent the over rates growth and their axis) horizontal the (on productivity bour la- of levels initial between correlations partial sub-Saharan economies by presenting estimated 21 for work at dynamic this year.shows 13 Figure per cent per 3 to 2 rateof a convergeat activities manufacturing in levels productivity that shows Organization Development covering (UNIDO) formal activities, Rodrik (2013a) Industrial tions Na- United the from data disaggregated Using growth. productivity labour faster enjoy levels productivity lower initially with activities cause be- happens essentially This infrastructure. and geography or institutions, or policies of quality the as variables,such other on depend not does productivity manufacturing convergencein that meaning convergence, unconditional exhibits precisely,Moremanufacturing activities). turing productivemanufac most - the (intendedhereas ing tend to converge to the technological frontier overthat time productivity levels in manufactur shows (2013a) Rodrik economics. development early by foraccounted than is powerful more even manufacturing authors, some to According u-aaa Arcn cnme, u hls as forwell otherworldregions. holds but economies, African sub-Saharan for valid is This productivity. manufacturing of holds, confirming the unconditional convergence relationship negative the included not are they two) are included as control the variables. Even when between terms interaction (and dummies tr olling f 1 or dummies) sub-Saharan Africa 2 23 Period and industry industry and Period - The structural transformation process: trends, theory, and empirical findings 1 Finally, recent empirical evidence has demon- of sectors. The second part of the formula, on the strated that not only is structural transformation other hand, captures the impact of labour move- module towards manufacturing positively associated ments across sectors along the time period. Hence, with economic growth, but that this economic this is the structural change, or reallocation, com- growth is also more sustained over time. Foster- ponent of labour productivity growth. It accounts McGregor et al. (2015) econometrically investi- for the fact that when labour moves from a lower- gate this relationship using a panel dataset com- productivity sector to a higher-productivity sector, prised of 108 countries between 1960 and 2010. the employment share of the former decreases Results confirm that a larger manufacturing and the employment share of the latter increases, industry, measured by the share of manufactur- thus increasing aggregate labour productivity. ing value added in GDP, is significantly associated with longer periods of economic growth. Hence, Imagine that an economy is composed of two in- a strong manufacturing industry is key both to dustries: shoes and computers. Labour productivity trigger and to sustain economic growth. of the computer industry is higher than labour pro- ductivity of the shoe industry, and the shoe industry 3.2.2 Quantifying the effect of structural employs more workers than the computer industry. change on labour productivity From time t-k to time t, the shoe industry becomes more productive (e.g. due to learning), and so does Labour productivity can be fostered in three dif- the computer industry (e.g. because firms invest in ferent ways. Within each sector, productivity can modern technologies). Let us also assume that the grow through capital accumulation, technologi- labour productivity increase in computers is higher cal change, exploitation of economies of scale, or than the labour productivity increase in shoes. If learning (the within, or direct, productivity effect). workers remain in their respective industries (i.e. During processes of structural transformation, la- no structural change occurs), the structural change bour moves across sectors: movements from low- component is zero. So, labour productivity growth to high-productivity sectors increase aggregate is exclusively due to the first component, the with- labour productivity by making the higher-produc- in-productivity effect. Because labour productivity tivity sector larger (the structural change, or real- has increased in both industries, aggregate labour location, effect). Finally, changes in productivity productivity growth would increase. Still, because can occur as a result of changes in relative out- the size of the two industries remained unchanged, put prices between different sectors (the terms- aggregate labour productivity increases less than it of trade-effect). Because the latter is relatively would have had the computer industry been larger. marginal, we will focus on direct and structural If the economy undergoes a process of structural productivity changes. Following this, aggregate change, and workers move from shoes to the com- labour productivity can be decomposed into: puter industry, the structural change component is not zero anymore; rather, it is positive. n n t ∆Y = i= 1 θi ,t-k ∆yi,t + i= 1 y i,t ∆θi,t (3) Using this decomposition formula and similar where Yt and yi,t refer to economy-wide and secto- variations of it like the one presented in Box A1 ral labour productivity and θi,t captures the share in the annex of this module, various studies have of employment in sector i at time t. ∆ denotes analysed how structural change contributed to la- changes in productivity (∆yi,t) or employment bour productivity growth (de Vries et al., 2015; Mc- shares (y∆i,t) between times t-k and t. The first Millan and Rodrik, 2011; Timmer and de Vries, 2009; component of labour productivity is the sum of Timmer et al., 2014b). Figure 14 presents averages productivity growth within each sector weighted of within and structural change productivity ef- by the employment share of each sector at the be- fects for Latin America and the Caribbean, sub-Sa- ginning of the time period. This is the within-com- haran Africa, Asia, and high-income countries for ponent of labour productivity growth. Intuitively, the 1990–2005 period. Consistent with the empir- this component captures the idea that the larger ical regularities discussed in Section 2.1, structural the sector with higher-than-average productivity change made the smallest contribution to overall growth in the economy, the larger the aggregate labour productivity growth in high-income econo- labour productivity growth of that economy. As mies. By contrast, structural change played a key discussed in Section 2.1, production structures role in developing regions, albeit in different ways. 24 This exercise does not in developing economies are highly heterogene- In Latin America and Africa, the structural change account for unemployment, ous, meaning that the economy is composed of component was negative, meaning that labour which would worsen the picture for Latin America and a few high-productivity activities and many low- moved from higher- to lower-productivity activi- the Caribbean and possibly productivity activities. This element captures this ties. In Asia, it was positive. These findings contrib- for Africa, given the rise of heterogeneity by taking into account differences ute to explaining the differences in growth rates unemployment in the period in sectoral productivity and differences in sizes between these three regions.24 under analysis.
31 1 module The The structural transformation process: trends, theory, and empirical findings 32 Structural change Within lar, structural change within manufacturing can lar,manufacturing within change structural - particu In branches. manufacturing productive more to productive manufacturing,i.e.less from ing, because structural change also occurs within manufactur to agriculture the from labour of as shift analysed) (and intended simply be not can- transformation structural consequence, a considerably. As differ branches manufacturing as category, homogenous a considered be not can- manufacturing that noted authors Some 3.2.3 Note: HI: high-income; LAC:the Caribbean. and LatinAmerica Source: andRodrik McMillan (2011: 66). tween The The Source: Authors. After shares. tween ment The the by share The the individual units worker-years, gate where A1 in Figure 14 Box 5 the share of impact shift-share second first method Looking into the annex of
a as decomposition Decomposition by oflabour productivity growth country group, two points in industries.
P straightforward This AFR
i well. term = a ASIA LA IC structural
Q N HI term component of A C is i i -0
islabour i, productivity inindustry inside and The captures structural .02 derived in these industries decomposition is
This third i = i this module, the that
time (as in∆P=P industry the “is component, is as
interaction term algebraic is the a make up positive -0 manufacturing change positive follows. purely .01 contribution measures (i = 1,…, m). labour productivity we as: canwrite method descriptive
manipulation if on
reflecting Let if total employment). the aggregate.” between the P the Shift-share decomposition method productivity 1
-P P = P == ∆P 00 0 P is share the
high-productivity-growth ), Then, QQ N to in equation (5.1) we canwrite an labour = industry contribution productivity changes example changes technique i
of similarly ii ii N P and high-productivity io productivity, andS P ∆S
== growth. o .01 - i using in ++ in i of the i to Q N is ∆P that tails on the shift-share on tails decomposition method. de- more provides 5 Box manufacturing. within branches different of contribution the identify and manufacturing inside look to method tion shift-sharedecomposi- the apply (2003) Peneder berg and Verspagen (1999), Fagerberg Fager(2000), and (2000), Szirmai and Timmer hypothesis. bonus structural the this called (2000) Szirmai (Chenery manufacturing heavy than capital-intensiveless is manufacturing light where manufacturing, heavy to light from movement a as qualified be productivity the i i growth of P the i
the share iin ofindustry o ∆S As N ∆ composition ii productivity N
i accounting-based attempts i as Divisia 0 described Q = Q .02 a S io of notation P ∆P i industries value o et et al., 1986; Hoffman, 1958). Timmer and industries [P changes i decomposition in i, S to (percentage points) 1990–2005 i the growth-rate form: each ] of by added, growth decompose 0 the for .03 Fagerberg in increase industry in aggregate, the approach the
N = N total within difference reallocation total employment. labour method the employment 0 their and (2000: .04 industries
change designed and changes shares input described in
changes 400), a of of variable
in 0 of labour
to (weighted
.05 increases. an the in terms employ analyse
labour within aggre- in shift- (5.2) (5.1) Box be- be- of -
- The structural transformation process: trends, theory, and empirical findings 1 Timmer and Szirmai (2000) study four Asian Database, they find that from 1973 to 1990, the economies (India, Indonesia, Republic of Korea, electrical machinery industry became one of the module and Taiwan Province of China) over the period most dynamic industries in developed econo- 1963–1993. Their data allow for distinguishing mies, with extraordinarily high labour produc- between 13 manufacturing branches. Their de- tivity growth rates. Inspired by this finding, they pendent variable is total factor productivity (TFP) develop an econometric model to estimate the growth, expressed as a linear function of output impact on manufacturing productivity growth of growth. The authors modify the standard shift- the size of the electrical machinery industry, cap- share decomposition method to account for the tured by its employment share.26 They find that 25 See also Fagerberg (2000). Verdoorn law (see Section 3.1.2). The idea behind the share of employment in electrical machin- the paper is that if returns to scale differ across ery is a significant determinant of productivity 26 The estimations include industries, then the contribution of structural growth in manufacturing, while the share of em- the change in the share of change to productivity growth is larger than ployment in other high-growth industries is not the workforce going to other high-growth industries to measured by the standard shift-share analy- a significant determinant. This supports the idea account for possible similar sis. The authors find that the structural change that the electrical machinery industry is special dynamics in other industries. component does not explain TFP growth, con- because it can drive productivity growth in man- Initial productivity levels, trary to what the literature suggests. Following ufacturing. This result also illustrates the con- enrollment in education, and their modification of the shift-share analysis, the cept of linkages discussed in Section 3.1.2 – that investments are also added in most of the estimated component of structural change is positive when is, thanks to the wide application of ICT in a large models. inputs move to higher-productivity branches, range of economic activities, fostering the electri- branches whose productivity grows faster, or cal machinery industry indirectly induces invest- branches with higher Verdoorn elasticity, in- ments in other industries, and spurs productivity tended as the elasticity of TFP growth to output in other industries and at the aggregate level, growth. This change of the methodology, howev- also fostering innovation through knowledge er, does not change the main results, so the shift- spillovers and new products. At the same time, share method does not systematically underesti- today’s new technologies generate different pat- mate the contribution of structural change. terns of structural transformation compared to those observed during the first half of the 20th Peneder (2003) examines the contributions century (e.g. electricity and synthetic materials). to economic growth of services and two cat- As stated by Fagerberg (2000: 409): “New tech- egories of the manufacturing industry, namely nology, in this case the electronics revolution, has technology-driven and human-capital-intensive expanded productivity at a very rapid rate, par- manufacturing. The study examines 28 econo- ticularly in the electrical machinery industry, but mies from the Organisation for Economic Co- without a similarly large increase in the share of operation and Development (OECD) over the that industry in total employment.” The weak ef- period 1990–1998. Results show that a rise in fect on employment may call into question the the employment share of services has a (lagged) poverty-reducing impact of this new type of negative effect on GDP growth, confirming the structural change, as well as its role as an engine structural bonus hypothesis put forth by Baumol of economic growth, especially in developing (see Section 3.1.2). By contrast, increases in the economies with large and growing populations. shares of technology-driven and human-capital- intensive manufacturing exports have a signifi- 3.2.4 Industrial upgrading through export cant and positive effect on the level and growth sophistication and within value chains rate of GDP. The author attributes these results to producer- and user-related spillovers, positive Structural transformation is a continuous process externalities, and other supply-side factors that spurred by industrial upgrading through diversi- enhance productive capacity that is associated fication and sophistication of production and with the industrial sector. He also points out that exports. Two strands of literature have recently when both the effects of services and manufac- analysed these processes: the product space litera- turing industries are taken into account, the net ture, and the GVC literature. The product space lit- effect of structural transformation appears to be erature (Hausmann and Kliger, 2007; Hausmann weak because the positive and negative effects et al., 2007, 2011; Hidalgo et al., 2007) builds on a from changes in the structure of the economy very structuralist idea: what economies produce cancel each other out. and export matters for their economic growth and development. This literature also contains a Fagerberg and Verspagen (1999) focus on the role strong evolutionary element: countries cannot of specific manufacturing industries deemed produce a good for which they have no knowl- to be particularly strong engines of economic edge or expertise. This puts learning, capabilities, growth.25 Using the UNIDO Industrial Statistics and technological change at the centre of struc-
33 1 module country’stotal exports. that each commodity in weightsthe shares are of each country,the where averagethe PRODY of for EXPYculate the weighted as to asPRODY).they cal- Next variable generally referred commodity (the that level of to 1). the income gives This the weights sumup that commodity (normalized so Box 2)ofeachcountrythat in comparative advantage (see the weightsthe revealed are traded commodity, where the countries each exporting averagethe incomes of of the weightedcompute commodities,the authors than 5,000more different System (HS), whichcovers andCodingdity Description Harmonized Commodigit - steps. First,the six- using 28 28 27 The structural transformation process: trends, theory, and empirical findings nitiative.htm. - lue-addedanoecd-wtojointi sti/ind/measuringtradeinva- lable athttp://www.oecd.org/ The TiVA database isavai- 2000, 2005, and2008-2011. countries). Datacover 1995, and someSouthAmerican Asianeconomies,Southeast EU28, G20, and East most economies,economies (OECD (WTO). includesdataon61 It the World Trade Organization and is producedthe OECD by Value Added(TiVA) Database .site/home.htm The Trade in http://www.wiod.org/new_ databaseThe isavailable at to 2011.China) from 1995 sia, and Taiwan Province of India, Mexico, Turkey, Indone- Russian Federation, Brazil, People’s Republic ofChina, Australia, Republic ofKorea, United States, Japan, Canada, and 13othereconomies (the Union (excluding Croatia) the Europeancomprise data for 27countriesthat Database (WIOD)collects EXPYtwo iscalculated in The The World Output Input 34 of increasingly sophisticatedgoods. another, leading to diversification and production map in which economies move to from one point ultimately configures a network of goods, a sort of This skills. of sets new completely requires producing them if away far are goods and similar, is them produce to used knowledge the if close are goods space, product the in Hence,good. certain a produce to needed capabilities and knowledge the to according wheredefined enough”“closeis it,to enough close is that one another to produce already countries that good a from moving tails en- transformation structuralframework, this In other.the produces already economy an if goods defined by the probability of producing one of the is goods two between distance the where world, space is an illustration of all goods exported in the product the specifically, More move. economies which in space a as possibilities production literaturesees This processes. transformation tural Note: EXPY denotesacountry’s sophistication. export Source: Rodrik (2007: 24). transformation by using input-output matrices matrices input-output using structural by transformation for GVCs of rise the the is analyzing of implications literature prolific similarly A al. ,and Fortunato et 2015, for Ethiopia). Jankowska Felipe Colombia; for 2008, Klinger, and Hausmann (see economies oping devel- for especially diversification, of productive paths possible map identify and to spaces literature product space product the in lined out methodologies the applied studies Various Figure 15 7 .88359 9.1273 EXPY et al.,et 2012, for Asia and Latin America; 6.7750 MDG 1 KEN BGD Relationship between EXPY andpercapitaincomes in1992 ., 2013, for China; for 2013, al., et IN D CH BO HT N L I LK A ID N ECU PER JA M - GDP percapita PR TR BL eoe a EXPY. as denoted generally sophistication countries’ export of dex Hausmann more pronounced in some industries than oth- than industries some in is pronounced more production of globalization and economies East Asia. Lead firms are generallyfrom advanced in a small number of countries, predominantly in concentratedis global,production being despite that recognize generally They countries. oping in devel- governments and firms for plications im- their discussed and GVCs of pervasiveness the on evidence empirical providedhave studies and the Tradeand in ValueDatabase). Added Database Output Input World the (e.g. tabases da- new of number a availableby made recently levels have might suggested. income their than profiles export sophisticated more had past, recent the in economies cessful suc- most the among India, and China that ing presents data which on GDP per capita and EXPY in 1992. 15, It is - tell Figure in illustrated is This Razo,and Fortunato also (see higher 2014).much is growth subsequent income, of level its to tive rela- basket export sophisticated a countryhas a sequent rate of economic growth. That is to say, if tion between the initial level of EXPY and the sub- they also show the existence of a positive correla- that is perspective our from important is what But income. capita per with correlated highly is sophistication export of measure this that show DZ HA Y TU K Z LC A M R CO A MY BR L CH A S TT HR O L V ME HU et et al. (2007) develop a quantitative in - X N KO OM R 27 nupiigy te authors the Unsurprisingly, CY N SA PR P U GR T SGP C IR ESP NZL L MA FI SW N AU C NL CA E DEU ISL S DN D N K CH US 10 E A .26 28 74 These The structural transformation process: trends, theory, and empirical findings 1 ers, with clothing and textiles, electronics, and ratio between forward and backward linkages, automotive industries being the most fragment- meaning that their net gains from participation module ed (De Backer and Miroudot, 2013; Timmer et al., in GVCs are the highest. Moreover, the study dem- 2014a; UNCTAD, 2014a). Another common find- onstrates that even when developing economies ing in this literature is that while participation manage to enter high-tech industries through of developing countries in GVCs has increased GVCs, their participation might not ensure net tremendously over recent decades, developed gains in terms of value added into exports. economies tend to benefit more from insertion in GVCs than developing countries. The latter are Timmer et al. (2014a) use the World Input Out- sometimes locked into low-value-added activi- put Database to illustrate how value chains have ties and face difficulties in upgrading (Milberget sliced up global production. An example from al., 2014; UNCTAD, 2002, 2014a). their paper illustrates this. In the German car manufacturing industry, defined in this frame- In this strand of literature, Banga (2013) uses the work as the industry that sells cars in Germany’s World Input Output Database to compare various domestic market, the value-added contribution indicators measuring the participation of coun- by firms outside Germany increased from 21 per tries in GVCs and the distribution of gains from cent in 1995 to 34 per cent in 2008, pointing to that participation. The author shows that while increased fragmentation of production (Table 3). developing countries are increasingly participat- Moreover, the value added by capital and high- ing in GVCs, developed countries contribute the skilled labour (no matter the origin) increased, most to value addition.29 The paper distinguishes while the value added by low-skilled labour de- 29 In particular, the contri- between two mechanisms through which coun- creased or remained constant. This suggests that bution of OECD economies tries can participate in GVCs: through forward in the car industry, countries that specialized in to global value added is estimated at around 67 per linkages, whereby the country provides inputs into capital-intensive stages of production gained cent, while the contribution exports of other countries, or through backward more than countries that specialized in labour- of all developing economies linkages, whereby the country imports intermedi- intensive stages of production. Consistent with is 8 per cent (excluding first- ate goods to be used in its own exports. This dis- this trend, empirical research has shown that tier and second-tier newly tinction captures how much countries gain from since the 1980s, a shift has occurred in the func- industrialized economies and the BRICS – Brazil, the participation in GVCs, as stronger forward link- tional distribution of income – which shows how Russian Federation, India, the ages, more so than backward linkages, are a sign income is distributed among the owners of the People's Republic of China of higher domestic value creation. Findings show main factors of production, i.e. labour and capital and South Africa). that the United States, Japan, the United King- – that has moved income away from wages and dom, and Italy are the countries with the highest towards profits (UNCTAD, 2010, 2012).
Table 3 Decomposing value in global value chains: the case of German cars, 1995 and 2008 (per cent) 1995 2008
German value added 79 66
High-skilled labour 51 21
Medium-skilled labour 55 14
Low-skilled labour 58 9
Capital 40 19
Foreign value added 61 7
High-skilled labour 42 17
Medium-skilled labour 47 13
Low-skilled labour 46 12
Capital 34 22
Total final output 48 15
Source: Timmer et al. (2014a:104).
35 1 module The The structural transformation process: trends, theory, and empirical findings 36 Note: Boldvaluesthe gapsinprofit marginsbetween different evidence theIpodglobal in participants value chain. Source: al.(2010: et Dedrick 92). traps,developmentof the with them associating middle-income on perspective evolutionary an avoidtrap.middle-incomethe Lee propose(2013) countries help diversification and phistication, so- export transformation, structural that find groups. They they higher-income to graduate to years took many how computing and groups income by economies 2010, classifying and 1950 between countries 124 of dynamics the analyse in- the for firms other pays turn in and activity or component its for price a charges firms these of Each countries. different in firms different by produced components of lots of made are puter com- a and Ipod an straightforward: relatively is exercise this behind intuition The GVCs. these two of participants the between distributed are profits how illustrate to notebook computers personal and Ipod Apple the of examples the differenta methodology, Dedrick applying and analysis of unit different Takinga o h mdl-noe rp Felipe trap. middle-income particular the in to and traps, income to upgrading chain value and sophistication export through upgrading industrial related have authors Some in value chains. upgrading industrial facilitate can policies industrial how and transformation structural to GVCspose that challenges the into deeper delve will material teaching this of 2 Module of 5.2.1 interactions with other GVC participants. Section and production through learn and into trade global themselves insert to countries allow and employment create lower-value-added activities chain,value the up move to try should countries local while Hence, employment. for create do they profits firms, high as- generate like not activities do sembly some that fact the Despite Controller chip Video chip Lead firm Primary memory Primary Battery Hard drive Assembly Minor memory Retailer Minor memory Distribution Display Table 4 Function Profit contributing marginsofmainfirms PortalPlayer Broadcom Apple Samsung TDK Toshiba Inventec Appliances Spansion Buy Best Elpida Ingram Micro Toshiba-Matsushita Display (2010) use (2010) al. et Supplier (2012) al. et to the production ofanIpod, hne opnn i maue b te labour the by measured is component change tential for productivity growth. The technological present generally above-averagepo- higher and levelsproductivity industries These services). professional and financial communications,and tele- and (transport services tradable and tion) construc - and utilities, manufacturing, mining, (i.e. industry of up made sector modern the in shares employment by captured is index the of component transformation structural The nent. tural change and technologicala change compo- - struc a of composed is index the purpose, this simultaneously.Forchange technological and al develop, structur of processes undertake successfully must countries to order in that idea the on builds that modernization structural of dex in- an develop (2014) Szirmai and Lavopa evolutionary views, and structuralist the Combining ties for theindustry. toenter newfirms - opportuni creating competitive, less cumbents quickly makes existing products obsolete and in- innovation characterized Rapid change. technological rapid by industries into moving by mies econo- their diversify and upgrade should tries traps,coun- middle-income avoid to order sis,in technological capabilities. According to his analy standardized components like chips. memory low-tech of production or assembly in specialize that firms and chip) video the or chip controller the as such components, critical of (orthe production design in product specialize that firms by enjoyed profits the between gap the depicts the technicalities of the exercise, the table clearly into going Without chain. value global Ipod the tors of profit margins the of main participants in indica- different presents 4 Tableproduction. of stage its complete to needed goods termediate Gross margin margin Gross 44.8 29.0 26.3 28.2 25.0 52.2 26.5 31.5 17.6 9.6 8.5 5.5 Operating margin Operating 2005(percent) -14.2 20.4 10.9 11.8 9.4 3.9 3.8 7.6 5.3 0.1 1.3 3.1 Return on assets assets on Return 16.6 -9.2 10.3 19.1 -1.0 9.6 9.8 4.8 1.8 6.1 3.1 1.7 - - The structural transformation process: trends, theory, and empirical findings 1 productivity of the modern sector, as defined curs at all income levels. In the case of positive above, compared to that of the United States deindustrialization, fast productivity growth in module (considered the world technological frontier). manufacturing allows firms to satisfy demand The structural modernization index is computed using less labour (in other words, productivity for 100 countries over the period 1950–2009. The growth reduces employment) while output ex- trends followed by this index in recent decades pands. Displaced workers find employment in confirm that only the economies that managed the services sector because, as incomes rise, de- both transformations at the same time (e.g. the mand patterns shift towards services, also due to Republic of Korea, Taiwan Province of China, Hong Engel’s law. Therefore, the share of employment Kong (China) and Singapore) caught up with the in services is expected to rise at the expense of advanced world. By contrast, those that did not employment in manufacturing (Baumol, 1967; embark on sustained processes of structural and Baumol et al., 1985; see also Section 3.1.2). By being technological transformation got caught in low- the result of industrial dynamism (i.e. productiv- and middle- income traps. ity growth), positive deindustrialization is a sign of economic success. Negative deindustrializa- 3.3 Premature deindustrialization and tion, on the other hand, is a product of economic the (possible) role of services as the new failure. It occurs when a country has a poor eco- engine of economic growth nomic performance or when its manufacturing industry faces challenges. In these cases, falling Some observers have recently suggested that manufacturing output, or higher productivity in services are taking over the role of manufactur- manufacturing, creates unemployment, thereby ing and becoming the new engine of economic depressing incomes (Rowthorn, 1994; Rowthorn growth. This position draws on several observa- and Wells, 1987; UNCTAD, 1995). tions. First, as already discussed in Section 2.3, one of the empirical regularities about structural In addition, Palma (2005) documents that the re- transformation is that as economies develop be- lationship between manufacturing employment yond a certain (relatively high) level of income, and income per capita is not a stable one. Rather, they tend to deindustrialize. Studying the rela- a declining level of manufacturing employment tionship between manufacturing employment is associated with each level of income per capita, and income per capita in 70 countries in 1990, suggesting that today developing countries tend Rowthorn (1994) shows the existence of a stable to deindustrialize before they reach high enough inverted-U relationship between these two vari- incomes. Figure 16 depicts the log of income per ables. This empirical regularity is supported by capita (at constant 1985 prices) on the horizontal econometric evidence showing that in the ad- axis and the share of manufacturing employ- vanced world, manufacturing is not the engine ment in total employment on the vertical axis. of economic growth that it was some decades Each curve represents data for a certain year. The ago (see Section 3.2.1). figure illustrates the decline in the share of man- ufacturing employment with each level of per The phenomenon of deindustrialization, how- capita income and a dramatic reduction in the ever, is a bit more complex than that. Rowthorn level of income per capita from which the down- and Wells (1987) distinguish between two types turn in manufacturing employment begins. of deindustrialization: positive deindustrializa- In particular, the level of income per capita at tion, which occurs in developed economies as which the manufacturing employment began to a natural result of sustained economic growth, decline dropped from $20,645 in 1980, to $9,805 and negative deindustrialization, which oc- in 1990 and $8,691 in 1998.
37 1 module 30 30 The structural transformation process: trends, theory, and empirical findings Pakistan andMongolia. Low-income economies are Republic of Venezuela. Lucia,the Bolivarian and the Russian Federation, St. Uruguay, Jamaica, Suriname, Argentina, Latvia, Romania, are Poland, Chile, Colombia, the analysis included in Middle-income economies 38 mies, including high-income as well as middle- middle- as well as high-income including mies, (2009) analyse the trends of 48 deindustrializing econo- Tregenna deindustrialization, mature pre- of determinants possible the discussing In to fast prematurehas led deindustrialization. endowments.countries’ This resource with ance accord- in hence, and, advantages comparative on based specializationpromote that policies by surplus in manufacturing have been substituted the 1980s. since Policies that sought to generate disease a trade Dutch policy-driven experienced oping countries, especially in Latin America, have devel- argues,some (2005) Palma trialization. As deindus- premature of determinant another is – 3.1.3.5) Section also (see activities manufacturing the expense cializeof commodities in primary at spe- economies makes resources natural of ery discov the which by phenomenon the – disease deindustrialization”. Dutch “premature towards trend the to contributed has GVCs,which these into themselves inserting of capable less been have countries African and American Latin from Firms industrialization). (i.e. output and ment employ manufacturing of expansion the to ing economies, Asian lead- benefited predominantly tion of labour-intensive production has activities Asia. As we will see later on in this section, reloca - in especially low-economies, labour-abundant wage to production of stages labour-intensive of relocation the facilitated have that GVCs and globalization of rise the and labour, of expense in- creasedthe capital intensity of productionthe at has that progress technological displacing labour- include They phenomenon. this explain may factors several (2005), Palma to According Note: usingdatafor isbuilt 81countries. 1960curve The usingdatafor are othercurves The built 105countries. Source: Palma (2005: 80). Figure 16
Manufacturing employment (%) 20 30 25 35 10 15 0 5 5. 4 changingrelationship betweenThe manufacturing employment 6.0 6.5 Log ofincomepercapita(1985in 7. 07 .5 8.0 - - and low-income economies. low-income and but not for output shares. Hence, as the authors authors the as Hence,shares. output for not but shares, employment for holds relationship This higher.points percentage 13 is that 2005–2010 in GDP capita per a with associated is shares ment employ manufacturing of peak the differencein tions by Felipe 2010 the on vertical axis. Accordingthe to estima- and 2005 between capita logarithm per income average of the and axis horizontal the on 2010 and 1970 between share employment facturing the historical the peakmanu- this by of depicting illustrates 17 today.Figure incomes higher enjoy past the in employment manufacturing of share high a achieved that countries that meaning ta, capi- per income of employ levels subsequent and ment manufacturing of peak historical the between relationship significant statistically a lower- identify They well. few as economies middle-income a but and ones, high- upper-middle-income mostly economies, 52 analyse They deindustrialization. premature of effects mental Felipe “growth-pulling effects ofmanufacturing”. the on out lost they as economies these of pects pros- growth long-term the reduced argues,this GDP.in shares facturing As Tregenna (2009:459) wasemployment associated with a fall in manu- manufacturing in fall the analysed, economies the of majority the case:in the been have to not seems this However,decreased. not had GDP in manufacturing of share the if problem a be not would This growth. productivity labour rapid to has become less labour-intensive, essentially due almost all the economies studied, manufacturing 8. 4 ternational dollars - detri the into deeper delve (2014) al. et 8.9 et et al. (2014), a one percentage point 9. 4 ) 9.9 andincome 1960 10 30 .3 She shows that in that shows She 1990 1998 1980 1970 10 .8 20 25 30 35 15 5 0 10 - - The structural transformation process: trends, theory, and empirical findings 1 put it, “the industrialization process predicts fu- from 1970 to 2010 has been an absolutely neces- ture prosperity only insofar as it generates manu- sary condition for becoming a high-income econ- module facturing jobs” (Felipe et al., 2014: 5). The paper fur- omy. Finally, results confirm that manufacturing ther shows that industrialization is a predictor of employment peaks at increasingly lower levels future wealth: achieving a manufacturing share of per capita income, confirming the above-de- in employment of 18 to 20 per cent in the period scribed trends of premature deindustrialization.
Figure 17 The relationship between the peak of the manufacturing employment share in the past and GDP per capita in 2005-2010
12 2010
– 10 , 2005
8 age per capita GDP er
av 6 Log of
4
10 20 30 40 50 Peak manufacturing employment share
Source: Felipe et al. (2014: 6).
Rodrik (2016) looks further into these processes is considered typical of services, there has recent- and uncovers interesting regional dynamics: con- ly been a rise in informal jobs in manufacturing; sistent with the descriptive statistics discussed and (b) the distinction between manufacturing in Section 2.3.3, Asia is the only developing region and services is becoming blurred as manufactur- that maintained a strong manufacturing indus- ing firms outsource many of their service activi- try over recent decades. By contrast, Latin Amer- ties to firms in the tertiary sector and thus create ica and sub-Saharan Africa present the most manufacturing-related services (see also Manyi- dramatic deindustrialization processes (see also ka et al., 2012).31 Manufacturing-related services, 31 UNIDO (2013) defines UNCTAD, 2003a). According to Rodrik (2016), these and especially business services such as design, manufacturing-related regional trends can be explained by the trends in research, engineering, branding, advertising, and services as services required for producing and delivering globalization: jobs in manufacturing have been marketing, are an important source of employ- manufacturing products. The destroyed mostly in countries without a strong ment in industrialized countries where they of- report identifies business comparative advantage in manufacturing. La- ten compensate for the decline in manufacturing services as most closely bour-displacing technological change, intended jobs. The rise in manufacturing-related services linked to manufacturing pro- as technological change that increases capital in- has not been limited to the industrialized coun- duction, followed by trade, financial intermediation, and tensity and saves unskilled labour, is also among tries, however. Increased regional integration and inland transportation servi- the causes of (premature) deindustrialization. participation in international production has led ces. Hotels and restaurants, Indeed, Rodrik (2016) shows that the reduction of to significant employment gains in manufactur- and air and water transpor- manufacturing employment predominantly af- ing-related services (e.g. business services and tation show the weakest link fected low-skilled workers. transport) in fast-growing developing countries to manufacturing, and activi- ties such as real estate, post and regions, and particularly in East Asia and the and telecommunications, In an attempt to explain the changing relation Pacific (UNIDO, 2013). and auxiliary transportation between industrialization and per capita income, show a low linkage. some have noted that certain statistics may un- It has also been argued that opportunities can derestimate the extent to which manufacturing be found in potential linkages between services is a source of employment and overestimate in- and high-productivity industrial activities. For stead the importance of services. UNIDO (2013), example, manufacturing firms are increasingly for example, points out that (a) while informality outsourcing activities such as business services
39 1 module The The structural transformation process: trends, theory, and empirical findings 40 auatrn a te nie f economic (Acevedo engine additional an come be- of has or 2014), O’Connell, engine and (Ghani growth the as replaced manufacturing have it of parts or sector services the that argue to authors some led has growth. This economic modern in importance its of some lost has manufacturing that shows discussion This (Salazar-Xirinachs al., et 2014). ness, a low level of capital, and a low usage of ICT busi- doing of ways new or products new create ceptual and proceduralto knowledge how about con- as such capabilities productive and capital of nature many activities,services the firms’ lack informal of human the from stem challenges These challenges. significant face industry with linkages establish to wishing ever,firms services would learn new ways to conduct business. How workers their technology,advancedas more and they are to the expected adopt industrial sector’s as firms, services labour-intensive for beneficial particularly be will exchanges These nologies. operate,they will exchange knowledge tech- and co- to begin firms sector. As tertiary the in firms to transportation and lo- etc.) warehousing,gistics, equipment, and machinery of renting (e.g. is uh s eal rd, etuat, r hotels. or restaurants, trade, retail as such ties - activi in especially services,non-tradableand in fostering structural transformation), is employed (therebylabourfreesagriculture in growth tivity produc- when expand further labour,can which excess existing countries, developing today’s in productivity.Nevertheless,agricultural in ments enhance- to due farms their from displaced ers work agriculturalfor solution employment able avail- readily more a provides manufacturing so easier than training him or her to work in a bank, is steel or textiles produce to machine a use to sector. services farmertradable Training a the in reallocate and train to difficult are sector tural - agricul the leaving workers because attain to difficult is that one and countries developing in resource scarce labour,a skilled require services tradableHowever, opportunities. learning more also pay higher salaries and provide workers with technologies liketheir usage ICT. of modern They than many manufacturing activities, levels to thanks in part productivity higher enjoy services business other and insurance, finance, banking, as such services tradable argument, his lowing Fol- (2014). Rodrik by offered is view skeptical A and Kharas, 2010; Joshi, 2011). tra, 2009; Dasgupta and Singh, 2005, 2006; Mi- Ghani and (Chakravarty decades two last the over tremendously grew ones,ICT-enabled especially India,services,of where experience the on based Felipe , 09. eea o tee tde are studies these of Several 2009). al., et et al.,2009; et - - that manufacturing did in the past. manufacturing didin that way the in jobs good and growth rapid deliver difficult to imagine that a services-led model can why,is explains This it Rodrik(2014) to according fashion. same the in technology absorb cannot services) (non-tradable employment absorbing at good are that services and employment, ing absorb - at good not are services) (tradable gies technolo- absorb can that services sector,where actly the trade-off that we observe in the services ex is labor.” This absorbing at good necessarily good at absorbing advanced technologies are not studies:his of other are that “Economic activities To conclude, as Rodrik (2013a: 171) has stated in an- the of economyto sustaineconomic inorder growth. rest the in growth productivity require growth. For the reasons explained above, services economic and manufacturing spur sustainably can that strategies industrial export-led devise can contrast,countriesdeveloping by small even manufacturing, In market. domestic the of size the by constrained naturally are they technological progress, from benefit also could services enhancements are limited. Moreover, while these productivity for opportunities their but labour, Non-tradable services are very good at absorbing nium Development Goals. - Millen the towards progress of terms in defined development, human and transformation tural - struc between relationship the of analysis the to move then inequality. will Weand poverty of reduction and generation employment in tion transforma- structural of role the on literature existing the review briefly section, will this we In module. this in discussed transformation - struc tural of processes the to related issues social modern the of some of review short a provides 6 Box spending. social and planning, tion,urban migra- rural to related those as such challenges of deal great a pose also country,they veloping de- any for opportunities important create and achievements great all are these While 2013c). (UNCTAD,population aging the of phenomenon the created has countries developing and oped devel- both in expectancy life Today, improved mographic transitions towards low fertility rates. de- as well as secularization, and urbanization higher as such transformations social pervasive brings change structural ago, years 50 almost noted (1966) Kuznets As development. human of and social of composition aspects various affects the production how at looks section This development Structural 4 transformation and - The structural transformation process: trends, theory, and empirical findings
Box 6 1 Structural transformation and demographic and labour market changes Several other changes have occurred in parallel with the process of structural transformation: (a) a rise in module the participation of women in the labour force, (b) rural-urban migration, (c) international migration, and (d) declining fertility rates. Each of these processes has in turn had an impact on household incomes as well as on the distribution of income. Over a decade, from 1997 to 2007, the participation of women in paid work in the global economy increased by 18 per cent. Combined with slower capital accumulation, this has meant an increase in the relative abundance of labour, resulting in downward pressure on real wages. Rural-urban migration can have positive and negative effects. It can be a source of remittances to rural areas (which is also true for international migration), thus contributing to rural development and a rise in rural household incomes. On the other hand, it can exacerbate social and economic challenges in cities, especially when the rate of migration exceeds the rate of urban job creation, leading to an increase in the surplus of urban labour and therefore to pressures on urban incomes (Lall et al., 2006; Todaro, 1980; on rural-urban migration trends in least developed countries (LDCs), see UNCTAD, 2013c). By comparison, international migration should have the opposite effect, since it decreases labour supply. Nonetheless, this effect is nullified if international mi- gration involves skilled labour, which can have an adverse effect on the productive capacity of the developing countries from which that skilled labour is emigrating.
Migration has also been accompanied by a steady growth in remittances, especially towards middle-income countries. For example, in Viet Nam in 2005 remittances accounted for US$5.5 billion, while official develop- ment assistance and foreign direct investment accounted for US$3 billion each. Remittances can be a source of foreign exchange at the country level and an additional source of income at the household level. They can also increase tax receipts, contributing to the financing of public policies. If the country from which remit- tances come faces a different business cycle than the one that the receiving country faces, remittances can be- come a source of counter-cyclical development finance. Despite the general optimism with the increased flow of remittances to developing countries, however, the impact of this flow on the receiving economy depends, among other things, on whether the country manages to avoid remittance dependency Source: Authors, based on UNRISD (2010).
4.1 Structural transformation, employment decomposition analysis discussed in Section 3.2.2 and poverty to investigate the relationship between struc- tural change and employment generation. These Structural transformation has clear implications studies are concerned with the social dimension for employment growth and poverty reduction. of economic growth and with the idea that eco- Lavopa and Szirmai (2012) distinguish three ways nomic growth alone is not enough to deliver de- in which economic growth affects employment velopment because it needs to be accompanied and poverty: a direct impact, an indirect impact, by employment generation. Following these ide- and an induced impact. A direct impact can result as, Pieper (2000) defines the “socially necessary from the creation of new jobs or the reallocation of rate of growth” as that which delivers both pro- workers. In the case of new jobs, previously unem- ductivity and employment growth. In particular, ployed people are employed, therefore the effect growth patterns are defined as socially sustain- on employment and income is straightforward. In able if labour productivity growth and employ- the case of reallocation of workers, provided that ment growth rates are equal or above 3 per cent. workers move from lower- to higher-productivity The author notes that economies that have fol- sectors and that wages reflect productivity levels, lowed socially sustainable patterns (Indonesia, economic growth will reduce poverty. The indirect the Republic of Korea, Malaysia, and Thailand) impact of economic growth on employment and have also enjoyed high output growth, led by poverty depends on the strength of the linkages growth in manufacturing. between the growing sector and the rest of the economy: the stronger the linkages, the larger the The definition of a “socially necessary rate of impact. Growth in the rest of the economic ac- growth” as proposed by Pieper (2000) uses em- tivities in turn further creates employment, pro- ployment growth as a measure of employment ductivity, and income growth, thereby creating generation and does not take into account the multiplying effects. This is the induced impact, as trends of higher participation rates in many de- defined by Lavopa and Szirmai (2012). veloping countries (e.g. due to stronger partici- pation of women in the labour force). As a con- Moving to the empirical literature on the rela- sequence, if an economy generates jobs at a rate tionship between structural transformation, of 3 per cent, but the labour force increases faster employment, and poverty, some studies used the than the rate of employment growth, the number
41 1 module The The structural transformation process: trends, theory, and empirical findings 42 patterns patterns of least developed countries (LDCs) from detailed analysis of the structural transformation a offers (2014b) UNCTAD module, this of annex Using the Divisia index presented in Box A1 in the ity enhancements generation. andemployment productiv between trade-off a creating thereby labour,absorbing in poor often are technologies absorbing at good activities economic that sion conclu- (2013a) Rodrik’s by summarized easily is which 3.3, Section in already discussed we what bour productivity growth. researchThis confirms la- aggregate to contributions lowest the with those also however are countries. They veloping de- in growth employment to most the tribute con- hotels and restaurants and trade retail and wholesale time, that same finds the paper the at and employment creation growth are difficult to achieve productivity labour that idea the with line In expansion. employment by accompanied growth”, meaning that economic growth was not “jobless experienced Asia, in especially regions, of the workforce and show that some developing thors compare employment growth with growth as defined by Pieper (2000) is very difficult. The au- sustainability social achieving that imply would which generation, employment and growth productiv ity labour between trade-off a of ence exist the note also (2012) Roncolato and Kucera developed economies (UNCTAD, 2010). is weaker growth ployment than in in developing em- and growth GDP between dynamics,link the these to Due nature. labour-saving its to owing tion) might have negative effects on employment, change (which can allow for expansion of produc- technological Even growth. employment further limits also growth,which manufacturing sustain to demand domestic allow not do wagesers, low 2010).purchasingthe work of power lowering By 2005, 2002, (UNCTAD, wages consequently and prices market lowering thus manufactures, sive labour-inten- of supply the increased has trade manufacturing global in economies developing of participation greater the that noted been has workers. to It guaranteeingincome adequate out with- figure employment the inflating growth, employment to contribute would growth ment underemploy cases, these In 2013c). (UNCTAD, employment low-quality and underemployment fordthe “luxury” of being unemployed, preferring af cannot individuals whereeconomies veloping de- many of problem employment the capture to enough be not might trends employment at ing look Finally, opportunities. job new of creation constant requiring trends), demographic to due (also rapidly grow forces labour where countries social inclusion. This is likely to occur in developing of jobs created might not be enough to guarantee ------urban poverty reduction (Suryahadiurban poverty al., et 2009). trial sector had only a limited impact on rural and reducing rural poverty, while growth of the indus- on impact largest the had growth services urban most. In the case of Indonesia from 1984 and 2002, the poverty reduces sector primary the that find People’s Republic of China from 1980 to 2001. They the study to methodology this apply (2007) Chen secondarythe sector. in than sector Ravallion and tertiary and primary the in growth output with re- duction,ruralboth urban, and more associated is poverty that find They sectors. these of in any growth output with associated is reduction poverty if test empirically They (services). sector tertiary the and utilities), and construction, ing, (manufactur sector secondary the mining), and intothree sectors: the (agriculture primary sector output split authors The 1991. to 1951 from India analyse the role of structural change in poverty in specific on (1996) Datt example,Ravallioncountries.and For focused have studies Other 2004). Quibria, and Hasan 2007; Demery, and tiansen - (Chris importance gain sectors secondary while pronounced, less becomes reduction poverty in agriculture of role the levels, income higher At reduction. poverty on effect sizable most the has agriculture in growth economies, poorer in that find studies Cross-country poverty. for patterns growth different of role the investigated plicitly throughtion employment. Some studies have ex popula- the of portion large a among shared are growth economic of benefits if alleviated be only foralso important reduction: poverty can poverty is growth economic sustainable socially Clearly, , al. et (Szirmai 2013; UNCTAD, 2013c, 2015c). policymaking economic in element prominent a be should higher-value-addedcrops and culture commercial- agri to subsistence from moving by agriculturalsector the in productivity increasing ductivity. This has led some authors to argue that pro- of levels higher with activities to move to it in the presence of modern machinery, and allows redundant becomes that labour freeing by tion transforma- structural activates agriculture in growth productivity Rapid basket. consumption items) represents the highest share of the average food-related(foodand output their because and the cause large of numbers of workers employed be- countries developing for important pecially es- are agriculture productivity in gains Productivity growth. aggregate to contributes greatly sector agricultural the LDCs, in that is analysis this of findings crucial the of contributions.One sectoral their distinguishing also productivity, labour aggregate to effects reallocation and ity productiv direct of contributions the vestigates in- (2014b) UNCTAD module). this of end the at annex the details,more(for to 2012 referto 1990 - - - The structural transformation process: trends, theory, and empirical findings 1 Despite this empirical evidence against an im- ment in manufacturing and the non-poor ratio, portant role of the secondary sector in poverty computed as one minus the poverty headcount module reduction, UNIDO (2015) shows that structural ratio. As the share of manufacturing employment transformation towards manufacturing is posi- in total employment increases, poverty decreases tively associated with a number of indicators of (the ratio of non-poor increases).32 Lavopa (2015) 32 Note that here we are social inclusiveness. For example, Figure 18 shows provides more solid econometric evidence in sup- talking about correlations, the relationship between the share of employ- port of these findings. without necessarily implying any causality, as it could be argued that poverty reduc- Figure 18 tion is driven and at the Relationship between manufacturing employment and poverty same time drives manufac- turing expansion.
1.00
0.75 atio
0.50 Non-poor r
0.25
0.00 0.00.1 0.20.3 0.40.5 Share of manufacturing in total employment
Source: UNIDO (2015: 110).
To conclude, structural transformation can ben- stitutions, widen social protection measures, and efit the economy beyond its direct effects on increase expenditure on public services such as economic growth. This is why the objective of education and health. All these measures have ev- economic policies must be to foster productive ident effects on social and human development. structural transformation, meaning that the generation of employment in sectors with above- One way to examine the link between structural average labour productivity should not come at transformation and human development is by the expense of their productivity levels. using the structural transformation component 33 For example, if in 1990 a of the Divisia index (see Box A1 in the annex of country had a very high (abo- 4.2 Structural transformation this module) in relation to progress towards the ve 90 per cent) enrolment rate in primary education, and human development MDG targets. The analysis is conducted on a sam- the achievement of that ple of 92 countries, including low-, lower-middle, MDG has not been conside- This section presents original empirical work on and upper-middle-income countries, from 1991 red relevant for that specific the relationship between structural transfor- and 2012. The sample varies by indicator, re- country, and so the country mation and human development. This analysis flecting data availability and the relevance of a has been dropped from that 33 specific analysis. This check builds on UNCTAD (2014b) by expanding the ini- certain development goal for the country. The has been conducted for all tial country coverage and using up-to-date data. analysis examines whether progress in these ar- MDG indicators used in this The report and this analysis build on the idea that eas of human development is correlated with the section. a virtuous process of structural transformation processes of structural transformation. It focuses can transform an economy and a society beyond on several aspects of human development as 34 These indicators capture its effects on GDP growth, as higher wages for a captured by progress on the following MDGs:34 only five of the eight MDGs. larger share of the population allow economies Moreover, only one indicator per goal is selected. Other to reduce overall poverty and hunger, and en- • Eradication of extreme poverty and hunger indicators could have been able families to send their children to school and (MDG 1), measured by progress on the propor- picked but the quality of the spend more on their health. Higher wages and tion of the population living below US$1.25 data was considered better rising incomes also allow governments to collect (2005 PPP) per day; for the indicators that were more taxes, which can be used to strengthen in- selected.
43 1 module 35 35 The structural transformation process: trends, theory, and empirical findings sort ofanalysis. sort studentsthis canreplicate this moduleillustrates how The annex at the endof annexat The 44 Reallocation Direct
ods meth- decomposition how illustrate to order In It suggests a strongIt and positive relationship be- day.a US$1.25 than less is income whose people of proportion the halving i.e.1, MDG of 1A target on performance and transformation structural the between relationship the depicts 20 Figure ty growth, and achievement of the MDGs targets. the reallocation component of labour productivi- tween structural transformation, as measured by be- link the of analysis the to move now will We CSEE: Central Europe. andSoutheastern Note: SSA: sub-Saharan Africa; MENA: Africa; andNorth East Middle LAC:the Caribbean; and LatinAmerica ASIA: all Asianregions; the Internationalfrom Labour Organization’s Global Employment Trends (seeBox Dataset 3). Source: Authors’ computations basedonvalue-addedthe UnitedNationsNational datafrom Accounts data andonemployment • • • • Figure 19 ter source. the of safewaa drinking to - access with population proportion the on progress by ured meas- 7), (MDG sustainability Environmental ratios; 5), mortality maternal on progress (MDG by measured mortality maternal of Reduction ured by progress on under-five mortality rates; meas- 4), (MDG mortality child of Reduction rolment ratio education; inprimary (MDG 2), measured by progress on the net en- education primary universal of Achievement 35 ok w nw hw h rsls f h de- the of results the show now we work, Decomposition ofaggregate by labour productivity growth country groups (percentage points) MENA CSEE ASIA LA SS A C 0 .00 0 .20 0. 40 0 .60 d’Ivoire). Côte and Haiti, Togo, Congo, the of Republic ic Democrat the (e.g. where slower was those transformation than reduction poverty of terms in better performed Nam) Viet and Cambodia, Bhutan, China, of Republic People’s (e.g. mation transforfaster achieved that countries whereby reduction, poverty and change structural tween ductivity effectsductivity ratherthan reallocation effects. pro- direct by driven mainly growth, productivity modest but positive experienced regions other highest. the The also is countries these in ponent com- reallocation The rate. growth productivity 3.2.2, we find that Asian countries had the highest Section presentedin and Rodrik (2011) and Millan Mc- by obtained results the with line In values). small their to due included not are effects trade (terms-of- effects reallocation and effects tivity produc- direct components: main its of two into decomposed growth productivity labour gregate ag- presents 19 Figure method. decomposition index Divisia the on based exercise composition 0 .80 1.00 1.20 1. 40 - - The structural transformation process: trends, theory, and empirical findings
Figure 20 1 Structural transformation and progress in poverty reduction, 1991–2012
300 module
250
20o eduction y r
rt 150
100 t of pove 50
0 achievemen -50
er ce nt -100 P
-150 -0.6 -0.4 -0.2 0.00.2 0.4 0.6 0.8 1.0 1.2 1.4 Reallocation effect
Source: Authors' elaboration based on the same data as in Figure 19 for the reallocation effect, and on data from the United Na- tions website for the Millennium Development Goals indicators (http://mdgs.un.org/unsd/mdg).
A positive albeit less strong relationship is found and Burkina Faso. While in 1997 Cambodia had 83 between structural transformation and achieve- per cent of its children enrolled in primary educa- ments in enrolment in primary education as per tion and Lao PDR had 71 per cent, the correspond- target 2A of MDG 2. As Figure 21 illustrates, rapidly ing figures for Ethiopia were 30 per cent and for transforming economies also perform well on this Burkina Faso 33 per cent. These numbers indicate goal, even if progress on schooling seems more how difficult it was for certain developing coun- difficult to achieve than progress on reducing tries to achieve MDG targets and how structural poverty. Among the best performers are countries change can be a powerful driver of improvements such as Cambodia and Lao PDR, but also Ethiopia in social and human development.
Figure 21 Structural transformation and progress in primary education enrolment, 1991–2012
140
120
100 eduction y r
rt 80
60 t of pove 40
20 achievemen 0
er ce nt -20 P
-40 -0.6 -0.4 -0.2 0.00.2 0.4 0.6 0.8 1.0 1.2 1.4 Reallocation effect
Source: Authors' elaboration based on the same data as in Figure 19 for the reallocation effect, and on data from the United Na- tions website for the Millennium Development Goals indicators (http://mdgs.un.org/unsd/mdg).
Similar patterns are found for the other MDG tar- ductivity growth on the horizontal axis and the gets, suggesting a positive relationship between average achievement of MDGs target, computed structural transformation and achievement of as the average achievement in the five indicators those targets. Figure 22 confirms this by showing mentioned above, on the vertical axis. the reallocation effect component of labour pro-
45 1 module The The structural transformation process: trends, theory, and empirical findings 46 Linear (Dynamic) Linear (Lagging) Dynamic Lagging tions websitefor Developmentthe Millennium Goals indicators(http://mdgs.un.org/unsd/mdg ). Source: Authors'elaborationthe samedataasinFigure 19for basedon the reallocation effect,the UnitedNa- andondatafrom tions websitefor Developmentthe Millennium Goals indicators(http://mdgs.un.org/unsd/mdg ). Source: Authors'elaborationthe samedataasinFigure 19for basedon the reallocation effect,the United Na- andon datafrom oet rdcin MG ) n piay educa- primary and 1) (MDG reduction poverty concern differences largest economies. The ging lag- in than economies dynamic in stronger are economic growth and performance on the MDGs between ratios),correlations mortality maternal andreducing rates mortality under-five ducing countries. With the exception of MDG 4 and 5 (re- and of groups two the in growth MDGs the on performance economic between relationship the below comparing by respectively,and average, and the above growth productivity labour of component reallocation the of value a with dy into those as countries defined economies, lagging and of namic sample the dividing by investigated further be can development man hu- on transformation structural of impact The Figure 22 Figure 23 Structural
Per cent achievement of poverty reduction Per cent achievement of MDGs -1 - 200 300 250 100 100 180 140 120 -5 150 -20 150 00 60 80 40 20 50 0 0 0 -0 -4 transformation andachievement .6 Poverty nexus, andgrowth -0 .4 -2 -0 .2 02 0. 00 dynamic andlaggingeconomies, Ye arly GDPpercapitagr Development ofMillennium .2 Re - allocation ef tutrs ter cnmc rwh il o be to achieve reduction. poverty enough not will growth economic their structures, transformproductivetheir not do growbut tries coun- if that means ultimately This small. been has growth productivity in transformation tural - struc of component the wherecountries zeroin almost been has reduction poverty on growth economic of impact specifically, the More erage. av than slower been has transformation where those than reduction poverty and between growth GDP correlation stronger much a display process transformation structural than-average faster- a from benefit that economies.Countries and lagging and dynamic for 1 growth MDG of achievement economic between relationship the presents 23 Figure 2). (MDG enrolment tion 0. 41 4 fe ct 0. ow 6 6 th 0. 8 Goal 8 1991–2012 1.0 targets, 0 1.2 1991–2012 1. 12 4 - The structural transformation process: trends, theory, and empirical findings 1 Figure 24 shows the differential impact of GDP help growing economies by creating conditions growth on the achievement of MDG 2, i.e. mak- for people to access education and benefit from module ing primary education universal. While there is a education through better job opportunities. This difference between dynamic and lagging econo- might happen because in more industrialized mies, this seems to be less strong than in the case economies, productive activities agglomerate in of poverty reduction. Nevertheless, in the case of urban areas where governments find it easier dynamic economies, the association between to provide basic education, or because through economic growth and improvements in educa- structural transformation more skills become tion is positive. In the case of lagging economies, necessary, giving parents and children more in- on the other hand, it is negative. These results centives to attain basic education. indicate that structural transformation can
Figure 24 Poverty and growth nexus, dynamic and lagging economies, 1991–2012
140 Dynamic Linear (Dynamic) 120 Lagging Linear (Lagging) 100
80 of education
nt 60
40
20 t achieveme
0 er cen P -20
-40 -1 0 12364 5 Yearly GDP per capita growth
Source: Authors' elaboration based on the same data as in Figure 19 for the reallocation effect, and on data from the United Na- tions website for the Millennium Development Goals indicators (http://mdgs.un.org/unsd/mdg).
To conclude, this simple analysis suggests that translate into more and better jobs and prosper- economic growth by itself is not enough to ity for all. By contrast, in a highly transformative achieve the MDGs and improve human devel- economy such as the Cambodian one, economic opment indicators. Many developing countries and productivity growth have been accompanied have achieved high or modest rates of economic by processes of structural change that led to im- growth in recent decades without making im- pressive improvements along all the dimensions provements in poverty reduction, inequality, or of human development investigated here. These other social indicators. findings support the idea that economic growth can improve the living conditions of the most Angola and Cambodia are two illustrative exam- vulnerable segment of society if accompanied by ples. Angola’s GDP grew by 3.2 per cent annually fast structural transformation processes. in the period from 1991 to 2012 and its labour pro- ductivity growth was 0.69 per cent. Based on our 5 Conclusions decomposition of labour productivity growth, this increase in labour productivity was due to This module has examined the process of struc- direct productivity effects, while reallocation tural transformation that accompanies and fos- effects were negative. Angola had a rather low ters socio-economic development. We presented performance in MDG targets: its best result was the main ideas on which our approach is based achieved in primary education enrolment, on and the most widely accepted stylized facts using which it almost reached the MDG target of 100 historical evidence for today’s industrialized econ- per cent. During recent decades, Angola did not omies and more recent data for a larger sample manage to diversify away from oil production, of both developed and developing countries. We which still represents more than 90 per cent of also showed that structural transformation is as- Angolan exports. While oil guaranteed rapid eco- sociated with economic growth, especially when nomic growth, economic growth alone could not directed towards industry and manufacturing.
47 1 module The The structural transformation process: trends, theory, and empirical findings 48 The key messages of this moduleinclude: keyThe messagesof transformation andhumandevelopment. structural between relationship the examined empirically we years, 25 last the over of countries number large a to methodology this plying Ap- transformation. structural of effect the gle disentan- to order in growth productivity labour havedecomposedstudies empirical how on sion - discus a included review literature The mation. transfor structural on literature empirical and theoretical the of strands different from in- sights key the of some reviewed also module The teaching material.this of Module 2 of the subject are decisions These decisions. policy by shaped) (and influenced critically is upgrade and fication affected by endowments, the potential for diversi- undoubtedly While growth. economic sustain to essential therefore are upgrading technological and diversification both that and evolution, tical verhorizontaland transformationboth on relies structural productive that stressed module The • Exercise No. (d) Analyse the statistical association between income per capita and measures of economic structure using structure economic of measures and capita per income between association statistical the Analyse (d) economy.this particular of structure andoutput the evolutionthe employment (c) Analyse of (b) Using the formulas presented in Box 3 and a spreadsheet software such as MS Excel, compute the shares of (a) Choose an economy to study and get the following data for this economy: real value added by economic sec- (a) Aftertwo articles,these reading students should: isbasedonOcampo(2005)andLin(2011). activity This Question 1for discussion: • • Exercises andquestionsfor discussion ondary and tertiary sectors, and especially especially and with anexpandingmanufacturing industry; sectors, tertiary and ondary shares sec- employment of and output higher Sustained economic growth is associated with between GDPpercapitaandindicatorsofeconomic Discuss. structure? associations significant any identify students sector.Can each for output or employment of shares nual an- and capita per GDP annual coefficientscorrelation between axis). compute also vertical may the They (on output and horizontalemployment sectoralannualthe sharesof axis)and (on capita per GDP annual UNCTAD (2014b) as a guide. Tothis end, students may simple construct graphs called scatterplots between three for for forthe period andemployment sectors the output whichdataare eachof available. agriculture, industry, andservices. sectors:threemain BoxeconomyKeyMarkets 3).into(see this Labourfor of data Indicators the Aggregate tor and GDP per capita from the UN National Accounts, and employment by economic sector from the ILO’s ofstructuraltransformation; analysis its in advantagecomparative of concept the uses and views perspectives these of each how Discuss characterizethese perspectives; that three eachof Identify mainideas 1: Structural transformation
Theoretical perspectives onstructural trends andeconomic growth - - • • • • • • more progressthe MDGs. inattaining achieve also could processes transformation structuralfaster experienced that Economies tion; and reduc- poverty on transformation structural of impact the creation.maximizesjob This of expense the at come cannot sectors enhancements within productivity that transformation, meaning productive and with structural growth economic at aim should tries coun - growth, economic pursuing of Instead reduction, and social and human development; as a whole, affecting economic growth, poverty society the and economy the on effects vasive per have processestransformation Structural transformation, reduction; andpoverty structural growth, economic sustain to sary neces- are agriculture in gains Productivity source ofemployment; main the is sector services the while growth, productivity of engine the is Manufacturing structure; economic the in changes and gains ficiency ef both requires growth economic Sustained transformation - - The structural transformation process: trends, theory, and empirical findings
Exercises and questions for discussion 1 • Discuss the methodological issues researchers face when they try to analyse causal linkages between eco- nomic growth and variables such as productivity growth, physical and human accumulation, institutions, module and economic policies; • Discuss the concept of complementarities that appears in Ocampo (2005) and provide examples; • Discuss the types of structural transformation processes identified by Ocampo (2005) based on the interac- tion between the learning process and complementarities.
(b) Two groups of students (3-4 students each) should debate similarities and differences between old struc- turalist and more recent perspectives.
Question 2 for discussion: Empirical studies on structural transformation
(a) This activity is based on Lavopa and Szirmai (2012), who provide a comprehensive review of the literature on the contributions of manufacturing to economic growth, employment creation, and poverty reduction. Students should read the paper and address the following issues:
• Define the three channels through which growth in manufacturing output affects economic growth, em- ployment, and poverty according to the analytical framework proposed by Lavopa and Szirmai (2012). Dis- cuss the main factors and mechanisms of each of these three channels. • The paper reviews several studies that econometrically test Kaldor’s laws. Discuss the main findings of the literature and present in detail the findings of one of the papers reviewed by Lavopa and Szirmai (2012) to the class. • Summarize the findings of the empirical literature on direct, indirect, and induced effects of manufactur- ing on employment generation. Discuss why employment multipliers (for expansion of manufacturing activities) found by micro-based studies are so much higher than those found by macro-based studies. • Discuss the methodology used in the literature to estimate sectoral poverty elasticity of growth. What are the main findings on the relationship between structural change and poverty reduction?
(b) Several recent papers (Ghani and Kharas, 2010; Ghani and O’Connell, 2014) challenge the view that manu- facturing is the main engine of economic growth (see Section 3.3). Two small groups of students should first present the findings of this literature. This would be followed by a debate of its main arguments.
(c) This activity is based on Palma (2005). Students should read the article and answer the following questions:
• What are the main sources of deindustrialization and what is the method that the author uses to quantify them? • What are the factors that may cause the Dutch disease in an economy? • What does the author mean by "policy-induced Dutch disease"? • How has the process of industrialization differed between Southeast Asian economies such as the Republic of Korea, Singapore, or Taiwan Province of China, and countries in Latin America and the Caribbean such as the Dominican Republic, El Salvador, Honduras, and Mexico?
Exercise No. 2: Structural transformation trends and economic growth
This activity is based on Chapter 4 of UNCTAD (2014b), which presents a methodology that allows researchers to identify the contribution of each economic sector to aggregate productivity growth and to the employment- to-population ratio. Students should read this chapter and continue the case study started in Exercise No. 1:
• Discuss the meaning of the following concepts: direct productivity growth effect, reallocation effect, and terms-of-trade effect; • Analyse the sectoral contributions of agriculture, industry, and services to aggregate labour productivity growth and to employment generation using the Divisia index decomposition method presented in Box A1 in the annex of this module; • What are the main observations with respect to sectoral contributions to aggregate labour productivity growth? • Which economic sector appears to be the main direct contributor to aggregate labour productivity growth? • Which economic sector appears to be the main contributor to the employment-to-population ratio?
49 1 module The The structural transformation process: trends, theory, and empirical findings 50 results empirical discuss and labour productivity growth into: specialization export their by here classified are study.to intend FollowingUNCTAD (2014b),LDCs are available for the country and period they that use more disaggregated data,they providedthat can students services, and industry,agriculture, for data using analysis the TAD conducts (2014b) sample of countries differs. Moreover, while - UNC ogy applied here is the same as in Section 4.2, the methodol- the while that note Please ployment. with significant shares in overall and output em- economies towards biased sometimes are here results the economies,across aggregated cators indi- of analysis any for case the is developed As countries. of group the and developing (ODCs), other countries of group the LDCs, of group the groups: country main three into countries dividing basis comparative a on conducted is sis analy 2012. The and 1991 between growth ment employ and output, transformation, structural their analyses (2014b).and LDCs UNCTADon focuses chapter of The 4 Chapter replicate in to analysis order the in follow to need students that steps the various discusses and identifies it end, of this Towards role transformation. the structural on research original conduct to A1 Box in presented method decomposition Divisia UNCTADthe using in students of guide to aims and 4 (2014b) Chapter on based is annex This ofhow An illustration ANNEX 1 • • • Mauritania, Mozambique, andZambia; Mali, Guinea, Eritrea, Congo, the of Republic Democratic products: mineral of Exporters Equatorial Guinea, SouthSudan, Sudan, and Yemen; Chad, Angola, fuel: of Exporters Islands, andSomalia; goods:Guinea-Bissau,Malawi,Solomon tural - agricul and food of producers and Exporters to decompose - - STEP to labour productivity growth. tions tivity growth; and (3) analysing sectoral contribu- produc- labour decomposing (2) scrutiny; under economies the of situation economic the lyzing ana- (1) steps: three of composed is analysis The culture exporters. - agri than better considerably expected, as and, exporters fuel and mineral than better formed per manufacturedgoods in specialize that mies econo- and exporters diversified LDCs, among 2.4, and 2.1 Section in shown evidence the with Consistent countries. developing other the than slowly more grew LDCs A1). (Figure period 2012 1991– the over dollars US in prices 2005 constant at countries of GDP,groups capita by per real to equivalent is which capita, per added value of real rates growth annual the at looking by start sectors which us transformation. structural Let from benefited and sector by added value and are, i.e. what is their composition of employment per are forming and what their structural economies characteristics selected the how know to In the first step of our empirical analysis, we want • • • United Republic of Tanzania. anmar,Niger,Leone, Senegal,Sierra Togo, Myand Republic, Democratic People’s Lao bati, - Kiri Republic, African Central Faso, Burkina Benin,goods: of basket mixed a of Exporters and Uganda; Vanuatu, Tuvalu, Timor-Leste, Principe, and ToméSão Rwanda,Madagascar,Nepal, beria, Li- Gambia, The Ethiopia, Djibouti, Comoros, Burundi, Afghanistan, services: of Exporters tan, Cambodia, Haiti, andLesotho; manufactures:of Bangladesh,ExportersBhu- of 1Analysing countries the selected the economic situation - - - The structural transformation process: trends, theory, and empirical findings
Figure A1 1 Average annual growth rates of real value added per capita, 1991–2012 (per cent)
5 module
4.0 4 3.5 3.3
3 2.7 2.6 per capita ters 2.1 ters 2 ters ers ters ters e expor te of output l expor 1 actuers expor th ra 0.4 d expo rt el expor Ds ow Mi xe Fu Mine ra ODCs LC Agricultur Manuf Service expor Gr 0
-0.7 -1
Source: Authors' elaboration based on UNCTAD (2014b). Note: ODCs: other developing countries; LDCs: least developed countries.
We now turn to the description of structural pared to developed countries, where only 4 per change dynamics in employment and value add- cent of the workforce is employed in agriculture. ed. Changes in employment depend on the rate of Moreover, it is worth noting that country groups employment growth, but also on initial conditions whose GDP grew the fastest – namely manufac- and the rate of population growth. Most develop- turing exporters and mixed exporters (see Figure ing countries are characterized by large shares of A1) – also recorded the fastest (absolute) changes the workforce employed in subsistence agricul- in employment shares. In particular, manufactur- ture and rapid growth in the working-age popula- ing exporters saw a reduction of the agricultural tion. The former characteristic is reflected in the share in total employment of 16 percentage points. high shares of employment in agriculture in both Most of these workers went to services, whose LDCs and ODCs (Table A1): in LDCs, 74 per cent of share in total employment grew by 15 percentage the working population was employed in agricul- points, with the other percentage point that left ture in 1991, and while that number declined over agriculture going into industry. By contrast, secto- time, by 2012 agriculture still employed 65 per cent ral employment compositions of mineral export- of the working population. A reduction in agricul- ers and agriculture exporters changed the least. tural employment was more sizable in the ODCs. Finally, in all country groups, workers moving out These figures are especially striking when com- of agriculture mostly entered the services sector.
Table A1 Sectoral composition of employment, 1991–2012 (per cent and percentage points) Agriculture Industry Services
1991 2000 2012 Change 1991 2000 2012 Change 1991 2000 2012 Change Developed 7 5 4 -3 31 27 23 -9 62 67 74 12 economies ODCs 53 46 34 -19 20 20 25 5 27 33 41 14 LDCs 74 71 65 -9 8 8 10 1 18 21 26 8 Agriculture 75 73 71 -3 8 8 8 0 17 19 20 3 exporters Fuel 57 57 50 -7 9 8 10 0 34 35 40 6 exporters Mineral 76 80 76 0 6 4 4 -1 19 17 19 1 exporters Manufactures 70 65 54 -16 13 11 14 1 17 25 32 15 exporters Service 82 78 72 -10 5 6 8 3 13 15 19 7 exporters Mixed 72 68 63 -9 7 8 10 2 20 24 27 7 exporters
Source: UNCTAD (2014b: 64). Note: Figures are expressed in per cent, except for the columns titled “change”, which are expressed in percentage points. Dif- ferences between the figures shown and the last column are due to rounding. ODCs: other developing countries; LDCs: least developed countries.
51 1 module The The structural transformation process: trends, theory, and empirical findings 52 developed countries. ferences to column are thelast the figures due rounding. and shown between ODCs: otherdeveloping countries; LDCs: least Note: Figures are expressed inpercent, excepttitled forthe columns “change”, whichare expressed inpercentage points. Dif Source: UNCTAD (2014b: 65). ure 3). This can explain the discrepancy between discrepancy the explain 3).can ure This less productive than the industrial sector (see Fig- but labour-intensive more is sector services the because surprise a be (Table not should A2). This pansion occurred in industry rather than services In contrast to employment, the largest output ex reports reports the results of this exercise. It shows A2 that Figure in A1. Box in presented method position decom- index Divisia the applying components main its along growth productivity labour pose productivity growth. In order to labourdo so, we decom - affected patterns transformation tural productivity growth - struc these how understand to try now will We STEP economies Developed ODCs exporters Agriculture LDCs exporters Manufactures exporters Mineral exporters Mixed exporters Service exporters Fuel Table A2 Decomposing labour 2 1991 Sectoral composition ofoutput, 44 48 39 38 28 33 21 11 1 2000 Agriculture 40 30 36 38 23 45 22 10 1 2012 30 33 25 37 19 18 31 8 2 Change -10 -10 -14 -4 -8 -8 -2 -5 0 1991 (percent 1991–2012 20 20 36 38 28 23 16 12 17 - 2000 production structures. ing to a certain difficulty for LDCs to change their ODCs,point in than LDCs in smallerhowever, is transformation processes. The reallocation effect, structural major their underwent already economies,which developed in smallest the is effect reallocation The effect. within) (or productivity direct the than smaller always is effect change) countryallgroups, structuralreallocation(or the sector.the services labour productivity in in negative,increase even modest,or a indicates output services of share stable a and ployment em- services of share growing a of combination the Clearly, output. and employment of terms in measured when dynamics change structural 40 26 24 22 45 Industry 27 18 12 17 2012 40 48 29 20 24 22 22 25 31 andpercentage points) Change -4 11 9 9 8 2 5 5 5 1991 40 40 43 45 45 53 41 71 51 2000 44 43 43 43 42 33 72 53 Services 51 2012 44 44 48 34 43 45 53 52 75 Change - -9 -1 0 9 0 4 3 3 2 - The structural transformation process: trends, theory, and empirical findings
Figure A2 1 Decomposition of aggregate labour productivity growth by country groups, 1991–2012 (percentage points and per cent) module
120 114.2 Direct productivity effect Reallocation effect 100 Labour productivity growth rate
80 75.7
60.0 60
37.3 38.9 40 33.3 29.9 19.8 20 2.9 0 Developed countries ODCs LDCs
Source: Adapted from Chart 27 in UNCTAD (2014b: 73). Note: The direct productivity effect and the reallocation effect are expressed in percentage points, labour productivity growth rate in per cent. ODCs: other developing countries; LDCs: least developed countries.
Figure A3 zooms in on the group of LDCs, follow- location effects. By contrast, in economies spe- ing the categorization according to export spe- cialized in fuel and extractives, aggregate labour cializations proposed at the beginning of the productivity growth was primarily due to direct annex. Interestingly, exporters of manufactured productivity increases, and in mineral exporting goods experienced the fastest growth rates of economies, the structural change effect was even labour productivity, as well as the highest real- negative.
Figure A3 Decomposition of aggregate labour productivity growth in least developed countries, 1991–2012 (percentage points and per cent)
100 Direct productivity effect 82.2 80.5 Reallocation effect 80 Labour productivity 62.9 62.1 growth rate 60 51.4 49.3 42.5 38.4 40 23.6 21.0 18.8 20 7.4 8.8 4.9 3.5 0
-3.9 -20 -16.1 -19.7 -40 Food and Fuel Mineral Manufactures Service Mixed agriculture exporters exporters exporters exporters exporters exporters
Source: Adapted from Chart 27 in UNCTAD (2014b: 73). Note: The direct productivity effect and the reallocation effect are expressed in percentage points, labour productivity growth rate in per cent.
53 1 module The The structural transformation process: trends, theory, and empirical findings 54 added, of of ment-to-population where Changes index factors: of of the Multiplying Hence, This constant decompose value” The (A2) withrespect val Turning To match where Applying ampo ratio jobs Let within andbetween sectors. productivity Box A1 trade sectoral nominal trade.
[0,T] gives there economy weight in box of is
et al., et aggregate labour productivity canbeexpressed asfollows:
the components are given by:
ε (Ang, excess
X, total a = reflect
to
presents
in prices) Aggregate be the exponential the discrete format “weighted as X L employment
employment i θ value
i as sectoral
2009). equation n i in the 2004: real
stands Divisiaindex decompositionThe oflabour productivity andemployment is as the Divisiadecomposition ofaggregate labour productivity growth: of a sectors
market sector the function measured and its
sum to value added a
To 1133). share population time, method labour labour for ratio employs sum see i of in (A1)
structure is added
sectoral
The the in sectoral generation, t, ε of of L the of into to equation (A4)we get: i
by ln anddividingbothsidesby aggregate labour productivity εyields: = = by each factors productivity productivity sector
logarithmic of economy. X first of ε ε details L L to i the sectoral 0 T i /L i i=1 n /L
decomposing growth) workers. =+ the data we canwrite i labour total sector effects. i
L ln(
and real step ∫ allows i labour i 0 t of . ε in
Because
)/dt we a interest. sectoral employment. θ
value total of Each contribution fundamental i (i.e. productivity,
D if
= D Assuming can growth As D ε amount D us growth dln( D the price shares prod D its str =
price prod
str dt nominal = at in = sector θ = to added. = start = p = output i prices D decomposition aggregate [dln(
i=1 n
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can i
ρ ∫ X to begin
with
∫
∫ 3, i
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that i 0 X
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)/dt +dln( t 0 across t produces Aggregate Instead,
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we within-productivity per ln( ln( insight for prod ln(
now λ to level
aggregate i=1 n θ where θ the decomposition indiscrete sectoral i θ L θ λ
the i = ε
p i i all L D i i define with i [dln( )( labour structural i [dln( capita [dln( i i i=1 n )( i=1 n )( θ str L L θ = θ added. dln( sectors P be variables i i,0 PL per
i,0 identity based D i,0 i
X
ε + dt λ total ε + i is p + the analysis price aggregate i i i i=1 n )/dt +dln( )/dt] i real θ decomposed ε i )/dt] θ )/dt] θ capita labour i,T total prices, i that ) i,T grows ρ i,T productivity employment )/2] )/2] )/2] labour i weights
ε on Integrating +
real value differ, i λ change
i ø ∫ a employment are the 0 t
= is sector is productivity P faster λ value i L/P i ) defined )/dt] labour continuous, θ
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) i
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is i calculate
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ρ After
over
productivity 1976). product computed i of the jobs =
total
shares production price P P in i a simple of structure indicator as (i.e.
as The time real the dynamics for equation
the the employ of index
factors. in creates Labour Divisia (A6.2) (A5.2) as terms terms (A6.3) (A5.1) inter value (A5.3) (A6.1) three alge- total sum sum (A2) (A5) (A4) (Oc- (A3) (A1) the at to of P. - -
The structural transformation process: trends, theory, and empirical findings
Box A1 1 The Divisia index decomposition of labour productivity and employment growth
braic manipulation, the employment-to-population ratio can be expressed as ø=∑(ξi/εi). module
Following a similar approach as for aggregate labour productivity, the growth rate of ø can be decomposed according to:
ØT n ln = i=1 [ln(ξi) – ln(εi)](λi,0 + λi,T)/2 (A7) Ø0
where λi are the sectoral employment shares. In a multiplicative form, the Divisia index decomposition of the employment-to-population-ratio growth rate is:
Dinc Dempl = (A8) Dprod
where Dinc is the income per capita index, and Dprod is the productivity index.
Source: Authors.
STEP 3 Analysing sectoral contributions attention to the most visible ones. Table A4 indi- to labour productivity growth cates that labour productivity growth is mostly associated with direct productivity increases and We now know that productivity growth is mainly with structural transformation in favour of the due to direct productivity effects rather than real- industrial sector occurring simultaneously, as location effects. But which sectors contribute the suggested by the correlation between direct and most to this productivity growth? The third and aggregate and reallocation and aggregate which last step of this analysis answers this empirical are higher in industry than in agriculture and ser- question. Before delving into the analysis, it is im- vices. This finding corroborates the insights from portant to clarify two aspects of the decomposition the literature reviewed in Section 3. In ODCs, the method used here. First, the index assigns a nega- fastest-growing group of countries (see Figure A1), tive reallocation effect to a sector whenever there labour productivity in industry added 33.4 per- is a decline in its share of employment. If workers centage points through direct productivity effects transfer from a low- to a high-productivity sec- and 13.5 percentage points as a result of absorp- tor, the (positive) reallocation effect observed for tion of labour, leading to the highest aggregate the high-productivity sector is, in absolute terms, productivity growth (114.2 per cent). The group above the (negative) reallocation effect observed with the second-highest aggregate productivity for the low-productivity sector. Hence, the realloca- growth is the group of LDC manufacturing ex- tion effect at the aggregate level will be positive. In porters, followed closely by LDC mixed exporters. this case, we can say that the process of structural change has benefitted the economy. Second, real- Another group of countries that registered high location and direct productivity effects by sectors aggregate productivity growth, namely the group must be analysed concomitantly, since employ- of LDC fuel exporters, achieved labour productiv- ment and labour productivity are closely related to ity enhancements mainly through direct effects each other. For example, a rise in employment in a within industry, with lower reallocation effects. A sector can cause a decline in its labour productiv- similar pattern characterizes the LDC mineral ex- ity if output does not sufficiently expand. Similarly, porters, with even lower reallocation effects. This a rise in a sector’s labour productivity caused by result can be explained by three factors. First, more capital-intensive modes of production can extractive industries are very capital-intensive. A lead to a decline in employment. These examples more advanced machine, for example, can there- suggest that the ideal structural transformation fore increase labour productivity by facilitating process is the one where high-productivity sectors the production of more output with the same create many jobs, while also generating strong amount of labour. This would explain the gener- productivity gains. In Section 2.1, we defined this as ally high direct productivity effects in industry. productive structural transformation. We are now Second, due to their high capital intensity, re- ready to interpret the results of the analysis. source-intensive industries are characterized by above-average labour productivity, meaning that Direct productivity and reallocation effects by sec- a movement away from these industries is likely tor are presented in Table A3, while Table A4 shows to reduce, rather than enhance, aggregate labour correlations between aggregate labour produc- productivity. Finally, as mentioned in Section tivity growth and its productivity and realloca- 2.1, structural transformation is more difficult tion components by sector. Several conclusions in resource-abundant economies, reducing the can be drawn from these two tables. We limit our chances of productive structural transformation.
55 1 module The The structural transformation process: trends, theory, and empirical findings 56 Source: UNCTAD (2014b: 77). in percent. ODCs: otherdeveloping countries; LDCs: developed countries. least Note: productivity effects Direct andreallocation effects are expressed inpercentage points, aggregate productivity growth Source: Adaptedfrom Table 15inUNCTAD (2014b: 74). Services Developed economies ODCs Industry Agriculture LDCs Mixed exporters exporters Service Manufacturing exporters Mineral exporters Fuel exporters Agriculture exporters Table A4 Table A3 analysisCorrelation ofaggregate anditscomponents labour productivity growth analysisCorrelation ofaggregate anditscomponents labour productivity growth Agriculture Direct andaggregate Direct Direct productivity effects productivity Direct -14.3 28.2 -6.6 12.6 14.7 15.3 13.1 8.2 1.7 0.46 0.88 0.73 Industry 29.4 32.0 33.4 14.0 21.0 12.9 17.3 3.6 4.7 Services -10.2 Reallocation andaggregate 29.2 14.3 16.7 -1.6 2.4 9.3 5.2 4.1 Agriculture -0.75 0.50 0.81 -6.6 -6.8 -8.8 -3.8 -5.3 -7.4 -1.4 -1.7 0.2 Reallocation effects Industry -10.1 10.3 -5.6 13.5 0.4 3.0 5.2 2.1 7.1 Reallocation anddirect Services 44.3 20.2 19.9 14.4 18.4 31.2 6.2 9.1 1.5 -0.80 0.67 0.37 productivity productivity Aggregate Aggregate growth 114.2 60.0 62.9 80.5 49.3 82.2 33.3 -16.1 3.5 The structural transformation process: trends, theory, and empirical findings 1 REFERENCES module Acemoglu D, Johnson S, and Robinson JA (2001). The colonial origins of comparative development: An empirical investigation. The American Economic Review 91(5): 1369–401.
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