Download Industrial development and the role of policy

Industrialization and
the role of policy
African Economic Development
Renata Serra – Feb 19th 2007
Structural transformation
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How would you define an economic structural
transformation?
The dual-sector economic model (Lewis, Todaro
etc.):
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The starting point is labor surplus in agriculture …
 But it could also be productivity and investment increase
in the agricultural/traditional sector
… and investment in the industrial/modern sector
Labor moves from the agricultural/traditional to the
industrial/modern sector
Capital accumulation continues to require more labor
Economic growth is a function of the investment rate
The imperative of economic
diversification
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Economic diversification is essential for low-income
countries
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The fastest growing economies have always a large
and increasing share of manufacturing in GDP
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The relationship between income levels and specialization
is negative first and then positive
Manufacturing shares in SSA, South Asia, MENA and
LA&C are now around 15% on average
The major goal is to learn how to do new things and
do them well!
Advantages from industrialization
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Increasing returns
Positive spillovers from technology transfers
Learning-by-doing
Greater chance of further diversification
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Increase in the share of tradable goods
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Jumping into other, high-quality products is more likely
Better producing tradable than non-tradable goods
In the modernization version, industrial development
comes along with urbanization, socio-economic
modernization, emergence of a female labor force,
decreases in fertility rates…
Determinants of
industrialization
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Geography
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History – path dependence
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Factor endowments
Quality of factors (land and soil; human capital)
Distance to markets
Other geographical characteristics (mountainous country)
Inherited comparative advantages: static concept
Policies
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Comparative advantages can be transformed: dynamic
concept
Determinants (cont’d)
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Other factors are also important, and are
determined by policies:
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Political security
Macro-economic stability
Institutional and market efficiency
Infrastructures
Savings (domestic or foreign) and investment
Human capital
Positive externalities
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What are examples of spillovers and externalities
from industrial activity?
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Ex. of industrial districts:
 A firm’s cost function is a decreasing function of the
district’s total level of production (or of the number of firms
producing the same goods)
Why may individual entrepreneurs invest suboptimally in these activities?
If externalities, then state policy is necessary.
But which type of policy?
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Read Rodrik (2006)
Import liberalization
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Import liberalization (IL) is intended to stimulate
export production
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But IL may squeeze import-competing sector without
stimulating non-traditional exports, if:
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Lerner symmetry theory
The traditional exportable sector exhibits high supply
elasticity: X increases, but GDP may decline (remember
what is the source of growth!)
There is an increase in the trade deficit
This is Rodrik’s interpretation why IL failed to spur
economic growth in Latin American countries
Export oriented policies
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The non-traditional tradable sector must be nurtured
so that it is not penalized by liberalization
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Access to cheap inputs, export subsidies, export
processing zones
IL follows only in a second phase
Subsidies to the non-traditional tradable sector
possibly squeezes the traditional tradable sector,
without affecting the import-competing sector
Hence economic growth accelerates
This explains the success of East Asian countries in
the past as now (China)
Competitive exchange rates
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Large budget deficits will discourage non-traditional
exports
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Governments can try to keep a ‘competitive’
(undervalued) exchange rate through:
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Because of higher prices, wages, and overvalued
exchange rates; and also due to the volatility in exchange
rates associated with capital inflows
Encouragement of capital outflows, restrictions on capital
inflows, tighter fiscal policies, nominal devaluations
This is more beneficial to economic growth than
inflation targeting, which leads to volatile exchange
rates
The role of industrial policy
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Set of policies conducive to expansion in
non-traditional sectors (rather than selection
of particular sectors and goods to favor)
Challenges for African governments:
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Go beyond IS and support exporting sectors
Align industrial policies with the interests of the
economy as a whole (while they mostly failed to
promote national interests)
Capture the benefits from greater regional
integration