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Summary of literature Economic Development
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Summary of the literature by McMillan, Nelson & Pack, Deaton, Arrow, McCaig, Winters, Alvaredo, Hsieh, Autor, Gereffi, Timmer
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Economic development literature- McMillan, Rodrik & Sepulveda (2017) – structural change, fundamentals and growth: a
framework and case studies
Developing countries made considerable gains during the first decade of the 21 st century: economies
grew large reductions in extreme poverty expansion of the middle class economic
convergence.
Recently, this progress has slowed down due to global trade, not enough jobs, skill mismatches,
technological change, greater income inequality and ageing in richer countries versus youth bulges in
poorer ones unlikely that gap between richer and poorer countries will be closed anytime soon
Growth prospects for developing countries, two types of explanation:
1. Dual economy approach (Lewis, Ranis, Fei). There is a sharp distinction between traditional
(agriculture) and modern (industry) sectors of the economy different economic logics
work within them therefor these sectors cannot be lumped together.
Accumulation, innovation and productivity growth take place in the modern sector, the
traditional sector remains technologically backward and stagnant economywide growth
depends on the rate at which resources migrate from the traditional to the modern sector.
Growth is just a matter of moving traditional farmers into modern industries in urban areas
where productivity is on a positive trajectory.
2. Neoclassical growth model of Solow. Presumes different types of economic activity are
structurally similar enough to be aggregated into a single representative sector. Growth
depends on incentives to save, accumulate physical and human capital and innovate by
developing new products and processes.
these two explanations can be combined: neoclassical model focuses on growth within modern
sectors, and dual economy model focuses on relationships and flows among sectors. Both
explanations have failed.
Two broad development challenges:
- Structural transformation challenge: how can we ensure that resources flow rapidly to the
modern economic activities that operate at higher levels of economic productivity?
- Fundamentals challenge: how can we accumulate skills and broad institutional capabilities
needed to generate sustained productivity growth across the entire range of services.
The relationship between these challenges is critical.
Africa has been largely absent from any work on structural change, because there is largely
unreliable economic data, or nonexistent data. A deeper reason is poverty however, African
countries have grown very fast in unusual ways, making them especially interesting.
Based on case studies about Botswana, Nigeria, Ghana, Zambia, India, Vietnam, brazil we learn that
experience with structural change has been quite diverse around the world:
- Structural change played only a tiny role in the recent growth performance of the middle-
income countries of Brazil and Botswana, although it did play an important role in launching
them into middle-income status.
- Structural change contributed significantly to growth in Vietnam and Ghana over the past
two decades, although their experiences have been quite different—with Vietnam
undergoing much more industrialization than Ghana, where the formal manufacturing sector
is still relatively small.
- Structural change contributed to growth in India, Nigeria, and Zambia, but it is not the kind of
structural change that China and Vietnam enjoyed. Rather, the three countries have seen a
less rapid decline in the employment share of low-productivity agriculture, exacerbated by
the lack of a boom in labor-intensive manufacturing for export.
despite significant improvements in policy in Africa (economic stabilization, democratization,
external opening), the rate and direction of structural transformation have been disappointing in this
region.
,Again, the challenges in growth:
- Structural transformation challenge: focus on moving resources into modern industries
- Fundamental challenge: focus on developing broad capabilities
these challenges may seem too closely linked to be separable there is overlap, but the
challenges have different strategic implications: it may be easier to promote industrialization by
subsidizing, than to promote it by making broad investments in human capital.
It is possible to have rapid structural transformation (industrialization) without significant
improvements in fundamentals
It is possible to invest significantly in fundamentals without reaping much reward in terms of
structural transformation.
both of the above can happen, but if we want sustained growth and convergence, both processes
are required.
Growth must depend on the steady accumulation of fundamentals emphasized by neoclassical
growth theory.
Institutional quality and human capital are both highly correlated with income levels, yet
improvements in institutions and human capital are not a reliable factor of economic growth only
countries that steadily enhance their fundamental capabilities eventually become rich. However,
early on, industrialization fuels growth, and this requires policy that may differ from fundamentals.
(1) Pt = total labor productivity in year t
θi,t = proportion of total labor employed in a
sector (i) at time (t)
pi,t = labor productivity in sector (i) at time
(t)
(2) ∆𝑃𝑡 = change in total labor productivity between t
and t-k
First term on the right captures within sector productivity
changes, second term on the right captures between sector productivity changes, third term on the
right captures cross-sector productivity changes. In essence, the cross term is a covariance term that
captures the effects on overall productivity of simultaneous changes in sectoral employment and
productivity.
The second and third term are combined and referred to as structural change term, leading to
equation (3). Pt =economywide labor productivity levels
pi,t=sectoral labor productivity levels
θi,t =share of employment in sector i at time t.
The Δ operator denotes the change in productivity or
employment shares between t – k and t.
this decomposition suggests that economywide labor productivity growth can be achieved in two
ways:
1. First term: the within sector component: how much of overall labor productivity growth can
be attributed to changes within sectors. Weighted sum of productivity growth within
individual sectors, where the weights are the employment share of each sector at the
beginning of the time period
2. Second term: structural change component: how much of overall labor productivity growth
can be attributed to movement of workers across sectors. Inner product of productivity
levels with the change of the employment shares across sectors when changes in
employment shares are positively correlated with productivity levels, this term will be
positive structural change will increase economywide productivity growth.
Findings based on country studies:
, - Vietnam: big pools over labor in agriculture have moved into services rather than
manufacturing. Productivity in services was higher than in manufacturing people moved
from lower to higher productivity activities.
Vietnams structural transformation came alongside two other important shifts that were
linked
o Transition from state owned firms to private employment
o Transition from family farms and businesses to formal registered farms
contributed to productivity growth within sectors & allowed reallocation of factors of
production across sectors GDP per capita tripled
Vietnam is an example of a clear cut development success greatly enabled by structural
transformation, easy to explain: excess labor on the countryside productivity gains from
ppl moving from farm to urban employment were huge relaxing grip of state regulation
unleashed these hidden sources of productivity liberalizing internal and external trade
introducing competition and private business opening the world up to the world economy
foreign investment and technology.
- Ghana: agricultural employment decreased absorbed by low productivity services
limited impact on countrywide productivity.
how could it be so different in these two countries?
- Vietnam has had government liberalization policies and other efforts -> remove obstacles
facing private business. However, this does not explain it at all because Ghana had an even
freer economy.
- Vietnams government does provide a more hospitable environment than Ghana for private
business (by nurturing new economic activities and removing obstacles that existing ones
faces)
- Vietnams specular growth is likely to be partly driven by strong commitment to improving
fundamentals like education and infrastructure investments.
India, Nigeria and Zambia have underperformed, limited structural change.
- In India, the share in agriculture has shrunk, but moved to information technology and
business process outsourcing services high productivity activities, but these are highly skill
intensive unable to absorb the vast majority of the Indian workforce that remains poorly
educated India’s growth trend is suppressed by slow accumulation of fundamental
capabilities (education, infrastructure, governance)
- In Nigeria, share of employment in agriculture fell only slightly the productivity growth
that took place was mostly dependent on within sector productivity improvements, instead
of from the movement to manufacturing. Nigeria could have grown much more if there had
been structural change in the form of
o Stimulating agricultural production
o Liberalizing trade policies
o Upgrading infrastructure
o Improving human capital
- In Zambia, there has been highly uneven structural change. first a rise in agricultural
employment, then a fall services absorbing most of the workers that left the farm
services are small scale informal activities still more productive than agriculture. Structural
change could play a significant role in the future, focus on fundamentals is also needed.
Botswana and brazil have had no structural change in recent years, have been middle income
countries from some time.
- Brazil: fast structural change from 1950-1970s labor productivity growth because
shrinking agricultural jobs, more services policies of import substitution predominated.
From the 1970s, no more structural change rely on in sector enhancements (e.g. investing
in human capital and new technologies) this failed slow growth. For brazil, future
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