Section IA Slides: Structural Change, Industrialisation, and Development Part A (1) PDF

Section IA: Structural change, industrialisation and development (Part A) Cite as: Cattaneo, N., 2024a. Structural change, industrialisation and development (Part A). ECO412 Course notes, Department of Economics and Economic History, Rhodes University, Makhanda....

Section IA: Structural change, industrialisation and development (Part A) Cite as: Cattaneo, N., 2024a. Structural change, industrialisation and development (Part A). ECO412 Course notes, Department of Economics and Economic History, Rhodes University, Makhanda. Copyright© 2024 Nicolette Cattaneo 1  Outline (Section I: Parts A & B) 1. Structural change and economic development 2. The importance of the manufacturing sector 3. Manufacturing-led vs alternative growth paths 4. Premature deindustrialisation and the middle-income trap 5. Recent views on Africa’s growth and development trajectory 6. Industrialisation and the policy implications of shifting sectoral boundaries Note: This session covers Part A (1-3). Next session will contain Part B (4-6) 2  Class readings for Section I (Parts A & B) Cramer and Tregenna, 2020. Heterodox approaches to industrial policy and the implications for industrial hubs, pp. 40-41, 45-52 (Sections 3.1, 3.3-3.5) Rodrik, 2018. An African growth miracle? Chang et al., 2016. Transformative Industrial Policy for Africa (UNECA report), pp. xii-xiii, 2-5, 18-25, 30-34. Andreoni, A. and Tregenna, F., 2021. The middle-income trap and premature deindustrialization in South Africa. In Andreoni, A., Mondliwa, P., Roberts, S. and Tregenna, F. (eds), Structural Transformation in South Africa: The Challenges of Inclusive Industrial Development in a Middle-Income Country, Oxford University Press, Oxford, Chapter 11, pp. 237-258. Video Carlos Lopes 2020 Industrialisation in Africa (APORDE Amsden Memorial Lecture) (25 mins) 3  1. Structural change and economic development Structural change changes in the sectoral structure of the economy i.e. changes in relative contributions of agriculture, industry and services to GDP and employment In the process of development, the structure of the economy is expected to shift from one that is agrarian-based, through a period of industrialisation and then finally to a mature services-oriented economy. Structural change important due to productivity differences between sectors and hence in the sectors’ ability to drive growth Structuralist perspective: origins in the “old” development economics, especially the ECLAC (Economic Commission for Latin America and the Caribbean) school of thought in the early 1950s Raul Prebisch, Hans Singer; other associated writers Albert Hirschmann and Nicholas Kaldor (political economists, Kaldor in the post-Keynesian tradition) 4  1. Structural change and economic development By contrast to structuralists, neoclassical view assumes: Disequilibria temporary Automatic adjustment to equilibrium Optimal factor distribution between sectors Growth convergence Whereas structuralists recognise: May be “sustained structural imbalance” Less than optimal factor distribution for growth Convergence exception rather than norm Orthodox idea of conditional convergence based on getting the “growth fundamentals” right (institutions, property rights, etc.) is insufficient to generate sustained growth (Tregenna, 2019: 3-6; Rodrik, 2018: 3-7) Points to a rationale for active industrial and other policy interventions 5  1. Structural change and economic development What do we mean by beneficial/growth-enhancing structural change? Reallocation of resources (L and K) from lower-productivity to higher-productivity sectors i.e. shift to more dynamic/increasing returns activities Specifically, to sectors with scope for cumulative productivity increases What do we mean by this? “productivity increases that build on one another in a virtuous circle” (Cramer & Tregenna, 2020: 46) Two key questions for developing countries: i) What sectors/activities are we talking about that we need to shift to? ii) And how do we achieve this shift? 6  1. Structural change and economic development i) To what sectors/activities? Structuralist approach sees a special role for the manufacturing sector (debated further in the next sub-section) ii) How to shift? Structuralist approach emphasises that the shift does not happen automatically Due to a wide range of factors discussed during the course Include Patterns of ownership and control State of technology Costs Institutional and political economy factors Global trade rules Provides part of industrial policy rationale together with the need to manage the numerous tradeoffs involved (Tregenna, 2019: 6) 7  1. Structural change and economic development Central to the analysis of structural change is the relationship between output (VA) growth, employment growth and productivity growth Ideally, would like output growth accelerations to be accompanied by productivity growth and employment growth increases However, output growth accelerations may be accompanied by productivity growth increases coupled with decreasing employment growth or vice versa (UNIDO, 2013) Similarly, output growth decelerations may be accompanied by different combinations of productivity and employment growth changes According to UNIDO (2013: 1-2) manufacturing provides developing countries with the best opportunity to enhance value added growth while maintaining employment and improving productivity Direct transition from agriculture to services may provide employment but not productivity growth, for example (see also Rodrik, 2018: 9-13) We will elaborate on this discussion in the following sub-section. 8  2. The importance of the manufacturing sector Economic development could be based on agriculture, mining, manufacturing or services, so why the argument for a focus on manufacturing as the engine of growth and development? In the sectoral approach: broad economic sectors have particular characteristics that impact on the scope for cumulative productivity increases i.e. on the scope for beneficial structural change and growth. An additional unit of value added (VA) or additional job has different effect on growth depending on sector (Tregenna, 2019: 8). In the structuralist view, additional unit of VA in manufacturing has stronger growth effect than an additional unit of VA in agriculture, mining or services. Manufacturing therefore has special “growth-pulling” characteristics. Accords with the Kaldorian approach based on Nicholas Kaldor’s three growth laws 9  2. The importance of the manufacturing sector Kaldor’s growth laws (KGLs) These three laws describe a set of relationships between output, employment and productivity growth at the broad sector level: i) Increased growth of manufacturing value added (MVA) increases the productivity growth rate of the economy as a whole ii) Increased growth of MVA raises productivity growth rate in manufacturing due to the presence of increasing returns to scale in manufacturing sector iii) Increased growth of MVA raises productivity growth rates in other sectors of the economy (Di Meglio et al., 2018: 1496, 1498-1500). i) arises via ii) and iii) 10  2. The importance of the manufacturing sector Evidence for Kaldor’s growth laws (KGLs) strong in the context of now developed economies mixed for developing economies, but some fairly strong evidence return to this in Parts 4 and 5 below KGLs and other sectoral characteristics of manufacturing lead to a number of arguments for a focus on manufacturing as engine of growth: Manufacturing has faster productivity growth than agriculture or services and better prospects for cumulative productivity increases Manufacturing is the best source of increasing returns to scale at the firm level and dynamic increasing returns at the sector/cluster level Continued… 11  2. The importance of the manufacturing sector Manufacturing is the lead sector in terms of technological diffusion: Manufacturing produces productive inputs for other sectors, including both agriculture (e.g. agricultural machinery, fertilisers) and services (e.g. computers, transport equipment), that increase their productivity Manufacturing sector is the source of organisational innovations used in other sectors Manufacturing also provides a source of demand for other sectors So there are stronger inter-sectoral (backward and forward) linkages between manufacturing and other sectors (Chang et al., 2016: 31; Tregenna, 2019; UNIDO, 2013; Zalk, 2014: 329) Continued… 12  2. The importance of the manufacturing sector Manufacturing is important for the health of the balance of payments: services are less tradeable; is lower income elasticity of demand for primary products; are manufactured substitutes for primary products; primary products have more volatile prices due in part to the financialisation of commodity markets Better wages for a broader range of wage-earners is generally found in manufacturing which can then in turn improve incomes and hence stimulate a larger domestic market (Chang et al., 2016: 31; Tregenna, 2019; UNIDO, 2013; Zalk, 2014: 329) 13  3. Manufacturing-led vs alternative growth paths What about alternative growth paths? Rodrik (2018: 13-17) considers 4 possible growth paths which we return to later, in the discussion on Africa’s growth trajectory: Manufacturing-led growth Agricultural-led growth Services-led growth Natural-resource based growth However, there is much current debate on the role of the services sector in structural transformation and development. Why this interest? Services sector grown in importance: now a significant share of GDP and employment for many countries (see tables below for SADC) Services have become increasingly tradeable following advancements in ICT and an important proportion of FDI flows to services sectors in some countries Rise of GVCs has also increased the importance of services Debate: Some analysts argue that services are now more important than manufacturing and developing countries can (and should) follow a services- led development path 14  Services as a share of GDP: selected SADC countries Services, value added (% of GDP) 1976 1980 1985 1990 1995 2000 2005 2010 2015 2019 2020 2021 Angola 33.06 22.21 35.53 41.89 48.66 42.12 45.35 47.49 Botswana 35.46 29.91 30.05 31.83 46.26 42.75 45.28 55.01 57.03 60.72 65.76 Eswatini 26.58 40.49 43.76 39.64 36.08 45.56 46.57 49.55 50.08 52.10 53.60 51.54 Lesotho 38.92 44.54 64.68 55.92 53.20 51.32 48.88 53.84 51.53 50.18 43.69 Malawi 39.95 30.25 31.27 22.33 44.15 38.37 40.92 47.94 50.20 52.41 52.61 52.44 Mauritius 46.47 52.47 46.34 46.05 51.04 55.99 59.55 62.86 66.30 67.66 68.20 66.42 Mozambique 52.57 45.94 47.80 46.96 47.44 40.99 41.48 Namibia 38.33 49.51 53.78 58.71 56.90 56.49 53.96 57.94 58.42 58.84 58.63 South Africa 52.54 46.89 50.72 52.44 58.23 61.19 62.64 64.28 64.10 64.36 64.57 62.75 Tanzania 33.29 35.51 49.08 45.08 43.32 40.43 36.77 36.25 34.34 Zambia 34.67 24.84 39.65 48.96 48.96 52.81 56.22 54.60 53.62 48.07 Least developed countries: UN 39.49 41.31 43.84 41.61 42.62 45.51 44.22 44.62 43.42 Low income 59.68 44.65 40.36 40.71 42.86 41.79 39.07 39.05 35.53 Lower middle income 40.97 39.75 42.63 44.52 45.85 46.81 49.42 49.00 48.15 46.77 Upper middle income 34.50 37.57 38.18 44.08 50.71 50.84 49.60 50.46 53.89 55.68 55.85 54.25 High income 66.83 67.73 68.99 69.89 70.14 71.81 Sub-Saharan Africa 43.23 44.04 49.55 49.29 48.78 50.93 53.45 50.10 48.91 47.22 15  Services employment as a proportion of total employment: selected SADC countries Service employment (% of total emp) 1991 1995 2000 2005 2010 2015 2019 Angola 51.30 51.95 53.93 53.05 43.27 41.28 42.47 Botswana 58.64 58.77 58.88 56.48 57.35 60.09 62.49 Eswatini 47.49 48.43 50.92 54.81 58.21 61.58 64.46 Lesotho 25.77 26.65 28.47 31.78 35.64 39.59 42.39 Malawi 11.77 12.21 12.99 13.92 15.71 17.09 18.27 Mauritius 44.89 45.68 49.32 57.54 62.66 66.99 70.35 Mozambique 13.07 13.28 14.83 16.65 18.25 20.14 21.19 Namibia 36.67 43.59 56.41 55.60 57.84 58.53 61.75 South Africa 59.94 60.93 62.82 66.73 70.75 70.57 72.41 Tanzania 12.68 12.91 14.18 20.62 23.81 26.23 28.44 Zambia 21.94 22.50 22.22 20.60 26.96 37.13 39.83 Least developed countries: UN 19.20 20.87 22.11 25.42 27.24 29.68 32.08 Low income 19.47 20.05 21.21 22.43 25.34 28.30 30.21 Lower middle income 26.76 28.90 30.36 32.21 34.50 37.51 40.14 Upper middle income 28.42 33.23 36.19 40.10 43.58 49.32 53.28 High income 61.86 64.18 66.85 69.96 72.50 73.47 74.08 Sub-Saharan Africa 26.01 26.66 27.85 29.25 32.03 34.63 36.39 16  3. Manufacturing-led vs alternative growth paths Can growth of services in low and middle income countries replace manufacturing as a core developmental strategy? Characteristics of services sectors and relationships between the core sectors of the economy (agriculture, mining, manufacturing and services) have changed significantly since the ICT revolution (see Part 5 below) Large manufacturing firms tend to outsource services that were produced in-house previously (e.g. catering, security guards, design, etc.) Also firms obtain services from specialist service providers outside the firm to a much greater extent (e.g. telecomms, financial services, transport and logistics, other business services) Both of the above account for part of the services sector expansion (reallocation of activities previously undertaken within manuf. firm) 17  3. Manufacturing-led vs alternative growth paths However, a key point is that modern services like telecoms and certain business services resemble manufacturing to a greater extent, with increasing returns to scale and technological diffusion to other sectors Means that some modern services sectors may be able to induce productivity growth and have growth-pulling properties like manufacturing May apply to knowledge-intensive services like computer services and R&D services; also business services like engineering, technical consultancy, legal and other business services (Di Meglio et al., 2018: 1496-1497) Preliminary empirical work looks at whether KGLs apply to these service activities; some positive results However, services sector is extremely heterogeneous and other service activities still seen as a “structural burden” Although it is important to recognise that sectors important for growth and those important for employment are not necessarily the same 18  3. Manufacturing-led vs alternative growth paths Rodrik (2018: 16) sceptical about services-led growth path for developing economies: Services not traditionally propulsive growth sector Services with potential to be propulsive tend to be high skill-intensive Reallocation of labour from agriculture to say IT services harder than to labour-intensive manufacturing as an initial step for raising productivity Productivity gains hard to achieve due to less tradeability of services, context specificity and the need to coordinate across a wide range of policy domains Chang et al. (2016: 31-33) argue that what may seem to be higher productivity in some services may be due to “de-basement” of the service, e.g. in retail (lowering service quality) or banking (complex, risky, opaque financial products) Also part of fall in MVA/GDP in developed countries due to decline in price of manufactured goods relative to services 19  3. Manufacturing-led vs alternative growth paths Most importantly, modern services, in particular high-value producer services, rely on manufacturing firms as customers Hence importance of manufacturing in terms of its economic linkages to the rest of the economy means a decline of manufacturing would have adverse consequences for services and other sectors Services increasingly important as supporter and facilitator of manufacturing production and trade in context of GVCs Especially ICT and producer services important for industrialisation (Wade, 2016) In sum, it is more the interaction between the two sectors that is likely to be most important for development in the current global environment rather than services-led versus manufacturing-led trajectories (see also Part 5 below) 20  3. Manufacturing-led vs alternative growth paths Dasgupta and Singh (2006) and Singh (2009) discuss the limitations of the ICT “services-led” growth model in the case of India Rapid services-led growth seen as “fragile” by many Indian economists (Singh, 2009); accompanied by jobless growth in manufacturing ICT has grown rapidly but quantitative significance overall is small: Sector accounts for less than 1% of GDP Employs less than 1 million out of a total labour force of 450 million But very important for BOP: 20-30% of exports, although this is decreasing as software becomes increasingly embedded in final goods Directly employs only educated people In the economy overall: only 8% of labour force in formal employment; 92% in informal sector 21  3. Manufacturing-led vs alternative growth paths Closely related to analysis of structural change is the study of deindustrialisation Recall: as economy grows and matures, generally first primary production then manufacturing decline in importance and economy ultimately becomes more services-oriented Decline in manufacturing is called deindustrialisation, and in this context is an expected characteristic of mature developed economies which have reached a certain level of per capita income A country may deindustrialise in terms of manufacturing value added or manufacturing employment or both However, this appears to be happening earlier (at a lower level of p.c. income) than expected in many developing countries in recent times Why is this occurring? Does this matter? We consider the question of “premature deindustrialisation” further in Section I, Part B: 4-6 22  References used in these slides Chang H-J., Hauge, J.L. and Irfan, M., 2016. Transformative Industrial Policy for Africa, United Nations Economic Commission for Africa (UNECA), Addis Ababa. Cramer, C. and Tregenna, F., 2020. Heterodox approaches to industrial policy and the implications for industrial hubs. In Okubay, A. and Lin, J.Y. (eds), The Oxford Handbook of Industrial Hubs and Economic Development, Oxford University Press, Oxford. Dasgupta, S. and Singh, A., 2007. Manufacturing, services and premature deindustrialization in developing countries: a Kaldorian analysis. In Mavrotas, G. and Shorrocks, A. (eds), Advancing Development: Core Themes in Global Economics. Palgrave Macmillan, Houndmills, Basingstoke. Di Meglio, G., Gallego, J., Maroto, A. and Savona, M., 2018. Services in developing economies: the deindustrialization debate in perspective. Development and Change, 49(6): 1495-1525. Rodrik, D., 2018. An African Growth miracle? Journal of African Economies, 27(1) (published online in 2016). Singh, A., 2009. The past, present and future of industrial policy in India. Chapter 11 in Cimoli et al. (eds), Industrial Policy and Development: the Political Economy of Capabilities Accumulation, Oxford University Press, Oxford: 79-106. Tregenna, F., 2019. Structural change and deindustrialisation. Lecture delivered at the African Programme on Rethinking Development Economics (APORDE), Johannesburg, September. UNIDO, 2013. Industrial Development Report 2013 Overview: The role of manufacturing and structural change. (pp.1-17 of the Overview). Wade, R., 2016. Industrial policy in response to the middle-income trap and the third wave of the digital revolution. Global Policy, 7(4): 469-480. Zalk, N., 2014. Industrial policy in a harsh climate: the case of South Africa. Chapter 12 in Salazar-Xirinachs et al. (eds), Transforming Economies: Making industrial policy work for growth, jobs and development. ILO, 23 Geneva.