Archives for posts with tag: Economic growth

Thanks to Cherokee Gothic, I came across this very interesting paper by Herrendorf, Rogerson and Valentinyi (pdf) about the structural transformation of economies in the process of economic growth. The figures are striking:

Source: "Growth and Structural Transformation" (2013), by Herrendorf, Rogerson and Valentinyi

Source: “Growth and Structural Transformation” (2013), by Herrendorf, Rogerson and Valentinyi

These figures focus on a sample of industrialized countries, mostly EU, US and East Asian powers (Japan and Korea). They show that as GDP per capital grows, (1) employment in the agricultural employment tends to decrease, (2) employment in the services sector increases linearly and (3) employment in the manufacturing sector follows an inverted u pattern: it grows initially but then it tends to decrease as GDP per capita grows. The question that we should ask ourselves is whether African economies will follow the same pattern.

My opinion is that ‘yes’ – over the long term African economies will go through such structural transformation. However, the biggest mistake is to say that during the process one sector is more important than the other. If someone concludes that African governments should focus on services and neglect agriculture because that’s how economic growth happens. Well, he or she hasn’t understood much about the topic. As Di Maio recently argued, industrialization and food security are not competing policy objectives.

At the same time, it is clear that growth in the manufacturing sector is one of the key components missing from the puzzle. Kenya is in the initial part of the graph, moving from low-income to middle-income, but that is happening without any significant growth of employment or value-added in the manufacturing sector. This is what John Page calls “structural deficit” in Africa:

Africa faces a significant structural deficit—the result of two and a half decades of deindustrialisation and increasing dependence on natural resources. Today Africa’s manufacturing sector is smaller, less diversified and less sophisticated than it was in the decade following independence. Agro-industry and tradable services are still in their infancy. As industry lost ground, labour moved from higher to lower productivity employment. Without an acceleration of structural change, the region’s recent growth turnaround runs the risk of not sustaining its momentum into a middle-income status.



Interesting new article by MIT professor Yasheng Wang in the Journal of Economic Perspectives (ungated pdf here)

There are two prevailing explanations of what caused China’s rate of economic growth to take off. The first view gives the pride of place to globalization. According to this view, Chinese growth started when Deng Xiaoping liberalized trade and foreign investments by setting up special economic zones in the in the coastal provinces. In this view, China’s export-oriented manufacturing, largely foreign-funded, employed millions of rural migrants, boosted their income, and reduced poverty far and wide. The second perspective emphasizes the importance of internal reforms—especially in rural, interior regions—of the agricultural pricing system, land contracting, and the entry of rural businesses known as township and village enterprises.

Huang argues that township and village enterprises were the key to China’s take-off

 … the economic contributions of foreign investments do not remotely match those of China’s rural industry. At their peak, firms funded by foreign capital employed 18 million people (in 2010). By contrast, at their trough in 1978, township and village enterprises employed 28 million people. Between 1978 and 1988 China’s poverty headcount declined by 154 million, by far the most impressive  record during China’s three decades of reforms.

And he dismantles some “myths” about China’s village enterprises

 Many China scholars believe that township and village enterprises have a distinct ownership structure—that they are owned and operated by local governments rather than by private entrepreneurs. That these firms could be so dynamic and efficient, yet government-owned, is often treated as a paradox in the economics literature.

But my own historical narrative—formulated on the basis of voluminous government and bank documents and data from the 1980s—directly contradicts this heterodox interpretation of Chinese reforms. I will show that township and village enterprises from the inception have been private and that China undertook significant and meaningful financial liberalization at the very start of reforms.

Source (PDF)