The role of industrialization in economic development: theory and evidence Bineswaree Aruna Bolaky




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TitleThe role of industrialization in economic development: theory and evidence Bineswaree Aruna Bolaky
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Globalization promotes specialization according to comparative advantage. Here there is another potentially important difference among countries. Some countries – many in Latin America and Africa – are well-endowed with natural resources and primary products. In these economies, opening up to the world economy reduces incentives to diversify towards modern manufactures and reinforces traditional specialization patterns. Some primary sectors such as minerals do operate at very high levels of labor productivity. The problem with such activities, however, is that they have a very limited capacity to generate substantial employment. So in economies with a comparative advantage in natural resources, we expect the positive contribution of structural change associated with participation in international markets to be limited. Asian countries, most of which are well endowed with labor but not natural resources, have a natural advantage here.



C-Some Econometric Evidence

  • Second, they find that countries that maintain competitive or undervalued currencies tend to experience more growth-enhancing structural change. Undervaluation acts as a subsidy on those industries and facilitates their expansion.

  • Finally, they also find evidence that countries with more flexible labor markets experience greater growth-enhancing structural change. This also stands to reason, as rapid structural change is facilitated when labor can flow easily across firms and sectors. By contrast, they do not find that other institutional indicators, such as measures of corruption or the rule of law, play a significant role.

  • Countries that do well are those that start out with a lot of workers in agriculture but do not have a strong comparative advantage in primary products. That most Asian countries fit this characterization explains the Asian difference.



C-Some Econometric Evidence-Rodrik on structural change and globalization

  • “A key promise of globalization was that access to global markets and increased competition would drive an economy’s resources toward more productive uses and enhance allocative efficiency. It is certainly true that firms that are exposed to foreign competition have had no choice but to either become more productive or shut down. As trade barriers have come down, industries have rationalized, upgraded and become more efficient. But an economy’s overall productivity depends not only on what’s happening within industries, but also on the reallocation of resources across sectors. This is where globalization has produced a highly uneven result. Our empirical work shows that countries with a comparative advantage in natural resources run the risk of stunting their process of structural transformation. The risks are aggravated by policies that allow the currency to become overvalued and place large costs on firms when they hire or fire workers.”

  • “Structural change, like economic growth itself, is not an automatic process. It needs a nudge in the appropriate direction, especially when a country has a strong comparative advantage in natural resources. Globalization does not alter this underlying reality. But it does increase the costs of getting the policies wrong, just as it increases the benefits of getting them right.”



D- Challenges and Opportunities from globalization

  • Need for economic diversification

  • Increased vulnerability to economic shocks

  • Haddad et al (2009): trade openness reduces volatility when countries are well diversified -panel of 77 developing and developed economies over the period 1976-2005.

  • The effect of trade openness on growth volatility is positive on average, there is strong evidence pointing to the important role that export diversification plays in reducing the vulnerability of countries to global shocks. In addition, they find that product diversification clearly moderates the effect of trade openness on growth volatility, while the market diversification measures yield much more mixed results.

  • They were able to identify positive thresholds in terms of their product diversification indicators at which the effect of openness on volatility changes sign.

  • The relationship completely breaks down when they exclude low-income economies from the analysis, and this is irrespective of the diversification indicator employed This suggests that much of the action indeed lies with low- and middle-income economies, for which export diversification matters more in shielding their economies from external shocks.

  • One possible explanation for this outcome is that developed economies possess other means of insuring their economies against shocks, whereas developing countries depend more strongly on implicit insurance as represented by a more diversified export basket.



D- Challenges and Opportunities from globalization

  • Imbs and Wacziarg (2003)- characterizes the pattern of sectoral diversification along the development path. Using data on sector-level employment and value added, covering a wide cross section of countries at various levels of disaggregation, they provide new and robust evidence that economies grow through two stages of diversification. At first, sectoral diversification increases, but there exists a level of per capita income beyond which the sectoral distribution of economic activity starts concentrating again. In other words, sectoral concentration follows a U-shaped pattern in relation to per capita income.

  • The estimated turnaround point occurs quite late in the development process and at a surprisingly robust level of income per capita. Thus, increased sectoral specialization, although a significant development, applies only to high-income economies. Countries diversify over most of their development path

  • Portfolio motive v/s comparative advantage



D- Challenges and Opportunities from globalization

  • Important roles for agriculture and services

  • Rattso and Torvik (2003) show that discrimination against the agriculture sector could lead to the contraction of industry, through trade linkages.

  • De Janvry and Sadoulet (2010) stress the need for complementarity between agriculture and industry. They also argue that agricultural development can contribute to the creation of competitive advantage in industry. Furthermore, in the short-to-medium term the agriculture sector will continue to be an important source of foreign exchange required to import intermediate inputs needed by domestic industries.

  • It is also important to recognize that the provision of producer services also matters for the competitiveness of the manufacturing sector. In this context, the challenge for policymakers is how to create mutually supportive linkages between the industrial and non-industrial sectors of the economy.



D- Challenges and Opportunities from globalization

  • Challenges and opportunities on how to indsutrtialize? Just 3 examples

  • (i) New multilateral trade rules are slowly shrinking the policy space available to African countries for promoting industrial development. For example, the rules of the World Trade Organization (WTO) prohibit the use of industrial policy instruments such as quotas and local content requirements. The use of export subsidies have also been banned, except for the Least Developed Countries.

  • Furthermore, as a result of the Economic Partnership Agreements (EPAs) African countries are under increasing pressure to abandon the use of tariffs as a measure of protection. Consequently, African industrialisation will have to take place in an environment in which the use of some industrial policy instruments applied by the developed and emerging economies are either banned or regulated



D- Challenges and Opportunities from globalization

  • Just 3 examples

  • (ii) The global environment in which manufacturing production takes place is changing in the sense that firms are increasingly facing stiff competition in global export markets due to the reduction in tariff and non-tariff barriers to trade in industrial products coupled with the significant decrease in transport costs and improvements in information and communication technology.

    • For African countries, the new environment is challenging
    • because of the rise and growing role of large developing
    • countries such as China, India and Brazil in labour-intensive
    • manufactures (Kaplinsky 2007). These new competitive
    • pressures imply that an effective response to competition is no
    • longer just about selling products at lower cost. It is also about
    • producing better products and getting them to consumers in a timely manner.


D- Challenges and Opportunities from globalization

  • Just 3 examples

  • (iii) Third, increasing concerns over climate change is forcing firms to adopt or switch to new technologies and methods of production. In particular, manufacturers are under increasing pressure to adopt climate-friendly technologies and methods of production.

  • Consequently, if African industrialisation is to be sustainable it cannot rely on the old technologies and methods of production used by the developed countries when they were at a similar stage of development.



E-African Initiatives for Industrialization

  • Lagos Plan of Action for the economic development of Africa

  • From the concepts and objectives of the Lagos Plan of Action emerged the idea of a decade specifically devoted to translate the goals of the Lagos Plan of Action into industrial programmes and projects. Proposals for an Industrial Development Decade for Africa (IDDA), 1980-1990 were adopted at the Sixth Conference of African Ministers of Industry, held at Addis Ababa, Ethiopia in November 1981. UNIDO IDDA Support Programme

  • The Alliance for Africa's Industrialisation (1996):initiated by UNIDO in cooperation with the Economic Commission for Africa and the Organisation of African Unity, and launched in Cote d'Ivoire, yet another initiative aiming at revitalizing African economies. Intended to provide a mechanism for African leaders to define appropriate industrial development strategies and commit political will and resources to their achievement. It is also an effort to draw the attention of African decision makers and the international community to Africa's industrial development potential and the need to fully realise this potential.

  • New Partnership for Africa's Development (NEPAD) adopted by African Leaders in 2001 identified economic transformation through industrialisation as a critical vehicle for growth and poverty reduction in the region. Trade, Industry, Market Access and Private sector development as one of the 9 priority sectors in AU/NEPAD African Action Plan 2010-2015

  • In February 2008, African Heads of State adopted a Plan of Action for the Accelerated Industrial Development of Africa (PIDA). Implementation strategies for the Plan were subsequently endorsed by African Ministers at the 2008 Conference of African Ministers of Industry (CAMI).



AU/NEPAD STRATEGIC OBJECTIVES IN TRADE, INDUSTRY, MARKET ACCESS AND PRIVATE–SECTOR DEVELOPMENT


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