Challenges,  Opportuni2es  and  Strategies    for  Structural  Transforma2on    in  Least  Developed  Countries  

Jus$n  Yifu  Lin  Senior  Vice  President  and  Chief  Economist,  The  World  Bank  

Keynote  Presenta2on  “Economic  Growth  and  Structural  Change:  

 Priori2es  for  the  Least  Developed  Countries”  

Columbia  University,  New  York  

March  9,    2012  

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Structure  of  the  Presenta2on  

•  Structural  Change  and  Challenges  of  Structural  Transforma2on  in  Least  Developed  Countries  

•  The  New  Structural  Economics  •  Growth  Iden2fica2on  and  Facilita2on:  An  applica2on  of  the  New  Structural  Economics  

•  New  opportuni2es  of  structural  transforma2on  for  Developing  Countries  in  the  Mul2-­‐polar  Growth  World  

•  Conclusion  2  

LDCs’  growth  performance  has  improved  in  the  recent  decade  

*In constant USD, Except Angola and Equatorial Guinea. Source: WDI database.

• The  growth  rate  of  46  LDCs  has  increased  in  the  recent  decade  • Their  contribu2on  to  World  GDP  growth,  although  small,  is  increasing  

Source: United Nations. World Populations Prospects. 2010 Revision.

Youth  bulge  –  Genera2ng  jobs  for  young  people  

24%  24%  25%  25%  26%  26%  27%  27%  28%  28%  29%  29%  

1975  

1980  

1985  

1990  

1995  

2000  

2005  

2010  

2015  

2020  

2025  

2030  

2035  

2040  

2045  

2050  

LDC  Popula2on  Age  15-­‐29    (in  %  of  Total  Popula2on)  

How  to    “achieve  sustained,  equitable  and  inclusive  economic  growth  in  least  developed  countries,  to  at  least  the  level  of  7  percent  per  annum”  ?      Istanbul  Declara2on  -­‐  Programme  of  Ac2on  (2011-­‐2020)    

Poverty    -­‐    Reducing  poverty  across  countries    

Source: Ravaillon and Chen, World Bank Development Economics Research Group. 2012.

S2ll,  many  challenges  remain.  

0  

500  

1000  

1500  

2000  

2500  

1990   2005   2008  

Number  of  people  (in  millions)  below  $1.25  a  day  in  2005  PPP    

Sub-­‐Saharan  Africa  

South  Asia  

Middle  East  and  North  Africa  

La2n  America  and  The  Caribbean  

Eastern  Europe  and  Central  Asia  

East  Asia  and  Pacific  

Economic  Development  is  a  process  of  structural  change  Example:  USA,  Now  

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Economic  Development  is  a  process  of  structural  change  Example:  USA,  in  1600s  

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Economic  Development  is  a  process  of  structural  change  Example:  USA,  in  1600s  

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Structural  Transforma2on  China  versus  LDCs  

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0%  10%  20%  30%  40%  50%  60%  70%  80%  90%  

100%  

1980s   1990s   2000s  

Agriculture   Non-­‐Manufacturing  Industry  

Manufacturing   Services  

0%  10%  20%  30%  40%  50%  60%  70%  80%  90%  100%  

1980s   1990s   2000s  

Agriculture   Non-­‐Manufacturing  Industry  

Manufacturing   Services  

Sectoral  Contribu2on  to  GDP  (in  %)                      China                  LDCs    

NEW  STRUCTURAL  ECONOMICS  

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How  has  economic  development  theory  evolved?  

1950   1960   2010  2000  1970   1980   1990  

Structuralist  Approach  Focus  on  Market  Failures:  

Import  Subs=tu=on  Strategy  Miserable  results  

Liberaliza2on  Approach  Focus  on  Government  Failures:  Priva=za=on  and    Marke=za=on    

Mixed  Results  

Market  based  economies  with  proac3ve  role  for  government  

Successful  East  Asian  Tigers:    Export  Promo3on  

China,  Vietnam  and  Mauri3us:  Dual-­‐track  approach  to  transi3on    

Rethink  Development  

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   New  Structural  Economics  

 Applica2on  of  neoclassical  economic  approach  to  understand  the  determinates  of  economic  structure  and  its  evolu$on  in  development  

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New  Structural  Economics  (NSE):    Key  Concepts    

•  The  main  hypothesis:  Industrial  structure  in  a  country  is  endogenous  to  its  endowment  structure  

•  Ini2al  Endowments  provides  compara2ve  advantage  and  op2mal  industrial  structure  (endogenous).  

•  Dynamics:  Income  growth  depends  on  –  Upgrading  of  endowments                    –  Upgrading  industrial  structure                      –  “hard”  and  “sog”  infrastructure  

•  Best  way  to  upgrade  endowment  structure  and  to  sustain  industrial  upgrading,  income  growth  and  poverty  reduc2on  is  to  follow  compara2ve  advantage  determined  by  the  endowment  structure  

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New  Structural  Economics  (NSE):    Key  Concepts    

•  Firms  maximize  profits…choice  of  technology  and  industries  based  on  rela2ve  factor  prices…  

Need  for  compe==ve  market  system  

•  Industrial  upgrading  needs  to  – Solve  coordina2on  problems  – Address  externali2es  

             Need  for  a  facilita=ng  state  13  

The  role  of  Industrial  Policy  

•  Industrial  policy  is  a  useful  instrument  to  facilitate  forma2on  of  clusters  and  obtaining  agglomera2on  effect  

–  Contents  of  coordina2on  will  be  different,  depending  on  industries.    

–  It  is  important  that  the  government  uses  its  limited  resources  and  capacity  strategically.  

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Failures  of  Industrial  Policy  

•  Most  governments  in  the  developing  world  used  industrial  policies  but  failed.  Why?  

–  Countries  akempted  to  develop  the  industries  of  advanced  economies  and  went  against  their  compara2ve  advantages  

–  Firms  in  targeted  sectors  were  non-­‐viable  in  compe22ve  markets  and  required  large  and  ongoing  policy  support  

–  The  policy  supports  included  price  distor2ons;  this  required  planning  and  administra2ve  alloca2ons  

–  This  led  to  rent-­‐seeking,  corrup2on,  and  poli2cal  capture.    

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Growth  Iden2fica2on  and  Facilita2on  

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Aim  before  fire:  From  the  new  structural  economics,  for  an  industrial  policy  to  be  successful,  it  should  target  sectors  that  conform  to  the    

economy’s  latent  compara$ve  advantage.  But  how  to  do  it?  

Growth  Iden=fica=on  and  Facilita=on  

Step  1:  Find  fast  growing  countries  with  a  

similar  endowment  structure  and  with  about  100%  higher  per  capita  income.  Iden=fy  dynamically  growing  tradable  industries  that  have  grown  well  in  

those  countries  for  the  last  20  years.    Step  2:  

See  if  some  private  domes=c  firms  are  already  in  those  industries  (of  which  may  be  exis2ng  or  nascent).    Iden2fy  constraints  to  quality  upgrading  or  further  firm  entry.  Take  ac2on  to  

remove  constraints  

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Growth  Iden=fica=on  and  Facilita=on  

Step  3:  

In  industries  where  no  domes2c  firms  are  currently  present,  seek  FDI  from  countries  examined  in  step  1,  or  organize  new  firm  incuba2on  

programs.  Step  4:  

In  addi2on  to  the  industries  iden2fied  in  step  1,  the  government  should  also  pay  aken2on  to  spontaneous  self  

discovery  by  private  enterprises  and  give  support  to  scale  up  the  successful  private  innova2ons  in  new  industries  

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Growth  Iden=fica=on  and  Facilita=on  

Step  5  

In  countries  with  poor  infrastructure  and  bad  business  environment,  special  economic  zones  or  industrial  parks  may  be  used  to  overcome  these  barriers  to  firm  entry  and  FDI  and  encourage  industrial  clusters.  

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Step  6:  

The  government  may  compensate  pioneer  firms  in  the  listed  iden2fied  above  with  

Tax  incen2ves  for  a  limited  period,    Direct  credits  for  investments,    Access  to    foreign  exchanges  

NEW  OPPORTUNITIES  OF  STRUCTURAL  TRANSFORMATION  FOR  DEVELOPING  

COUNTRIES  IN  THE  MULTI-­‐POLAR  GROWTH  WORLD  

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The  Rise  of  Developing  countries  as  growth  poles  in  the  Mul$ploar  Growth  World  

*In constant USD, Except Angola and Equatorial Guinea. Source: WDI database.

• Before  2000  the  global  growth  was  driven  mainly  by  industrialized  high-­‐income  countries.  

• In  the  new  century,  due  to  fast  growth  and  their  popula2on  sizes,    “BRICs”  (Brazil,  Russia,  India  and  China)  become  new  growth  poles  in  the  world  although  they  are  middle-­‐income  countries.    

Historically,  the  dynamically  growing  developing  countries  achieve  rapid  structure  transforma2on  by  tapping  into  the  latecomer  advantages  in  a  flying-­‐geese  pakern    

22  Source:  hkp://www.grips.ac.jp/module/prsp/FGeese.htm  

The  New  Opportuni2es  arise  from  the  industrial  upgrading  of  China  and  other  new  growth  poles  

•  Japan’s  industrial  upgrading  in  the  1960s  provided  the  opportunity  for  East  Asia  Tigers’  industrial  upgrading  and  dynamic  growth  

•  The  East  Asian  Tigers’  industrial  upgrading  in  the  1980s  provided  a  similar  opportunity  for  China.  

•  Now  China  and  other  new  growth  poles  such  as  Brazil  and  India  have  reached  a  similar  stage  as  Japan  in  the  1960s  and  East  Asian  Tigers  in  the  1980s.    The  opportunity  to  the  developing  countries  will  be  many  2mes  of  that  provided  by  Japan  and  East  Asian  Tigers    

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• If  a  developing  country  can  use  the  growth  iden2fica2on  and  facilita2on  framework  to  capture  this  new  opportunity,  the  country  will  become  one  of  the  most  dynamic  economies  in  the  world.    • Similar  opportuni2es  will  also  arise  from  other  BRICs’  dynamic  growth  

Two  addi2onal  points  

•  Agricultural  development  is  crucial  for  developing  countries:  –  For  poverty  reduc2on,  and    –  For  providing  capital  and  a  market  for  industrial  products.  

•  A  resource-­‐abundant  country’s  resources  will  be  a  blessing  if:  –  It  has  a  good  management  of  resources.  (E.g.,  some  of  it  must  be  saved  for  future  genera2ons,  and  enclave  rent  capture  avoided.)  

–  It  uses  (part  of)  the  wealth  generated  from  resources  to  facilitate  structural  transforma2on.  

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Concluding  Remarks  

•  Economic  development  is  a  con2nuous  process  of  technological  innova2on  and  structural  transforma2on.  

•  The  best  way  to  achieve  dynamic  growth  in  a  LDC  is  to  implement  a  compara2ve-­‐advantage  following  strategy  and  tap  into  its  latecomer  advantage.  

•  A  mul2-­‐polar  growth  world  can  provide  new  opportuni2es  for  LDCs.  

•  The  GIF  framework  may  help  LDCs  grasp  this  opportunity  for  structural  transforma2on.  

•  A  world  of  high,  sustainable  and  equitable  growth  will  then  not  be  a  dream  too  far.    

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The  book  can  be  downloaded  freely  from  the  World  Bank  at  hkp://go.worldbank.org/QZK6IM4GO0  

THANK  YOU  

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