Should-Read: Dani Rodrik: Growth Without Industrialization?

Should-Read: Dani Rodrik: Growth Without Industrialization?: “FLow-income African countries can sustain moderate rates of productivity growth into the future, on the back of steady improvements in human capital and governance…

…But the evidence suggests that, without manufacturing gains, the growth rates brought about recently by rapid structural change are exceptional and may not last…. Sub-Saharan Africa’s economic growth has slowed precipitously since 2015, but this reflects specific problems in three of its largest economies (Nigeria, Angola, and South Africa). Ethiopia, Côte d’Ivoire, Tanzania, Senegal, Burkina Faso, and Rwanda are all projected to achieve growth of 6% or higher this year. In Asia, the same is true of India, Myanmar, Bangladesh, Lao PDR, Cambodia, and Vietnam.

This is all good news, but it is also puzzling. Developing economies that manage to grow rapidly on a sustained basis without relying on natural-resource booms – as most of these countries have for a decade or more – typically do so through export-oriented industrialization. But few of these countries are experiencing much industrialization. The share of manufacturing in low-income Sub-Saharan countries is broadly stagnant – and in some cases declining. And despite much talk about “Make in India,” one of Prime Minister Narendra Modi’s catchphrases, the country shows little indication of rapid industrialization.

Manufacturing became a powerful escalator of economic development for low-income countries for three reasons…. It was relatively easy to absorb technology from abroad and generate high-productivity jobs…. Farmers could be turned into production workers in factories with little investment…. Manufacturing demand was not constrained by low domestic incomes: production could expand virtually without limit, through exports….

What, then, are we to make of the recent boom in some of the world’s poorest countries? Have these countries a discovered a new growth model?… Growth-promoting structural change has been significant in the recent experience of low-income countries such as Ethiopia, Malawi, Senegal, and Tanzania, despite the absence of industrialization…. Rapid structural change in these countries has come at the expense of mostly negative labor productivity growth within non-agricultural sectors…. The African model appears to be underpinned by positive aggregate demand shocks generated either by transfers from abroad or by productivity growth in agriculture….

Because of low income elasticity of demand for agricultural products, outflows of labor from agriculture are an inevitable outcome during the process of development. The labor that is released must be absorbed in modern activities. And if productivity is not growing in these modern sectors, economy-wide growth ultimately will stall…. Continued convergence with rich-country income levels seems achievable. But the evidence suggests that the growth rates brought about recently by rapid structural change are exceptional and may not last.