Must-Read: Dani Rodrik: Innovation Is Not Enough

Must-Read: Dani Rodrik: Innovation Is Not Enough: “Who can seriously doubt that innovation is progressing rapidly?…

…Technological diffusion can be constrained on both the demand and supply sides of the economy…. In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing, and retail goods [where] technological innovation has had comparatively little impact to date…. The two sectors in the United States that have experienced the most rapid productivity growth since 2005 are the ICT… and media… with a combined GDP share of less than 10%…. Techno-optimists… look at such numbers as an opportunity: There remain vast productivity gains to be had from the adoption of new technologies in the lagging sectors. The pessimists, on the other hand, think that such gaps may be a structural, lasting feature of today’s economies…. On the supply side… when the technology requires high skills… its adoption and diffusion will tend to widen the gap between the earnings of low- and high-skill workers. Economic growth will be accompanied by rising inequality, as it was in the 1990s.

The supply-side problem faced by developing countries is more debilitating. The labor force is predominantly low-skilled. Historically, this has not been a handicap for late industrializers, so long as manufacturing consisted of labor-intensive assembly operations such as garments and automobiles. Peasants could be transformed into factory workers virtually overnight, implying significant productivity gains for the economy. Manufacturing was traditionally a rapid escalator to higher income levels. But once manufacturing operations become robotized and require high skills, the supply-side constraints begin to bite. Effectively, developing countries lose their comparative advantage vis-à-vis the rich countries. We see the consequences in the ‘premature deindustrialization’ of the developing world today. In a world of premature deindustrialization, achieving economy-wide productivity growth becomes that much harder for low-income countries. It is not clear whether there are effective substitutes for industrialization…