Studies agree that productivity enhancing structural transformations, which shift labour and resources from agriculture to more productive economic activities, are necessary components for sustained economic growth. Yet structural change can also hinder productivity and growth in developing countries, particularly in the context of an increasingly globalised world economy.
For example, McMillan and Rodrik (2011) find that structural change in developing country economies that have focused on exporting natural resources often reduces labour productivity, and intensified import competition as a result of trade liberalisation can result in displacement of workers and reduced growth. There is some consensus that policies that enable developing countries to maintain competitive exchange rates and flexible labour markets are likely to lead to structural transformations that increase productivity (McMillan and Rodrik, 2011; Martins and Lucci, 2013). However, there is mixed evidence that the conventional route of trade openness and financial liberalisation leads to an economic transformation that benefits the poor (CAFOD, 2014).
The Growth Commission report (2008) highlights several factors that policymakers should take into account to ensure structural transformations lead to inclusive outcomes. Among these are the need for policy experimentation, a focus on outcomes that favour the poor, and the need for stability and smooth transitions when implementing policies for economic transformation.
The literature also emphasises that shifting household livelihoods from subsistence agriculture to individual wage and salary employment takes generations, and the role of the non-agricultural informal economy as an intermediate stage in the process of economic transformation should not be overlooked (Fox and Pimhidzai, 2011). Finally, national economic transformations may also require global coordination on macroeconomic and financial policies, as highlighted in the paper by Martins and Lucci below (2013).
McMillan, M. and Rodrik, D. (2011). Globalization, Structural Change, and Productivity Growth. Cambridge, Massachusetts: National Bureau of Economic Research.
Using sectoral and aggregate labour productivity statistics for 38 countries, the paper confirms that growth-enhancing structural change – the movement of labour and other resources from less productive to more productive activities – is a key driver of growth and development. However structural change in the context of intensified import competition caused by trade liberalisation can also cause displaced labour to move from high productivity to low productivity activities, as the least productive firms exit industries and others shed surplus workers. The authors find that differences in the pattern of structural change can explain the differences in economic performance between many Asian countries (where structural change has been increased productivity), and countries in Latin America and Africa (where structural change has led to decreased productivity). Countries that have maintained competitive exchange rates and flexible labour markets have been more likely to exhibit growth enhancing structural change. In contrast countries with a comparative advantage in natural resource exports tend to exhibit growth reducing structural change, as these industries do not generate much employment and cannot absorb the surplus labour from agriculture.
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Fox, L. and Pimhidzai, O. (2011). Is Informality Welfare-Enhancing Structural Transformation? Washington DC: World Bank.
Despite the strong growth performance and substantial reduction in poverty in sub-Saharan Africa (SSA) over the last decade, macro level studies (often using unsuitable traditional metrics and survey methods used in developed countries) have found little evidence of structural transformation in the region. Analysing Uganda as a case study, the authors use alternative benchmarks (focusing on household livelihoods rather than individual level employment) to argue that countries in SSA are undergoing structural transformations more suited to their initial conditions and often missed by macro indicators. This is demonstrated by the huge growth in informal firms outside the agricultural sector, which is viewed as an intermediate step on their transformation path rather than a symptom of a lack of transformation. This is because household level income gains fuelled by the productive informal sector will lead to productivity increases, savings and investment in human capital. The authors conclude that enabling households to diversify into the non-farm sector through productive informality will increase growth as well as allowing the majority of the population to take part in the growth process.
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Martins, P. and Lucci, P. (2013). Recasting MDG 8: Global Policies for Inclusive Growth. London: Overseas Development Institute.
This paper explores the global economic policies which, if implemented, could stimulate inclusive growth in developing countries. The authors highlight three key areas in which global policies, rules and institutions can support national development efforts for stimulating inclusive growth. Macroeconomic policy coordination in the form of synchronised countercyclical fiscal and monetary policies, a new global reserve system, and exchange rate coordination will be vital in rebalancing the global economic system and addressing systemic crises. Finance-related policy measures such as an international liquidity buffer, measures to tackle illicit capital flows, alternative sources of development finance (e.g. global taxes and Special Drawing Rights), and strengthening investment standards will be necessary in promoting greater financial stability and increasing the availability of development finance. Finally, simplifying rules of origin and technical standards, mitigating the impact of commodity shocks and enhancing food security, reforming intellectual property rights, and scaling up aid-for-trade will help developing countries further integrate into the global trading system.
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DCED. (2013, December 2013). Special Feature: Structural Transformation. Latest Research and Evidence on PSD. The Donor Committee for Enterprise Development.
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ACET. (2014). 2014 African Transformation Report: Growth with Depth. Accra: The African Centre for Economic Transformation
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- CAFOD. (2014). What is “inclusive growth”? London: CAFOD
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