Virtual Institute Teaching Material on
Structural Transformation and Industrial Policy
New York and Geneva, 2016
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Acknowledgements
The teaching material on structural transformation and industrial policy was developed by the UNCTAD Virtual Institute, under the overall guidance of Vlasta Macku. The text was researched and written by Francesca Guadagno from the Virtual Institute, with supervision by Piergiuseppe Fortunato of UNCTAD’s Division on Globalization and Development Strategies. Contributions were also provided by Milford Bateman of Saint Mary’s University (Canada), Codrina Rada of the University of Utah (United States) and Kasper Vrolijk of the School of Oriental and African Studies, University of London (United Kingdom). The material benefitted from comments by Richard Kozul-Wright, Director of UNCTAD’s Division on Globalization and Development Strategies. The text was English-edited by David Einhorn, and the design and layout were created by Hadrien Gliozzo.
The financial contribution of the Government of Finland is gratefully acknowledged.
Table of contents
Note ii
Acknowledgements iii
Table of contents iv
List of figures vi
List of tables vii
List of boxes vii
List of abbreviations ix
Introduction 1
Module 1: The structural transformation process: trends, theory, and empirical findings 2
1 Introduction 2
2 Conceptual framework and trends of structural transformation 3
2.1 Definitions and key concepts 4
2.2 Measures of structural transformation 12
2.3 Global trends in structural transformation 14
2.4 Structural transformation and economic growth 22
3 Review of the literature 26
3.1 Structural transformation in development theories 26
3.2 Empirical literature on structural transformation 39
3.3 Premature deindustrialization and the (possible) role of services as the new engine of economic growth 52
4 Structural transformation and development 57
4.1 Structural transformation, employment and poverty 58
4.2 Structural transformation and human development 61
5 Conclusions 68
6 Exercises and questions for discussion 70
Annex: An illustration of how to decompose labour productivity growth and discuss empirical results 73
References 82
Module 2: Industrial policy: a theoretical and practical framework to analyse and apply industrial policy 98
1 Introduction 98
2 What is industrial policy? 99
2.1 Defining industrial policy 99
2.2 Industrial policy instruments 102
2.3 Implementing industrial policy 105
3 Why adopt an industrial policy? 110
3.1 A historical perspective 110
3.2 Arguments in favour of industrial policy 120
3.3 Arguments against industrial policy 126
4 Some cases of industrial policies 129
4.1 The state as regulator and enabler 129
4.2 The state as financier 130
4.3 The state as producer and consumer 139
4.4 The state as innovator 143
5 Current challenges to industrialization and industrial policy in developing countries 152
5.1 Challenges from internal conditions 152
5.2 Challenges from external conditions 157
6 Conclusions 165
Exercises and questions for discussion 166
Annex: Industrial policy at the local level 169
References 174
List of figures
Figure 1: Relative labour productivity by sector, 1991–2010 5
Figure 2: Relationship between inter-sectoral productivity gaps and average labour productivity, 2005 6
Figure 3: Share of employment and labour productivity by industry, 14 emerging economies, 2005 8
Figure 4: Industrial concentration and income per capita 10
Figure 5: Sectoral shares of employment and value added – selected developed countries, 1800–2000 15
Figure 6: Sectoral shares of employment – selected developed and developing countries, 1980–2000 17
Figure 7: Sectoral shares of nominal value added – selected developed and developing countries, 1980–2000 19
Figure 8: Manufacturing shares of value added in GDP, 1962–2012 (per cent) 20
Figure 9: Structural changes in the composition of employment in agriculture and annual growth rates of GDP per capita, 1991–2012 (per cent and percentage points) 23
Figure 10: Structural changes in the composition of employment in industry and annual growth rates of GDP per capita, 1991–2012 (per cent and percentage points) 24
Figure 11: Structural changes in the composition of employment in services and annual growth rates of GDP per capita, 1991–2012 (per cent and percentage points) 25
Figure 12: Economic growth and changes in the share of manufacturing value added in GDP, 1991–2012 (per cent and percentage points) 26
Figure 13: Convergence in manufacturing labour productivity, sub-Saharan Africa 42
Figure 14: Decomposition of labour productivity growth by country group, 1990–2005 (percentage points) 44
Figure 15: Relationship between EXPY and per capita incomes in 1992 48
Figure 16: The changing relationship between manufacturing employment and income 53
Figure 17: The relationship between the peak of the manufacturing employment share in the past and GDP per capita in 2005-2010 55
Figure 18: Relationship between manufacturing employment and poverty 61
Figure 19: Decomposition of aggregate labour productivity growth by country groups (percentage points) 63
Figure 20: Structural transformation and progress in poverty reduction, 1991–2012 64
Figure 21: Structural transformation and progress in primary education enrolment, 1991–2012 65
Figure 22: Structural transformation and achievement of Millennium Development Goal targets, 1991–2012 66
Figure 23: Poverty and growth nexus, dynamic and lagging economies, 1991–2012 67
Figure 24: Education and growth nexus, dynamic and lagging economies, 1991–2012 68
Figure A1: Average annual growth rates of real value added per capita, 1991–2012 (per cent) 74
Figure A2: Decomposition of aggregate labour productivity growth by country groups, 1991–2012 (percentage points and per cent) 77
Figure A3: Decomposition of aggregate labour productivity growth in least developed countries, 1991–2012 (percentage points and per cent) 77
Figure 25: A visual representation of industrial policy categories 102
Figure 26: Development bank lending as a share of GDP, 1960–1990 (per cent) 134
Figure 27: Development bank lending as a share of GDP, 2012 (per cent) 136
Figure 28: Average maturities of BNDES loans compared to maturities of major banks in Brazil, 2012 (per cent) 137
List of tables
Table 1: Value-added shares of agriculture, industry, manufacturing, and services, 1950–2005 (per cent) 21
Table 2: Impact of global value chains on structural transformation in developing economies 35
Table 3: Decomposing value in global value chains: the case of German cars, 1995 and 2008 (per cent) 50
Table 4: Profit margins of main firms contributing to the production of an Ipod, 2005 (per cent) 51
Table A1: Sectoral composition of employment, 1991–2012 (per cent and percentage points) 75
Table A2: Sectoral composition of output, 1991–2012 (per cent and percentage points) 76
Table A3: Sectoral contributions to aggregate labour productivity growth, 1991–2011 (percentage points and per cent) 81
Table A4: Correlation analysis of aggregate labour productivity growth and its components 81
Table 5: Industrial policies in low-income economies 104
Table 6: Industrial policies in middle-income economies 105
Table 7: Key operational principles of industrial policy 107
Table 8: A summary of the historical debate on industrial policy 120
Table 16.1: Differences between STI policies 144
Table 9: Implications of global value chains for industrial policies 159
List of boxes
Box 1: Measures of productivity and the meaning of productivity in the services sector 8
Box 2: The concept of comparative advantage 11
Box 3: Sectoral composition of employment and output 13
Box 4: Types and examples of production linkages 38
Box 5: Shift-share decomposition method 45
Box 6: Structural transformation and demographic and labour market changes 57
Box A1: The Divisia index decomposition of labour productivity and employment growth 78
Box 7: The World Bank report on East Asian economic growth and public policies 113
Box 8: The role of Japan’s Ministry of International Trade and Industry 115
Box 9: Measures of state capacity 128
Box 10: The key role of BNDES in realizing Brazil’s industrial policy objectives 132
Box 11: The role of the China Development Bank in China’s “going out” strategy 135
Box 12: The “missing middle” phenomenon 138
Box 13: Airbus as an example of the positive role of state-owned enterprises in industrial policy 141
Box 14: The role of state-owned enterprises in local development: The case of Medellin 142
Box 15: The use of offset clauses in defence public procurement: The case of India 143
Box 16: Defining science, technology, and innovation policy 144
Box 17: Government-supported research institutes: The experience of the Industrial Technology Research Institute in Taiwan Province of China 146
Box 18: Types of foreign direct investment 147
Box 19: Transnational-corporation-dependent industrialization strategies: The cases of the Philippines, Indonesia, and Costa Rica 150
Box 20: Examples of science, technology, and innovation policies in low-income economies 151
Box 21: Trade and investment agreements: Definitions of terms 163
List of abbreviations
ADB Asian Development Bank
ADV Advanced economies
AfDB African Development Bank
ASCM Agreement on Subsidies and Countervailing Measures
BNDES Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economic and Social Development, Brazil)
BRICS Brazil, the Russian Federation, India, the People's Republic of China, and South Africa
BTI Bertelsmann Transformation Index
CADF China-Africa Development Fund
CDB China Development Bank
CEA Central and Southeastern Europe (non-EU and Commonwealth of Independent States)
CODELCO Corporación Nacional del Cobre (National Copper Corporation of Chile, Chile)
CORFO Corporación de Fomento de la Producción de Chile (Chilean Economic Development Agency)
DBE Development Bank of Ethiopia
EA East Asia
ECLAC Economic Commission for Latin America and the Caribbean
EOI Export-oriented industrialization
EPM Empresas Publicas de Medellín (State-owned Enterprises of Medellin, Colombia)
EPZ Export processing zone
ERVET Emilia-Romagna Valorizzazione Economica Territorio (Emilia-Romagna Regional Development Agency, Italy)
FDI Foreign direct investment
FINAME Financiamento de máquinas e equipamentos (Machinery and Equipment Financing Programme, Brazil)
GATS General Agreement on Trade in Services
GDP Gross domestic product
GNP Gross national product
GRI Government-supported research institute
GVC Global value chain
HS Harmonized Commodity Description and Coding System
ICRG International Country Risk Guide
ICT Information and communications technology
IDC South African Industrial Development Corporation
ILO International Labour Organization
ISI Import-substitution industrialization
ISIC International Standard Industrial Classification
ITRI Industrial Technology Research Institute (Taiwan Province of China)
KDB Korea Development Bank
KfW Kreditanstalt für Wiederaufbau (Reconstruction Loan Corporation, Germany)
LAC Latin America and the Caribbean
LDCs Least developed countries
MDGs Millennium Development Goals
ME Middle East
MENA Middle East and North Africa
MFB Hungarian Development Bank
MITI Japanese Ministry of International Trade and Industry
NA North Africa
NIEs Newly industrialized economies
ODCs Other developing countries
OECD Organisation for Economic Co-operation and Development
PPP Purchasing power parity
R&D Research and development
SA South Asia
SEA Southeast Asia and the Pacific
SEZ Special economic zone
SIDBI Small Industries Development Bank of India
SITRA Finnish National Fund for Research and Development
SME Small and medium-sized enterprise
SOE State-owned enterprise
SSA Sub-Saharan Africa
STI Science, technology and innovation
TEKES Finnish Funding Agency for Technology and Innovation
TFP Total factor productivity
TiVA Trade in Value Added Database
TNC Transnational corporation
TRIMS Agreement on Trade-related Investment Measures
TRIPS Agreement on Trade-related Aspects of Intellectual Property Rights
TSKB Industrial Development Bank of Turkey
TVEs Township and village enterprises (People’s Republic of China)
UNCTAD United Nations Conference on Trade and Development
UNECA United Nations Economic Commission for Africa
UNIDO United Nations Industrial Development Organization
UNRISD United Nations Research Institute for Social Development
VDB Viet Nam Development Bank
WDI World Development Indicators (World Bank)
WIOD World Input Output Database
WIPO World Intellectual Property Organization
WTO World Trade Organization
69
Introduction
“[I]t is impossible to attain high rates of growth of per capita or per worker product without commensurate substantial shifts in the shares of various sectors” – Kutznets (1979: 130).
The shift in the share of output of various sectors, which according to Simon Kutznets lies behind economic growth, is what is known as structural transformation. Productivity enhancements in agriculture allow for the progressive release of labour and capital towards more productive industries such as manufacturing and modern services. This in turn spurs productivity and income growth. The shift of factors of production from low- to high-productivity industries is particularly beneficial for developing countries, where productivity differentials across industries run deeper.
Throughout the history of economic thought, structural transformation, especially towards manufacturing, has been regarded as the main engine of economic growth and development. This view is substantiated by massive empirical evidence. Ever since the Industrial Revolution, rapid economic growth has been associated with manufacturing growth. The industrialization of the European countries, the United States and Japan was followed by two waves of catch-up, both based on manufacturing growth: the first benefited the peripheral European economies, and the second the East Asian economies. In all these economies, the process of structural transformation has been accompanied by considerable advancements in social and human development, with decreasing fertility rates, increasing life expectancy, and reductions in poverty and inequality. Today, the People's Republic of China, Malaysia, Thailand, and Viet Nam seem to be located at different points along a similar path.