Industrial game over: can low-income countries grow through services rather than industry?

alumniMarco Antonielli ’12 (International Trade, Finance, and Development) is a consultant with Nathan Associates in London. Prior to this he was a consultant at the OECD in Paris and a research assistant at the Bruegel think tank in Brussels. The following piece by Marco originally appeared on Nathan’s website. (All opinion and analysis are only those of the author.)

Follow Marco on Twitter @AntonielliM and read his blog.


In a global economy with fewer opportunities to industrialize, low-income countries will need to embed the service sector in their vision for inclusive growth.

Amid a gloomy global economic outlook and crashing commodity prices, low-income countries ended 2015 with the slowest growth since 2009, and remain in serious need of new sources of inclusive growth. One major challenge to achieving higher living standards stems from the vast income and productivity gaps within these countries and in relation to the rest of the world.

Large-scale industrialization has traditionally been viewed as the main solution for bridging these gaps, as well as a strategic objective to create jobs and support future growth. Yet latecomers to development may have embarked on a path on which manufacturing—arguably the most promising sector—is expanding slowly in absolute terms, and often shrinking in relation to GDP. The questions are then: why do low-income countries struggle to industrialize? And could alternative sectors such as services replace manufacturing as engines of inclusive growth?

Growing out of the Traditional Economy

Let’s take a step back. While all economies are characterized by varying degrees of productivity and dynamism among sectors and businesses, the low-income countries feature tremendous structural gaps within their economies. Most of the workforce is employed in informal and traditional agricultural businesses, while manufacturing is limited and not fully organized and the dynamic services are largely confined to the cities. Also the modern and formal agricultural businesses are not as widespread as they could be.

To escape poverty, millions of workers need to move from low-productivity sectors and businesses, mainly agriculture, to high-productivity ones, where they will find better and more secure jobs. The reallocation of resources to modern and dynamic sectors can generate positive transformation and help low-income countries achieve inclusive growth.

However, economic transformation can lead to labor and capital being reallocated to more inefficient activities. Recent studies have found that from a macroeconomic perspective, structural transformation (i.e., intersectoral movement of resources) can be a drag on growth for long periods of time, and this is part of the reason why the growth dynamics of low- and middle-income countries have been so diverse. Such a pattern is illustrated in figure 1. Observing the breakdown (“decomposition”) of aggregate productivity growth in the sum of sectoral components and a component accounting for cross-sectoral labor reallocation, it can be noted that between the 1990s and the 2010s Asian and Eastern European countries benefited from the structural transformation of their economies, while Latin American and Sub-Saharan African countries had the opposite experience. Developing countries are therefore not necessarily transforming well over their growth paths.

Figure 1—Decomposition of aggregate productivity growth, 1990–2008

Figure 1

Source: Dabla-Norris et al. (2014)

CESEE: Central, Eastern and Southeastern Europe; CIS: Commonwealth of Independent States; LAC: Latin America and the Caribbean; MENA: Middle East and North Africa; SSA: Sub-Saharan Africa

Organized and modern manufacturing is commonly understood as the business where workers in informal or more traditional forms of agriculture should be reemployed. This is because, while manufacturing is not necessarily the most efficient sector in the economy, it can be a growth accelerator and engine of inclusive growth for at least three reasons. First, manufacturers in emerging economies can benefit from manufacturing technologies developed in more advanced countries, and can achieve fast productivity growth. Second, manufacturing can absorb unskilled labor—thus providing improved employment opportunities for agricultural workers in low-income countries. Finally, manufacturers can export their products, so their growth will not be confined by limited domestic demand. Tradability is key, because high productivity growth can quickly lead producers to lower their prices and shed labor and capital if they cannot scale up their sales in bigger markets.

Is Industrialization a Broken Engine?

Virtually all successful emerging economies in the past 30 years have industrialized by leveraging this potential. Manufacturing offers opportunities to diversify away from agricultural and other traditional products, and helps the country pull itself out of poverty. But is this growth trajectory still feasible for today’s developing countries?

In most countries, the share of jobs and GDP arising from manufacturing expands in the early stages of development, then peaks and starts shrinking as relative prices decline and the economy matures. As Dani Rodrik and others have recently argued, latecomers to development in Africa and Latin America are hitting the peak earlier in the process, and are starting to deindustrialize when manufacturing has exploited only part of its potential. Ghani and O’Connell, for example, explore this inverted-U relationship between the level of economic development and the industry’s share of total employment, in a panel of 100 countries. They show how, in recent times, jobs in industry have grown more slowly and shrunk earlier in the development process (figure 2). The engine of industrialization seems to be running out of steam.

According to Rodrik, this manufacturing decline is mainly due to the adverse effects of trade and globalization on low- and middle-income countries in Africa and Latin America in two respects. First, these countries struggle in the international goods market because of a decline in the relative price of manufacturing in advanced economies, where technological progress has pushed up efficiency and reduced the need for expensive labor. Second, low transport costs and low trade barriers expose them to hyper-cheap production from East Asia, effectively reducing the scope for “import substitution” to expand the boost in manufacturing exports to the wider economy. This would suggest that today’s low-income countries will need to wait until East Asia becomes expensive before they industrialize.

A competing theory is that the low-income countries have subscribed to a trade system that is altogether unfavorable to them. On the one hand, to get access to international markets they are required to forgo protectionist policies that foster import substitution and screen nascent industries from foreign competition during their early development (see e.g., Ha-Joon Chang). On the other hand, trade barriers to advanced markets like the EU are set low for raw materials such as coffee beans and cocoa pods but high for the products obtained from processing of materials—in these examples, roasted coffee and chocolate. This means that the entry points to industrialization of commodity-dependent countries are essentially shut down.

Figure 2—Is Industrialization Running out of Steam?

Figure 2

Source: Ghani and O’Connell (2014) with World Bank data

Help Services

Both theories offer plausible explanations of why low-income countries struggle to industrialize. While more evidence on the causes of the problem is needed, it is increasingly clear that vast-scale industrialization has not featured in the development of most low-income countries. In contrast, the service sector has grown rapidly and absorbed lots of labor. Looking at Sub-Saharan Africa, for example, in the 15 years of this century . This pattern does not adequately represent how low-income countries grow and expand their productive capabilities, at least in that it does not capture the role of the variety and complexity of the products menu offered by these countries. Yet it can raise the question of how services can replace manufacturing as an engine of inclusive development. At least three routes can be identified.

First, there is a fringe of dynamic and tradable services that can boost the economy just as manufacturing does. Banking, customer services, and communications are examples of services which the ICT revolution has opened up to trade, and which can take low-income countries on a growth escalator, as the Indian boom has demonstrated. Crucially, investments in infrastructure, education, and human capital need to be made to facilitate development in these services. An alternative service attracting foreign demand with decent labor-absorption capacity is tourism.

Second, services are crucial inputs to manufacturing and there is evidence that their importance is growing. Hence cheap and efficient services such as transport and telecommunications can translate into stronger competitiveness of the tradable sector—both manufacturing and services.

Finally, the fact that manufacturing and services are becoming increasingly “blurred,” with services activities making up a higher share of manufacturing output, means that low-income countries could exploit a competitive edge on relevant service tasks. Moreover, these tasks can often be unbundled from merchandise production and traded along the global value chain. Logistics, marketing and post-sales services have been on the rise, not only in developed economies but also in developing ones. Furthermore, this trend could lead to a misinterpretation of statistics based on obsolete sector categories, effectively misleading our understanding of structural change.

In sum, the service sector offers new and interesting opportunities for growth, both through tradable services that plug directly into the global economy and through services that support competitiveness of manufacturing. In a global economy with fewer opportunities to industrialize, low-income countries will need to embed the service sector in their vision of inclusive growth and focus on the conditions that enable these opportunities.

Many thanks to my colleagues Joe Holden and Ignacio Fiestas for their helpful comments. This blog first appeared at: http://www.nathaninc.com/news/industrial-game-over-can-low-income-countries-grow-through-services-rather-industry 

Legislative Quota, Women Empowerment and Development: Evidence from Tanzania

Master project by Gregory Raiffa, Ericka Sánchez, Jan Stübner, Feodora Teti, and Andreas Wohlhüter. Barcelona GSE Master’s in International Trade, Finance, and Development

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.


Authors: 
Gregory Raiffa, Ericka Sánchez, Jan Stübner, Feodora Teti, and Andreas Wohlhüter

Master’s Program:
International Trade, Finance and Development

Paper Abstract:

This paper analyzes whether the legislative women’s quota implemented in Tanzania has helped to reduce the existing gender gap in that country. We focus on a set of development indicators indicated by the literature and an analysis of female political activity. We exploit the variation in the number of female representatives across the 131 districts of Tanzania, employing a Difference and Differences approach including fixed effects and controlling for a number of socioeconomic variables.

Our analysis indicates that the legislative women’s quota in Tanzania has led to significant reductions in the gender gap and improvements for women. The quota has effectively increased political participation in accordance with its goals, and the level of female representation continues to rise. We find evidence that the quota has reduced the gender gap in education for certain age groups, and we find indications of small improvements to female empowerment. In accordance with previous findings in other countries, we find that the increased female representation has led to substantial investments in water infrastructure that has greatly increased the number of people with access to clean water. While we do not find significant health impacts, this may be due to limitations in our dataset.

Read the paper or view presentation slides:

The next move(ment) in tackling International Trade, Finance & Development opportunities

nexus

Jana Bobosikova ’10 is a graduate of the Barcelona GSE master program in International Trade, Finance and Development.


I was sitting in the Conference Room 1 at the United Nations in New York in summer 2013 amidst the Nexus Global Youth Summit attendees, listening to the opening address from Roland Rich, Executive Head of the United Nations Democracy Fund. The message I was hearing was clear and bold: we are here to take action. Not “we” as in  policy makers and government funded multilateral agencies” but rather “we” as in Nexus, the global movement of Doers from the circles of the largest philanthropists, hardest working and most daring social entrepreneurs, investors, international advocates and NGOs.

Part of me was elated: so many influencers, all on the same page, with substantial financial and human commitment to contributing to making the world a better place!

Another part of me, the one I cultivated through the study of economic analysis at the ITFD program at Barcelona GSE, was a bit nervous about so much “good doing”.

I felt too aligned with the work of my former professor Xavier Sala-i-Martin and William Easterly that suggest that much of external help to date has had none or negative effect on socio-economic growth to simply embrace the possibility that Nexus Youth Summit was different and effective.

I sent a mental greeting to Prof. Antonio Ciccone and his often restated quest for the “one-handed economist” – creating one best solution with all relevant sets of variables – conclusions with no caveats “on the other hand.” Had I found them? What were the Nexus development solutions that gathered at the UN?

Let’s see:

  • We have been conditioned to include savings as a basic variable for economic growth models. At Nexus, Aron Ping D’Souza felt so compelled by the meeting of Sir Richard Cohen at an earlier Nexus Europe Youth Summit that he started an impact investing annulation fund, using the best practice from classic and impact investing to target over AUS$1.7 trillion pension funds to a creating a 2.0 return for the economy.
  • We learned about girls’ education challenges in developing countries. One of Nexus’ members, Nikki Agrawal, invested in researching and launching menstruation-absorbing underwear to address one of the most significant school attendance problems for girls.
  • We studied about how to create policies that incentivize investing into R&D for a healthier global population. At Nexus, it was a great honor to be joined by Jake Glaser, the son of Elizabeth Glaser who pioneered and prompted research and development in pediatric AIDs in early 1990s. It was the one case of AIDS transmission via blood transfusion during Elizabeth Glaser’s giving birth and her subsequent fight to save her children that has kickstarted the largest research and movement on eliminating pediatric AIDS – a vision that is now becoming a reality.

I could probably keep going and catalogue the amazing encounters and inspiring efforts of the hundreds (!) of international innovators, family offices that fund some of the largest projects as well as startup social entrepreneurs – that make up Nexus.

And maybe I should, so that the passion and commitment of the Nexus movement and the research and rigorous analysis from the realms of development economists could start catalyzing into aligned efforts to improve international trade, finance and socio-economic development.

To learn more about Nexus and its initiatives, visit the Nexus website.

To discuss further how your passion and work can materialize in an initiative, email Jana.

The Aftermath of the Latin American Boom?

Throughout this academic year, we have learned about European policy making, immigration issues in the United States, OECD´s effort to put up with the current crisis, Spain’s unemployment and labor market and why Northern countries engage in intra-industry trade. My contribution to this blog is oriented towards the Southern Cone of the globe, and is a personal assessment of some of the challenges that Latin America in particular, faces as a region today.

Cover for the book “Enough of Histories” of Andrés Oppenheimer by artist Alfredo Sabat (2010)

While many countries in the north confront one of the worst financial crisis in history, the ability that Latin American countries have had to adapt to the recent crisis has been remarkable. Nevertheless, what was first called as the Latin American boom now appears to be coming to an end.

Continue reading “The Aftermath of the Latin American Boom?”

A Quick Overview of Thailand

Image
Thai Hawker In Bangkok, Kelvin Ong 2012

Kelvin Ong

Written in Thailand 2011, adapted from devac.org

Thailand has a rich history spanning nearly 800 years now, and throughout this time, it has never been colonised by a Western nation, which is unique among Southeast Asian countries. Thailand has the second largest economy of Southeast Asia, after Indonesia, and it has historically enjoyedhigh rates of growth, at least before and after the currency crisis of 1997. Its industrial sectors contributes 43.9% of GDP, coming in second-most important after its services sector, which accounts for 44.7% of GDP.

The past decade has been full of challenges for Thailand. Continue reading “A Quick Overview of Thailand”