Growth-reducing structural change

Dani Rodrik interviewed by Viv Davies, 18 March 2011

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<p><em>Viv Davies interviews Dani Rodrik for Vox</em></p>
<p><em>March 2011</em></p>
<p><em>Transcription of a VoxEU audio interview []</em></p>
<p><b>Viv Davies</b>: &nbsp;Hello, and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I'm Viv Davies from the Centre for Economic Policy Research. It's the 8th of March, 2011, and I'm in Washington, DC, attending a conference hosted by the IMF on macro and growth policies in the wake of the crisis. I'm talking to Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government. Professor Rodrik discusses his recent work on growth‑reducing structural change. He also talks about the role of industrial policy in growth strategies, global imbalances, and the importance of education and migration to growth.</p>
<p>I began the interview by asking Professor Rodrik whether or not, in his view, our understanding of growth had changed in light of the global financial crisis.</p>
<p><b>Professor Dani Rodrik</b>: &nbsp;With respect to the advanced countries, I think there are lots of potentially new and interesting things. I'm not sure that, with respect to developing countries, we've learned a whole lot of new things, since the crisis was primarily something that came from the advanced countries and their financial markets in the US and elsewhere. So, in terms of our basic views on growth strategies and growth policies for the developing world, I don't think there are major lessons.</p>
<p><b>Viv</b>: &nbsp;In your presentation this morning, you spoke about the issue of growth‑enhancing structural change. But, you also spoke about growth‑reducing structural change. Could you explain a little more about what you mean by that?</p>
<p><b>Professor Rodrik</b>: &nbsp;Yes. This is a very fascinating phenomenon. The work that I and my colleague, Maggie McMillan, have been doing on this was really inspired by something that I saw in a study by the Inter‑American Development Bank, work led by Carmen Pag&eacute;s. What they found in Latin America was that there was a very different pattern of growth after 1990 in Latin America compared to the period between 1950 and 1975. In that earlier period, there was very beneficial structural change, with workers essentially moving from low‑productivity parts of the economy to high‑productivity parts. If you will, think about the movement from agriculture to industry, which is the traditional kind of structural change you expect to see in a dual economy, and all developing countries are dual economies. When they turned to the 1990s, they found that not only had this process stopped in Latin America, but it looked like, actually, that there was now a structural change in reverse, which is that, on average, the trend was for workers to move from higher‑productivity activities to lower‑productivity activities.</p>
<p>And I was very intrigued by this, and so we put together a larger data set and also looked across the world. And what we found is that the Latin‑American pattern of growth‑reducing structural change is also one that holds very strongly for Sub‑Saharan Africa as well, but not, interestingly, for Asia. In fact, the bulk of the difference in the growth performance of Asia on the one hand, and Latin America and Africa on the other, since 1990, is accounted for by this difference in the patterns of structural change, that in the successful Asian case it moves in the right direction, and in the other cases it moves in the wrong direction.</p>
<p><b>Viv</b>: &nbsp;So, is this idea something that's reflected, or is it something that's happened previously in the growth patterns of the advanced economies?</p>
<p><b>Professor Rodrik</b>: &nbsp;I don't think so. I think this is, historically, quite an unprecedented development. The whole view of how development proceeds is one where people are moving from the traditional to the modern parts of the economy. And I think the reason that we have missed this, even though it's been happening in front of our eyes, is that we have focused on the success of a relatively few export‑oriented, modern sectors in Latin America, say, that are very well‑integrated in world markets, where technological progress has been very rapid. And that could be non‑traditional agricultural products, or it could be industrial activities. And when you look at those parts of those economies, indeed, they have done very, very well. And we've said that this global integration has been a huge success. What we haven't noticed is that these sectors that have been very successful haven't generated a lot of employment. They haven't generated jobs. And therefore, at the margin, workers have been moving not into these high‑productivity activities but, in fact, industries like informality or petty services and traditional services, non‑tradables, where their productivity is actually even lower than what it used to be in the old regime of highly protected economies and import substitution.</p>
<p><b>Viv</b>: &nbsp;So, it has negative impact on economic growth.</p>
<p><b>Professor Rodrik</b>: &nbsp;It definitely has a negative effect on economic growth. If Latin America had not experienced this kind of growth‑reducing structural change, its growth rate after 1990 would have pretty much matched the growth rate of Asian countries.</p>
<p><b>Viv</b>: &nbsp;Before the crisis, growth rates were much higher in emerging‑market countries than they were in advanced economies. Part of the reason for that was, as you mentioned, many emerging economies followed an export‑led growth strategy. But now, given that world demand has changed, and advanced countries are experiencing sluggish growth at best, what do you think are the implications for the growth model of these emerging economies?</p>
<p><b>Professor Rodrik</b>: &nbsp;I think the underlying growth potential of the developing countries and emerging markets depends not on how rapidly the rich countries are growing but depends on the gap between the poor countries' income level and the rich countries' income level.</p>
<p><b>Viv</b>: &nbsp;This is the convergence gap.</p>
<p><b>Professor Rodrik</b>: &nbsp;This is the convergence gap, exactly. So, whether the rich countries are growing rapidly or not affects whether, at the margin, the convergence gap is increasing or not, or how rapidly the frontier is moving. But, given that large gap that already exists, there's a huge potential for developing countries to catch up, which means to experience rapid growth, regardless of economic performance in the advanced countries. After all, what poor countries need to do is to be able to absorb the technologies that already exist. If rich countries grow less rapidly, that technology doesn't disappear; it's still there for poor countries to absorb. So, the critical thing is going to be whether those countries do the right things to close that convergence gap, and not on what's happening in the advanced countries.</p>
<p><b>Viv</b>: &nbsp;One of the lessons from the crisis has been that unfettered markets don't always work best. In many countries, there is increasing talk of the importance of industrial policy. Should we be revising our views about the pros and cons of industrial policy, and about the role of government more broadly?</p>
<p><b>Professor Rodrik</b>: &nbsp;I think yes, but we shouldn't go overboard. I think we had gone overboard in our earlier conception of growth strategies, which essentially had no room for industrial policy, or what one might call structural‑transformation policy, on the assumption that if you got markets to work well, if you got the state to restrain itself, that structural transformation was an automatic process, that you could just leave it to yourself and markets were self‑regulating, self‑growth‑generating, and so forth. And we've learned that that is not so. I've always been an advocate of the view that this wasn't the right way to look at things. So, definitely, we need a reorientation away from that view. Obviously, we shouldn't overdo it. Hopefully, the pendulums will stop somewhere in a reasonable middle this time around, where we understand that growth does require an active state that takes an active interest in shaping economic transformation. On the other hand, it is the private sector and private investors and private entrepreneurs who drive the process, and you need to make sure that the right incentives for them to do that are in place.</p>
<p><b>Viv</b>: &nbsp;I'd quite like to get your view on the issue of global imbalances, currency manipulation, and whether you think targets for current accounts surpluses and deficits are a good thing, and how you would envisage encourage countries not to run large surpluses.</p>
<p><b>Professor Rodrik</b>: &nbsp;I think macro imbalances are an important issue. They are probably, in the short run, the most serious issue threatening the global economy at this point. So, I do think that something needs to be done about it, and I think certain kinds of targets, with respect to the acceptable level of external imbalances, are the least bad among many other options that we could go to. So, I tend to favor that. On the other hand, I think that we need to understand the reason why a country like China is hooked on external imbalances, because it is fundamentally tied in with its growth strategy, so that if we are going to try to tie China's hands with respect to its external surplus, we need to ensure that China has room with respect to the pursuit of alternative policies that can also deliver high growth. What I have in mind is that part of the reason that China has moved towards currency policy in order to promote its industrialization and growth has been that it has less ability to use trade and industrial policies directly, because the WTO rules actually bind there. So, there are disciplines with respect to trade and industrial policies, but no disciplines, at the present, with respect to currency policy.</p>
<p><b>Viv</b>: &nbsp;And you think there should be.</p>
<p><b>Professor Rodrik</b>: &nbsp;And I think currency policies are much more harmful to trade partners, because they cause aggregate macroeconomic imbalances and, therefore, we should have disciplines there, where they really cause huge spillovers for the world economy, and have fewer disciplines in areas of trade and industrial policy, where the effects are much, much less significant.</p>
<p><b>Viv</b>: &nbsp;What sort of international coordination would you envisage that involving?</p>
<p><b>Professor Rodrik</b>: &nbsp;We do need some kind of a bargain where, I think, I don't see how we can do it, short of either a revision of some of the existing codes in the WTO, such as the agreement on subsidies. Or what may be easier to do is just an agreement to suspend the application of the agreement on subsidies, under certain conditions, to actually provide room for China to be able to, when needed, subsidize certain industries, but do so in a context where those subsidies don't spill over into producing large surpluses.</p>
<p><b>Viv</b>: &nbsp;A couple of the issues that came up in the discussion this morning, and their importance and relevance to growth in developing countries, were education and migration. I wonder if you could speak briefly about those two issues.</p>
<p><b>Professor Rodrik</b>: &nbsp;There was a question raised as to how important education is, really, to growth, because the question hadn't risen in our panel discussion. And I made the point that education is very important for a lot of different things, but the evidence that lack of education had been a significant constraint to growth, that was very, very thin, that most countries, the problem is not that enough people aren't being put through school but that there aren't enough high‑paying jobs for the people who are going to school. In many countries in Africa, there has been huge increases in educational attainment levels, without a corresponding increase in economic growth. On migration issues, I think the key point that I tried to make is that there's a huge, unexploited opportunity in the world economy in terms of increasing the size of the global economic pie, which is that even a marginal relaxation of restrictions on the use of unskilled workers from developing countries in the labor markets of developed countries would produce not only huge gains to the workers themselves but would also, actually, increase significantly the size of the global economic pie. The gains on this front, on something like a temporary work‑visa scheme for workers from developing countries, are many, many times larger than anything that we are likely to get under a Doha round in the World Trade Organization, for example. So, this is really an unexplored frontier for us.</p>
<p><b>Viv</b>: &nbsp;An important issue in relation to growth in developing countries, which has, to an extent, perhaps, received less attention than it should have in the last year or so, is that of climate‑change mitigation, and how to cut carbon emissions whilst also accommodating the growth of developing countries. What are your current views on this issue?</p>
<p><b>Professor Rodrik</b>: &nbsp;This is number one in terms of where we need much greater global cooperation and coordination. There's a huge difference between global‑climate‑change issues and most issues with respect to global trade and finance, which is that, in global trade and finance, if you leave countries to do what's good for them, and assuming most countries do what's good for them, then the world economy works out pretty well. You don't need a huge amount of global coordination over trade and financial policies. But, in climate change, you leave countries, &quot;Just do what's good for you,&quot; then, of course, the world goes to hell, essentially, because what's good for every country on climate change, given that we share just one climate, is to free‑ride on other countries' carbon taxes and climate‑control policies. So, this is an area where we cannot do without some kind of global agreement. But, of course, that has to be very sensitive to the needs of developing countries, that they are caught in this at a level in their development which is much, much earlier than where the advanced countries are. So, we need to be clear that we work out the transfer mechanisms, the income‑transfer mechanisms, the technological‑transfer possibilities, that will make it worthwhile for developing countries to actually want to do this.</p>
<p><b>Viv</b>: &nbsp;And finally, what can the advanced countries best do to assist the least‑developed countries, the LDCs of the world, to grow and develop their economies? Aid helps, but it's not a solution. Can we do anything for the LDCs?</p>
<p><b>Professor Rodrik</b>: &nbsp;Unfortunately, there is actually very little that developed countries can actually do for least‑developed countries, except for in a certain number of areas where the syndrome of underdevelopment is due to particular policies of the rich countries. So, arms sales. If arms sales are financing an ongoing civil war and the underlying fragility of the state, this is clearly an area where the rich countries can make a huge amount of difference by disciplining themselves. But, for the most part, I tend to believe that developing countries have the power within themselves to make a difference. And often, it is either the unwillingness or the inability of governments to do the right things that prevents development from taking place.</p>
<p>I think the best thing, really, for the rich countries is to make a better distinction between countries that look like they're really trying to help themselves and countries that are simply interested in aid, and focus on the first group of countries, not tie their hands too much in terms of policy conditionality, on the assumption that when you are facing government that are really trying to develop their countries, that those governments will be a better judge of how to use their resources than an external agent is.</p>
<p>So, I say, focus on fewer cases, rather than spreading all your resources thinly, and focus on the cases where governments seem to be doing things. And then don't make the process of aid so fraught with bureaucracy and paperwork and conditionality, and just give those countries a bit freer rein.</p>
<p><b>Viv</b>: &nbsp;So, you're optimistic about global economic recovery, and growth more generally?</p>
<p><b>Professor Rodrik</b>: &nbsp;I am. I mean, I think it's impossible not to be optimistic in light of what has happened in the last 30 years, which has been the huge miracle of 500 million people having been lifted out of extreme deprivation. Of course, all of that is in China, but I think China has shown us that this can be done. So, I think I remain optimistic.</p>
<p><b>Viv</b>: &nbsp;Dani Rodrik, thanks very much for taking the time to talk to us today.</p>
<p><b>Professor Rodrik</b>: &nbsp;Thank you. My pleasure.</p>

Topics:  Labour markets Macroeconomic policy

Tags:  growth, industrial policy

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Ford Foundation Professor of International Political Economy, Harvard University, and CEPR Research Fellow.


CEPR Policy Research