IMF Survey : Economic Structural Change Vital to Successful Development

IMF News, June 28, 2013

Source details

Canonical URL: IMF Survey : Economic Structural Change Vital to Successful Development

Structural change: the shift from a largely agrarian economy to one based on services or industry.
Essential mechanism for long-term, sustained economic growth:
- Growth spurts from improved terms of trade or capital inflows tend to peter out unless there is emergence and expansion of new industries and movement of labor from traditional to modern industries.
- Without these elements, a country is unlikely to achieve long-term growth.

Historical examples: Japan (earliest non-western industrializer), South Korea, Taiwan, Southeast Asian countries from the 1960s through late 1970s, and China.
Key features of successful Asian strategies:
- Rapid industrialization through outward-oriented or export-oriented industrialization.
- Pragmatism and eclectic use of policy instruments.
- State capability and willingness of governments to enter collaborative arrangements with the private sector.
- Movement of surplus rural labor into urban manufacturing, raising incomes and enabling investments in human capital (education), which further increases productivity.

Policy and ideological impediments observed in less successful cases (some African and Latin American countries):
- Obsessive attachment to particular ideologies, e.g., extreme import substitution in the 1960s and 1970s.
- Adoption of a “Washington Consensus” orthodoxy in the 1990s that urged focus on fundamentals while expecting structural transformation to follow automatically—this did not work out.
Potential structural constraints to diagnose:
- Labor market imperfections that discourage growth of formal or existing enterprises.
- Credit constraints.
- Poor performance of financial markets.
- Extractive political institutions that deter investment in visible modern enterprises due to risk of expropriation.

Start with diagnostics to identify specific obstacles to structural change:
- Is growth held back by labor market frictions, credit constraints, financial sector weaknesses, or political/institutional barriers?
- Do the country’s institutions and policies discourage investment in modern enterprises?
Principle recommendation: do the homework—figure out the problems affecting structural transformation before prescribing solutions.

Natural resource wealth presents both advantages (short-term cushion) and disadvantages:
- Risk of “Dutch disease”: non-natural resource sectors become unprofitable, hindering competitiveness of modern manufacturing techniques.
- Resource-rich countries may have limited potential for manufacturing-led diversification compared to historically resource-poor Asian industrializers.
Medium- to long-term strategy for resource-rich countries seeking diversification:
- Develop fundamental capabilities and skills of human capital to improve productivity in service sectors rather than focusing solely on manufacturing.
- Accept that this is a longer process but is supported in the short term by natural resource wealth.

IMF Survey : Economic Structural Change Vital to Successful Development, June 28, 2013