IMF Survey : New Products, More Value Can Advance Economic Take-Off

IMF News, March 4, 2013

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Conference: “Diversification and Structural Transformation for Growth and Stability in Low-Income Countries,” jointly organized by the IMF and the UK’s Department for International Development, held on February 21.
Publication: IMF Survey by Nikola Spatafora, IMF Institute for Capacity Development, March 4, 2013.
Central message: To reach the next level of development, low-income countries should transform their economic structures by diversifying into new sectors and producing new, higher value-added products.

Sustainable development requires:
- Diversifying into new sectors.
- Upgrading the quality of existing products.
- Reallocating resources toward more productive firms.
Key questions raised:
- What are the obstacles to diversification and product quality improvement?
- Do low- and middle-income countries face different challenges?
- What new opportunities and risks does globalization present?
- What is the appropriate role for government policy?

Development and diversification viewed in terms of “capabilities” — the key inputs needed to produce goods (for instance, specific skills or public goods).
Advanced economies have more capabilities and can produce a wider range of more complex products.
Capabilities develop incrementally by moving into new products similar to the existing product base.
Radical capability changes require coordination of many economic actors and are likely to fail.
Indicators of both the range of existing capabilities and the ease of acquiring new ones are strong predictors of growth at the country level.
Institutions, human capital, and financial development matter because they facilitate accumulation of capabilities, not as substitutes for capabilities.

The implications for growth of producing any given good are hard to measure because of varied country experiences.
Natural resources have sometimes been associated with fast growth, and sometimes with stagnation.
A given product will be produced by a wide range of countries at different income levels and sell for a wide range of prices.
Policy implication: Focus on resolving market failures related to innovation, risk-taking, and other barriers to the emergence of new goods and improvement of existing ones.

New, extensive dataset confirms significant cross-country differences in product quality.
Overall, quality in sub-Saharan Africa and South Asia is lower, and has been growing more slowly, than in East Asia.
Scope for quality upgrading is greatest in manufactures, but is also present in agriculture.
Better institutions and greater skills help increase the pace of quality upgrading, leading to faster growth in GDP per capita.

Rising trade openness leads to a reallocation of labor by sector and speeds up structural change.
Debate: China’s emergence may complicate other economies’ attempts to expand manufacturing.
Pattern from new data on the European Union, the United States, China, and India:
- Early stages of development: countries diversify into an expanded range of activities; new sectors localize in specific geographic regions and regional production structures diverge.
- Later stages of development: countries tend to specialize in a few sectors; specialized activities are increasingly carried out in all regions, and different regions become increasingly similar.

The world’s poorest countries are particularly unproductive in agriculture, though agriculture employs most of their labor force.
Measurement adjustments (hours worked, human capital per worker, household income and expenditure surveys) reduce but do not eliminate low relative agricultural productivity.
Policy-induced distortions contribute to low agricultural productivity:
- Example: farms are on average 34 times smaller in poor countries.
- Causes cited include land reforms that impose a ceiling on farm size and progressive land taxes.
- Since labor productivity is much lower in small farms, these policies significantly impact agricultural and aggregate productivity.

Observed pattern: In many low-income countries—particularly in sub-Saharan Africa—growth over the past 15 years has been relatively rapid, but manufacturing has expanded slowly, agricultural productivity remains low, and service sectors are largely informal.
Consensus on policy approach:
- Sector-specific policies can deliver rapid growth for a period.
- Broader “horizontal” policies, cutting across sectors, are required to sustain growth over time.
Broad recommendations for low-income countries:
- Public inputs—including infrastructure—are critical, as is continuous consultation between governments and businesses.
- Healthy economies constantly reinvent themselves; policies should aim at increasing productivity more broadly rather than emphasizing any particular product.
- Create an environment where firms can improve their capabilities and technology; structural reforms and improvements in the business climate are crucial.

IMF Survey : New Products, More Value Can Advance Economic Take-Off — Nikola Spatafora, IMF Institute for Capacity Development, March 4, 2013.