Industrial Structural Change, Growth Patterns and Industrial Policy

1. Industrial Structural Change, Growth Patterns and Industrial Policy Ludovico Alcorta Development Policy, Statistics and Research Branch United Nations Industrial Development Organization International Economic Association Pretoria, 3-4th July 2012

2. Outline • Research for Industrial Policy • Structural Change and Development • Industrial Structural Change Research at UNIDO • Results and Findings • Applications to Industrial Policy • Extensions

3. Research for Industrial Policy

4. Structural Change and Development • Definitions • Long-term change in the composition of an aggregate (Syrquin, 2007) • Ability of an economy to constantly generate new dynamic activities characterized by higher productivity and increasing returns to scale(Ocampo, 2005; UNDESA, 2006) • The importance of (industrial) structural change for economic growth • Sustained economic growth is associated with the speed and nature of structural change (McMillan and Rodrik, 2011; Ocampo and Vos, 2008; Taylor and Codrina, 2006) • Economic growth is associated with the size and growth of manufacturing industry (Prebisch, 1948; Kaldor, 1967; Rodrik, 2006) • Modern economic growth is a process of continuous technological innovation, industrial upgrading and technological diversification (Lin, 2012) • As countries get richer they diversify and produce a wider range of goods. Only at high level of incomes countries specialise (Imbs and Wacziarg, 2003) • Economic growth and industrial structural change are positively associated (UNDESA, 2006). • How does structural change impact the rate of growth? • Reallocation effects • Shifts in resource endowments • Technological change and technological capabilities • Learning by doing • Intra-national trade

5. Structural change and economic growth

6. Structural change and economic growth

7. Structural change and economic growth

8. Structural change and economic growth

9. Structural change and economic growth

10. Structural change and economic growth

11. Structural change and economic growth

12. Structural change and economic growth

13. Structural change and economic growth

14. Structural change and economic growth

15. Structural change and economic growth

16. Industrial Structural Change Research at UNIDO • Starting point • Chenery’s work (Cheneryand Watanabe 1958; Chenery 1960; Chenery and Taylor 1968, etc.) • UNIDO statistics • Departures • Data: • Value added in nominal and real terms • 18manufacturing industries • Stretching into 120 countries • Covers 45 years, 1963-2008 • Selection of appropriate estimation methodology: • Cubic form • Fixed effects estimation procedure to control for unobserved country conditions • Variables expressed in logarithmic terms to measure elasticity in each variable • Where X stands for dependent variables – value added share, value added per capita output, value added per worker (labor productivity) and employment share.

17. Results and findings 1. Country-size matters 2. Most manufacturing sectors in large countries peak in terms of value added share in total MVA – there is an inverted U-pattern. 3. Manufacturing sectors in large countries peak in stages at different income levels 4. In sectors that peak early valued added, employment and labour productivity growth slow down as income expand 5. In middle-peaking sectors value added and employment growth slows down but labour productivity growth holds steady as income expand 6. In late industries value added and productivity grow faster compensating for the slow down in employment

18. Results and Findings 1. Country-size matters : e.g. food and beverages

19. Results and Findings • 2.Most manufacturing sectors in large countries peak in terms of value added share in total MVA – there is an inverted U-pattern.

20. Results and Findings • 3.Manufacturing sectors in large countries peak at different income stages - early-peaking, middle-peaking and late-peaking sectors.

21. Results and Findings • 4. Early Industries: Slow down of value added, employment and productivity as incomes grow but……

22. Results and Findings • 5. Middle Industries: Slow down of value added and employment is kept in check by productivity growth except for…

23. Results and Findings • 6. Late industries: Value added and labor productivity grow much faster than GDP growth arresting the slow down in employment growth

24. Applications to Industrial Policy • Benchmarking • Any country at any level of income • Grouping of countries • Entry and exit points • At which level of income an industry becomes attractive according to its value added growth, labour productivity and employment potential • At which level of income the value added growth, labour productivity and employment potential may no longer be attractive

25. Application: Comparison Egypt, South Korea and Large Countries

26. Application: Comparison Egypt, South Korea and Large Countries

27. Application: Comparison Egypt, South Korea and Large Countries

28. Application: Comparison Egypt, South Korea and Large Countries

29. Application: Comparison Egypt, South Korea and Large Countries

30. Application: Comparison South Africa, South Korea and Large Countries

31. Application: Comparison South Africa, South Korea and Large Countries

32. Application: Comparison South Africa, South Korea and Large Countries

33. Application: Comparison South Africa, South Korea and Large Countries

34. Application: Comparison South Africa, South Korea and Large Countries

35. Application: entry and exit points • Growth charts: fastest and slowest growing – early, middle and late sectors Real GDP per capita (PPP adjusted) in Korea in 2007: 23,900 US$ Real GDP per capita (PPP adjusted) in South Africa in 2007: 10,400 US$ Real GDP per capita (PPP adjusted) in Egypt in 2007: 5,700 US$

36. Application: entry and exit points • Growth charts: fastest and slowest growing – early, middle and late sectors Real GDP per capita (PPP adjusted) in Korea in 2007: 23,900 US$ Real GDP per capita (PPP adjusted) in Egypt in 2007: 5,700 US$ Real GDP per capita (PPP adjusted) in South Africa in 2007: 10,400 US$

37. Application: entry and exit points • Growth charts: fastest and slowest growing – early, middle and late sectors Real GDP per capita (PPP adjusted) in Korea in 2007: 23,900 US$ Real GDP per capita (PPP adjusted) in Egypt in 2007: 5,700 US$ Real GDP per capita (PPP adjusted) in South Africa in 2007: 10,400 US$

38. Extensions • New variables: capital-labor ratio, wages, firm size, total factor productivity, resource intensity (energy, water) • Extension of the country classification: population density, natural resource endowments, landlocked • More detailed manufacturing classification – 4 digit ISIC • Expansion to international trade data • Exploration of linkages through input-output relations

39. Thank you!