1 / 11

Industrialization and the role of policy

Learn about the economic structural transformation process, advantages of industrialization, determinants, positive externalities, export-oriented policies, competitive exchange rates, and the role of industrial policy in African economic development. Gain insights on policies affecting industrial sectors, challenges, and the importance of alignment with national interests.

nievesmiller
Download Presentation

Industrialization and the role of policy

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Industrialization and the role of policy African Economic Development Renata Serra – Feb 19th 2007

  2. Structural transformation • How would you define an economic structural transformation? • The dual-sector economic model (Lewis, Todaro etc.): • The starting point is labor surplus in agriculture … • But it could also be productivity and investment increase in the agricultural/traditional sector • … and investment in the industrial/modern sector • Labor moves from the agricultural/traditional to the industrial/modern sector • Capital accumulation continues to require more labor • Economic growth is a function of the investment rate

  3. The imperative of economic diversification • Economic diversification is essential for low-income countries • The relationship between income levels and specialization is negative first and then positive • The fastest growing economies have always a large and increasing share of manufacturing in GDP • Manufacturing shares in SSA, South Asia, MENA and LA&C are now around 15% on average • The major goal is to learn how to do new things and do them well!

  4. Advantages from industrialization • Increasing returns • Positive spillovers from technology transfers • Learning-by-doing • Greater chance of further diversification • Jumping into other, high-quality products is more likely • Increase in the share of tradable goods • Better producing tradable than non-tradable goods • In the modernization version, industrial development comes along with urbanization, socio-economic modernization, emergence of a female labor force, decreases in fertility rates…

  5. Determinants of industrialization • Geography • Factor endowments • Quality of factors (land and soil; human capital) • Distance to markets • Other geographical characteristics (mountainous country) • History – path dependence • Inherited comparative advantages: static concept • Policies • Comparative advantages can be transformed: dynamic concept

  6. Determinants (cont’d) • Other factors are also important, and are determined by policies: • Political security • Macro-economic stability • Institutional and market efficiency • Infrastructures • Savings (domestic or foreign) and investment • Human capital

  7. Positive externalities • What are examples of spillovers and externalities from industrial activity? • Ex. of industrial districts: • A firm’s cost function is a decreasing function of the district’s total level of production (or of the number of firms producing the same goods) • Why may individual entrepreneurs invest sub-optimally in these activities? • If externalities, then state policy is necessary. • But which type of policy? • Read Rodrik (2006)

  8. Import liberalization • Import liberalization (IL) is intended to stimulate export production • Lerner symmetry theory • But IL may squeeze import-competing sector without stimulating non-traditional exports, if: • The traditional exportable sector exhibits high supply elasticity: X increases, but GDP may decline (remember what is the source of growth!) • There is an increase in the trade deficit • This is Rodrik’s interpretation why IL failed to spur economic growth in Latin American countries

  9. Export oriented policies • The non-traditional tradable sector must be nurtured so that it is not penalized by liberalization • Access to cheap inputs, export subsidies, export processing zones • IL follows only in a second phase • Subsidies to the non-traditional tradable sector possibly squeezes the traditional tradable sector, without affecting the import-competing sector • Hence economic growth accelerates • This explains the success of East Asian countries in the past as now (China)

  10. Competitive exchange rates • Large budget deficits will discourage non-traditional exports • Because of higher prices, wages, and overvalued exchange rates; and also due to the volatility in exchange rates associated with capital inflows • Governments can try to keep a ‘competitive’ (undervalued) exchange rate through: • Encouragement of capital outflows, restrictions on capital inflows, tighter fiscal policies, nominal devaluations • This is more beneficial to economic growth than inflation targeting, which leads to volatile exchange rates

  11. The role of industrial policy • Set of policies conducive to expansion in non-traditional sectors (rather than selection of particular sectors and goods to favor) • Challenges for African governments: • Go beyond IS and support exporting sectors • Align industrial policies with the interests of the economy as a whole (while they mostly failed to promote national interests) • Capture the benefits from greater regional integration

More Related