Structural Transformation, Deep Downturns, and Government Policy

Most recessions are a result of some shock to the economic system, typically amplified by financial accelerators, and leading to large, persistent balance sheet effects on households and firms. Over time, however, the balance sheets get restored. Even banks recover. But episodically, the ‘shock’ is deeper. It is structural. Among advanced countries, such large economic transformations include the movement from agriculture to manufacturing (completed in the twentieth century), and the more recent movement from manufacturing to the service sector. The associated downturns are longer lasting. The usual tools for restoring growth, particularly monetary policy, are of only limited efficacy. Policies have to be designed to facilitate such transformations: markets on their own typically do not do well. This chapter explains why such transformations are associated with persistently high unemployment, and what kinds of government policies are needed. It looks at the lessons of the Great Depression both for the advanced countries and the developing countries today as they go through their structural transformations.

Remodelling Structural Change

This chapter examines how structural change can be formally modelled in the New Structural Economics (NSE) proposed by Justin Yifu Lin. According to NSE, the aggregate production function is no longer considered exogenous and time-invariant. Instead, it is derived from the compositions of underlying industries which are in turn determined by the endowment structure. The central economic idea of NSE is that endowment structure determines optimal industrial structures and that capital accumulation (improvement of endowment structure) drives changes in industrial structures. After a brief overview of the current dominant framework for macro-development analysis, the chapter explains why structures are important in understanding economic development. It then introduces a benchmark model of NSE and discusses several theoretical extensions to it. It argues that structural changes should be remodelled to emphasize the key roles of endowment structure and firm viability.

Economic Reform and Structural Change

This chapter examines China’s experience with structural change during three distinct periods of economic reform and growth: 1978–1995, 1995 through to about 2010, and 2010 to present. In each case, the chapter finds that the pattern of structural change is related to the choices made by policy makers with respect to reform and market transition. The first period saw a shift towards a more labour-intensive output basket, a structure that was more in line with China’s underlying comparative advantage, while the second period witnessed a move ‘upstream’ toward more capital and skill-intensive industries. Since 2010, China has begun to move toward a service economy and embarked on a new era of structural change. Each of these periods offers specific ‘lessons’ about the relationship between policy and structural change. The chapter concludes with a discussion of these lessons and a number of generalizations that apply to China’s experience as a whole.

Growth and Structural Transformation in Viet Nam

This chapter examines structural transformation and change in the Vietnamese economy during the reform period of 2000–12. Using two Social Accounting Matrices (SAMs), one for the year 2000 and another for the year 2012, the chapter shows that Viet Nam’s economic structure underwent significant changes during this period, mainly due to external demand and international economic integration. Indeed, the Vietnamese economy has become internally more integrated and shifted from primary production (agriculture) towards more value adding manufacturing activities. Viet Nam’s experience with structural transformation provides important lessons on how success can be pursued under globalization. The chapter concludes with some policy recommendations, such as the need for Viet Nam to transform the economic growth model toward a more sustainable one which does not rely so much on expanding capital and labour.

Global Megatrends and the Macroeconomics of Gender

This chapter examines global megatrends such as demographic shifts, technological progress, globalization, and climate change and emphasizes the important role of gender equality in mitigating their adverse consequences. The chapter first discusses demographic change, globalization, technological progress, and climate change before explaining how the main challenges posed by these megatrends could be offset by increasing gender equality, providing more equal access to economic opportunities for women, and boosting female economic participation. In particular, it considers ways of mitigating the impact of population ageing, harnessing urbanization for growth and gender equity, catalysing change to reduce income inequality, accelerating economic diversification, and mitigating vulnerability to climate change. The chapter concludes with an evaluation of policy options for mitigating the risks posed by megatrends through gender equality, such as unleashing fiscal policy, easing the burden of non-market work, and removing legal discrimination against women.

Building Effective Clusters and Industrial Parks

This chapter discusses some of the strategies that are commonly used to build effective clusters and industrial parks. Industrial districts (clusters) offer three major advantages: better access to suppliers and markets, labour market pooling, and spillovers of technological know-how. Compared to the central government, local governments are in a better position to identify and solve the bottlenecks that affect clusters and industrial parks, mainly because of their informational advantage. The chapter first provides an overview of clusters and industrial parks before analysing the experiences of—and the lessons learned by—developing countries such as China in building them. Four strategies to increase the chances of success of a cluster and industrial park are highlighted: targeting international firms, targeting grouped businesses, incentivizing first movers, and adopting a step-by-step approach. The chapter also considers a number of reasons why clusters and industrial parks failed in countries like India, Egypt, and Senegal.

The Strength of American Federal Democracy

This chapter examines the important role played by two basic principles—representative democracy, and a proper division of power between national and subnational governments—in America’s successful development. The discussion begins with background on America’s colonial origins and its establishment as a nation, before turning to the benefits of decentralized democracy. The chapter then considers how American-style democracy has been applied in other countries without decentralization, in contrast to America’s systematic extension of decentralized federal democracy to new territories. It also shows how decentralized democracy empowered immigrants and argues that national elites tend to be biased against federal decentralization. In conclusion, the chapter explains how federal decentralization has benefited Americans in a variety of ways and summarizes lessons that the strength of American federal democracy imparts for global development.

Growth and Structural Transformation In the Waemu Countries

This chapter examines the extent to which the new economic growth that began in 2000 in the West African Economic and Monetary Union (WAEMU) has led to the structural transformation of member countries. To answer this question, four indicators of structural transformation are used: the share of final consumption in the gross national product, the share of each sector in total production, the decline of agricultural employment, and the diversification of the exports of WAEMU member countries. After discussing these indicators in greater detail, the chapter provides a background on WAEMU as well as the evolution of economic growth in member countries. It then considers the structural transformation of the WAEMU economies and presents a SWOT analysis emphasizing these economies’ principal strengths, weaknesses, and opportunities, and the threats to them. It also offers recommendations for removing obstacles to the structural transformation of the WAEMU economies.

Economic Transformation in Africa from the Bottom Up

This chapter examines economic transformation in Tanzania, with a focus on the nature of micro, small, and medium-sized enterprises. Between 2002 and 2012, Tanzania experienced economic growth more rapidly than at any other time in recent history. Labour productivity growth was largely accounted for by structural change and the rest by within sector productivity growth in agriculture. Using data from Tanzania’s Micro, Small and Medium Sized Enterprise Survey (MSME) 2010, the chapter analyses labour productivity, employment growth, and business owners’ self-reported motivations for owning a business, along with the productive heterogeneity and job creation of small firms. It also considers some policy lessons from the Tanzanian case, arguing that policies targeted at the MSMEs with potential for employment and productivity growth may have larger payoffs than blanket policies that offer assistance in the form of business training and access to credit. The chapter concludes with recommendations for policy makers.

Structural Transformation and Growth

This chapter illustrates how structural transformation and outcomes resembling balanced growth at the aggregate level can be generated simultaneously using a growth model. It begins with a discussion of the three key economic mechanisms that drive structural transformation: the first emphasizes income effects while the other two both emphasize relative price effects. These mechanisms are then incorporated into a standard version of the growth model to test whether it is possible to obtain balanced growth and structural transformation at the same time. By extending the model to include multiple consumption sectors, a new model that generates balanced growth and structural transformation is achieved. The chapter also explains how three basic mechanisms described can drive sectoral reallocation of labour in the face of development associated with increases in productivity and capital.