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Africa: "New Structural Economics"
AfricaFocus Bulletin
Apr 11, 2012 (120411)
(Reposted from sources cited below)
Editor's Note
"I believe that every developing country, including those in
Sub-Saharan Africa, can grow at 8 percent or more
continuously for several decades, significantly reducing
poverty and becoming middle- or even high-income countries
in the span of one or two generations, if its government has
the right policy framework to facilitate the private
sector's development along the line of its comparative advantages and tap into
the late-comer advantages" - Justin Yifu Lin, Chief
Economist, World Bank, in introducing his just published
book New Structural Economics: A Framework for Rethinking Development
and Policy
Leading Chinese economist Justin Yifu Lin, who ends his
terms as chief economist of the World Bank at the end of
May, has laid out an ambitious proposed framework which he
argues goes beyond the old structural economics of the 1960s
and 1970s with its overemphasis on state initiatives and the
"Washington consensus" of market orientation in the 1980s
and 1990s, building particularly on the experiences of
successfully industrializing countries such as the East
Asian tigers and other recently emerging powers such as
China and Brazil. He labels it "New Structural Economics,"
and, as the quote from the book's introduction cited above
makes clear, he is definitely optimistic about the prospects
that Africa may follow the path of such rapid growth.
These views are hardly likely to mark any new consensus, as
traditional macroeconomic assumptions remain embedded in
many Bank policies, and critics both in and outside the Bank
are likely to question whether the focus on growth, however
modified, is not still likely to result in ignoring wider
considerations of environmental impact, equity, and other
components of human development that are not measured by
gross domestic product. But there is no doubt that the
prominent position of such views signals the growing
intellectual weight as well as economic prominence of the
emerging powers.
This AfricaFocus Bulletin contains the text, but not the
footnotes and references, from the epilogue to the book.
A video from the book launch, press releases, related
references, and the full book available for download are
available at: http://go.worldbank.org/QZK6IM4GO0
Additional related commentary can be found in the Chief
Economist's blog at http://tinyurl.com/6ltrs3a See
particularly his March 22 blog post on his last visit to
Africa before ending his term at the World Bank this June.
Another AfricaFocus Bulletin, sent out by e-mail today and
available on the web at
http://www.africafocus.org/docs12/wb1204a.php, includes
several article from the Bretton Woods Project on current issues
facing the World Bank, as well as links to the debate on
the choice of a new Bank president.
For previous AfricaFocus Bulletins on economic issues, visit
http://www.africafocus.org/econexp.php
Particularly relevant issues include:
China/Africa: Development Issues
http://www.africafocus.org/docs11/ch-af1108a.php and
http://www.africafocus.org/docs11/ch-af1108b.php
Africa: ECA Calls for Developmental States
http://www.africafocus.org/docs11/eca1103.php
Africa: Thinking Beyond Acronyms
http://www.africafocus.org/docs10/pov1009.php
++++++++++++++++++++++end editor's note+++++++++++++++++
Epilogue: The Path to a Golden Age of Industrialization in
the Developing World
"The golden age of finance has now ended," as Barry
Eichengreen commented recently in reference to the Great
Recession. In my view, however, the golden age of
industrialization in the developing world has just begun.
The global financial crisis is still looming large over
Europe. Newspapers are carrying daily reports on the anemic
recovery, stubbornly high unemployment rates, downgraded
sovereign credit ratings, and recurrent debt crises
occurring in the wake of the recession in advanced countries
on both sides of the Atlantic. Political leaders the world
over are just waking up to the fact that over reliance on
making financial deals to maintain a high standard of
living, without building and rebuilding a strong industrial
base, is just a mirage.
For a sustainable global recovery and robust growth in the
coming years, the world needs to look beyond the Euro Area
and sovereign debt worries to the promise inherent in
structural transformation, which, as defined in this volume,
is the process by which countries climb the industrial
ladder and change the sector employment and production
compositions of their economies. Except for a few oilexporting
countries, no countries have ever gotten rich
without achieving industrialization first. During my travels
in the past three and a half years as the Chief Economist of
the World Bank Group, I have been struck by the potential
for less developed countries to take a page from the
playbook of more successful industrializing East Asian
countries, such as China, Indonesia, Japan, Korea, Malaysia,
Singapore, and Vietnam, and to dramatically improve their
development performance.
My belief in the coming of a golden age of industrialization
in the developing world is based on the potential to rapidly
expand industrial sectors in developing countries, including
those in Sub-Saharan African countries, and on the dynamic
relocation of industries in a multi-polar growth world. The
first force can be envisioned through an improved
understanding of the mechanics of economic transformation in
modern times ushered in by the Industrial Revolution in the
18th century. In advanced countries technological innovation
and industrial upgrading require costly and risky
investments in research and development, because their
vanguard technologies and industries are located on the
global frontier. By contrast, a latecomer country can borrow
technology from the advanced countries at low risk and cost.
Hence, if a developing country knows how to tap the
advantage of backwardness, its industrial upgrading and
economic growth can proceed at an annual rate several times
that of high-income countries for decades as the country
closes its industrial and income gap with advanced
countries. The second force is the rapid wage increase in
the dynamically growing emerging market economies and the
unavoidable relocation of their labor-intensive
manufacturing industries to other lower-income countries.
Take China, for example: its monthly wage for unskilled
worker is about $350. China is likely to maintain high
growth in the coming decades (Lin 2011a). Its monthly wage
for unskilled worker will reach at least $1,000 in 10 years.
Such wage dynamics means China will need to upgrade to
higher value added, more capital-intensive sectors, opening
up a huge opportunity for other countries with income levels
lower than China's to enter the labor-intensive
manufacturing industries.
In the UNU-WIDER annual lecture I delivered in Maputo,
Mozambique, in May 2011, I explained how developing
countries can capture these opportunities to achieve rapid
industrialization and economic growth. The winning formula
is for them to develop tradable industries that are
expanding rapidly in countries that have been growing
dynamically for decades and that have higher income and
similar endowment structures to theirs. The pattern of flying geese is a useful metaphor to explain my vision. Since
the 18th century, the successfully catching-up countries in
Western Europe, North America, and East Asia all followed
carefully selected lead countries that had per capita income
about twice as high as theirs, and emulated the leaderfollower
flying-geese pattern in their industrial upgrading
and diversification before becoming advanced countries
themselves (Lin 2011c).
The emergence of large market economies such as Brazil,
Russia, India and China (BRIC) as new growth poles in the
multi-polar world and their likely continuous dynamic growth
in the post-crisis world offers an unprecedented opportunity
to all developing economies with income levels currently
below theirs - including those in Sub-Saharan Africa - to
develop manufacturing and jump-start industrialization.
China, for example, having been a "follower goose" in East
Asia, is on the verge of graduating from low-skilled
manufacturing jobs. Because of its size, however, China may
become a "leading dragon" for other developing countries
instead of a "lead goose" in the traditional flying geese
pattern of the international diffusion of industrial
development. China will free up 85 million labor-intensive
manufacturing jobs, compared with Japan's 9.7 million in the
1960's and Korea's 2.3 million in the 1980s (Lin 2011c).
The benefits of reallocating labor-intensive manufacturing
jobs from China and other dynamically growing emerging
market economies, such as India and Brazil, to low-income
countries, most of which are located in Sub-Saharan Africa,
could be enormous. In 2009 alone, China exported $107
billion worth of apparel to the world, compared with SubSaharan
Africa's total apparel exports of $2 billion (2
percent of Chinese apparel exports). If only 1 percent of
China's production of apparel is shifted to lower-wage
African countries, African production and exports of apparel
would increase by 47 percent. Similarly, employment gains
could be significant. Africa's population (north and south
of the Sahara) is 1 billion, slightly less than India's 1.15
billion. In 2009 manufacturing value added was 16 percent of
GDP in India, 13 percent in Sub-Saharan African countries,
and 16 percent in North African countries such as Egypt,
Morocco, and Tunisia. India's employment in manufacturing
was 8.7 million in 2009. Hence, based on a back-of-theenvelope
calculation, it is reasonable to assume that total
manufacturing employment in Africa is at about 10 million
(Lin 2011c). This suggests that relocation of even a small
share of China's 85 million labor-intensive manufacturing
jobs to Africa would provide unprecedented opportunities for
Africa.
But why are Chinese firms and lower-income country
governments that would benefit substantially from a
reallocation of firms from China and other emerging market
economies not yet organizing themselves to seize these
opportunities? From my frequent interactions in the past
three years with policy makers in low-income countries in
Africa and Asia, as well as with business people and
government officials in emerging market economies, I know
that policy makers and business communities would be
interested in pursuing this opportunity. Some individual
firms from emerging markets have linked up with
entrepreneurs in low-income countries to develop various
labor-intensive manufacturing industries. Still, many
industrialists in emerging markets are hesitant to relocate
abroad, especially to Africa. They cite the following
concerns: (i) social and political instability; (ii)
differences in labor laws and qualification; (iii) poor
logistics; and (iv) the lack of adequate infrastructure and
business conditions. These soft and hard infrastructure
concerns add to the risks of their investments, increase the
transaction costs of their operations, and outweigh the
potential benefits of low labor costs in Africa and other
low-income countries.
How to deal with these infrastructure problems? The first
two issues can be mitigated through the commitment and
broad-based support of recipient governments; the latter two
could be addressed effectively through the development of
sector-specific cluster-based industrial zones. Why is the
latter sector-specific approach - sometimes called "picking
winners" - desirable?
First, the required infrastructure improvements are often
industry specific. The cut flower and textile industries,
for example, require different infrastructure for their
exports. Because the government's fiscal resources and
implementation capacity in a developing country are limited,
the government has to prioritize the infrastructure
improvement according to the targeted industries.
Second, to compete in the globalized world, a new industry
not only must align with the country's comparative advantage
so that its factor costs of production can be at the lowest
possible level, but the industry also needs to have the
lowest possible transaction-related costs. Suppose a
country's infrastructure and business environment are good
and industrial upgrading and diversification happen
spontaneously. Without the government's coordination, firms
may enter into too many different industries that are all
consistent with the country's comparative advantage. As a
result, most industries may not form large enough clusters
in the country and may not be competitive in the domestic
and international market. Only in the wake of many failures
might a few clusters eventually emerge. Such "trial and
error" is likely to be a long and costly process, reducing
the individual domestic and foreign fi rms' expected returns
and incentives to enter new industries or relocate to other
countries. This in turn can slow down or even stall a
country's economic development.
But there exists a long list of failed attempts to pick
winners. These failures, as discussed in the previous
chapters, were often the result of the inability of
government to come up with good criteria for identifying
industries that are appropriate for a given country's
endowment structure and level of development. In fact,
governments' propensity to target industries that are too
ambitious and not aligned with a country's comparative
advantage largely explains why their attempts to "pick
winners" resulted in "picking losers" (Lin, 2011d).
The recipe to economic success therefore is the one that
helps policy makers in developing countries identify the
industries in which their economies may have a latent
comparative advantage and remove binding constraints to
facilitate private domestic and foreign fi rms' entry to and
operation in those industries. Chapter III of this book
provides the governments in developing countries with a
pragmatic and easy-to-follow growth identification and
facilitation framework to do so.
Many low-income countries have an abundance of natural
resources. They may also benefit from the industrialization
opportunity provided by the industrial upgrading in
dynamically growing emerging market economies by following
the "flying geese" pattern. Resource-intensive industries,
such as extraction, provide very limited job opportunities.
In a visit to Papua New Guinea in 2009, I found that its
famous OK Tedi copper mine generated 40 percent of the
country's public revenues and 80 percent of its exports but
provided only 2,000 jobs in 2009. Most of Papua New Guinea's
6.6 million people still live on subsistence agriculture.
Their wage rate is low, and wages constitute the major cost
of production for labor-intensive industries. Low wage,
natural-resourcerich countries could therefore develop
labor-intensive industries, creating much needed jobs.
Indonesia is a good example showing that this is possible.
Labor-intensive manufacturing industries not only offer the
potential to absorb surplus labor from the rural subsistence
sector, but the development of such industries can also pave
the way through continuous upgrading to higher value added
industries. Finland's Nokia, for an example, started as a
logging company and diversified its operation to the laborintensive
business of producing rubber boots; it then became
the original equipment manufacturer of household electronics
for Phillips before venturing into mobile phones.
Still, resource-rich countries often suffer from the Dutch
Disease, as export receipts from natural resources push up
the value of the currency, thus adversely affecting the
competitiveness of their other exports. Sometimes also the
wealth from natural resources is captured by powerful
groups, turning resource richness into a curse. At the same
time natural-resource rents can provide a great opportunity
for development if managed in a transparent way and
prudently invested in human and physical capital, such as
infrastructure, and used to diversify to non-resource
sectors as suggested in the growth identification and
facilitation framework. These investments, if well chosen,
can increase labor productivity, reduce production and
transaction costs and ultimately cure the Dutch Disease, and
turn the abundance in natural resources from a curse to a
blessing. This is because such countries have opportunities
to accumulate capital, upgrade endowments, improve
infrastructure, transform industrial structure, and
subsequently raise incomes faster than labor-abundant,
resource-poor countries (Lin, 2011b).
The discussion so far has been on the opportunity of and
ways to achieve rapid industrialization in low-income
countries. The new structural economics also offers new
insights to middle-income countries about how to upgrade
their industries and achieve dynamic growth. A unique
feature of middle-income countries is that some of their
industries will still locate within the global frontier and
some of their industries will locate on the frontier because
of the graduation of higher-income countries from those
industries. For the former industries, the government can
follow the growth identification and facilitation framework
to assist the private firms to tap into the potential of the
latecomer's advantage, and for the latter industries, the
government should adopt the same measures as those in the
advanced countries for supporting innovation in technology
and industries. Commonly used measures include support for
basic research, providing patent protection, mandated use of
new technology/products, and direct government procurement
of new products. If a middle-income country can implement
these measures to facilitate private firms' industrial
upgrading and diversification, the country can not only
avoid the middle-income trap but also achieve dynamic growth
and catch up to advanced countries in a generation.
The discussion so far has not discussed the technological
innovation and productivity improvement in agriculture. In
low-income countries, where most people work in agriculture,
improving agriculture will be important not only for
reducing poverty but also for generating economic surplus to
support industrialization. Governments need to facilitate
the innovation and extension of agricultural technology and
improvement of infrastructure for agricultural production
and commercialization.
Finally, as stated in the introduction, I am convinced that,
every developing country, including those in sub-Saharan
Africa, has the potential to grow at 8 percent or more
continuously for several decades, to significantly reduce
poverty, and to become a middle-income or even a high-income
country in the span of one or two generations, if its
government has the right policy framework to facilitate the
private sector's development along the line of its
comparative advantages and tap into the latecomer's
advantages. I hope this book will help developing countries
to realize their growth potential. A world without poverty
will then become a reality instead of just a dream.
AfricaFocus Bulletin is an independent electronic
publication providing reposted commentary and analysis on
African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by
William Minter.
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