Elsevier

World Development

Volume 63, November 2014, Pages 11-32
World Development

Globalization, Structural Change, and Productivity Growth, with an Update on Africa

https://doi.org/10.1016/j.worlddev.2013.10.012Get rights and content

Introduction

One of the earliest and most central insights of the literature on economic development is that development entails structural change. The countries that manage to pull out of poverty and get richer are those that are able to diversify away from agriculture and other traditional products. As labor and other resources move from agriculture into modern economic activities, overall productivity rises and incomes expand. The speed with which this structural transformation takes place is the key factor that differentiates successful countries from unsuccessful ones.

Developing economies are characterized by large productivity gaps between different parts of the economy. Dual economy models à la W. Arthur Lewis have typically emphasized productivity differentials between broad sectors of the economy, such as the traditional (rural) and modern (urban) sectors. More recent research has identified significant differentials within modern, manufacturing activities as well. Large productivity gaps can exist even among firms and plants within the same industry. Whether between plants or across sectors, these gaps tend to be much larger in developing countries than in advanced economies. They are indicative of the allocative inefficiencies that reduce overall labor productivity.

The upside of these allocative inefficiencies is that they can potentially be an important engine of growth. When labor and other resources move from less productive to more productive activities, the economy grows even if there is no productivity growth within sectors. This kind of growth-enhancing structural change can be an important contributor to overall economic growth. High-growth countries are typically those that have experienced substantial growth-enhancing structural change. As we shall see, the bulk of the difference between Asia’s recent growth, on the one hand, and Latin America’s and Africa’s, on the other, can be explained by the variation in the contribution of structural change to overall labor productivity. Indeed, one of the most striking findings of this paper is that in many Latin American and Sub-Saharan African countries, broad patterns of structural change have served to reduce rather than increase economic growth since 1990.

Developing countries, almost without exception, have become more integrated with the world economy since the early 1990s. Industrial tariffs are lower than they ever have been and foreign direct investment flows have reached new heights. Clearly, globalization has facilitated technology transfer and contributed to efficiencies in production. Yet the very diverse outcomes we observe among developing countries suggest that the consequences of globalization depend on the manner in which countries integrate into the global economy. In several cases—most notably China, India, and some other Asian countries—globalization’s promise has been fulfilled. High-productivity employment opportunities have expanded and structural change has contributed to overall growth. But in many other cases—in Latin America and Sub-Saharan Africa—globalization appears not to have fostered the desirable kind of structural change. Labor has moved in the wrong direction, from more productive to less productive activities, including, most notably, informality.

This conclusion would seem to be at variance with a large body of empirical work on the productivity-enhancing effects of trade liberalization. For example, study after study shows that intensified import competition has forced manufacturing industries in Latin America and elsewhere to become more efficient by rationalizing their operations.1 Typically, the least productive firms have exited the industry, while remaining firms have shed “excess labor.” It is evident that the top tier of firms has closed the gap with the technology frontier—in Latin America and Africa, no less than in East Asia. However, the question left unanswered by these studies is what happens to the workers who are thereby displaced. In economies that do not exhibit large inter-sectoral productivity gaps or high and persistent unemployment, labor displacement would not have important implications for economy-wide productivity. In developing economies, on the other hand, the prospect that the displaced workers would end up in even lower-productivity activities (services, informality) cannot be ruled out. That is indeed what seems to have typically happened in Latin America and Africa. An important advantage of the broad, general-equilibrium approach we take in this paper is that it is able to capture changes in inter-sectoral allocative efficiency as well as improvements in within-industry productivity.

Our results for Africa are especially puzzling. The countries in Africa are by far the poorest countries in the world and thus stand to gain the most from structural transformation. Moreover, the fact that structural change in Africa was growth reducing during 1990–2005 seems at odds with Africa’s much touted economic success in recent years. The start of the 21st century saw the dawn of a new era in which African economies grew as fast or faster than the rest of the world. To better understand the results for Africa, in this update we decompose our analysis into two periods: 1990–1999 and 2000 onward. The latter period corresponds to what many have dubbed the “African Growth Miracle” and to a surge in global commodity prices. Our results for the period 2000 onward are notably different for Africa from those reported in the original version of this paper (McMillan & Rodrik, 2011). From 2000 onward, we show that structural change contributed positively to Africa’s overall growth accounting for nearly half of it.2 We also find that in over half of the countries in our Africa sample, structural change coincided with some expansion of the manufacturing sector (albeit the magnitudes are small) indicating that these economies may be becoming less vulnerable to commodity price shocks. For the other regions, the results do not differ significantly across periods.

In our empirical work, we identify three factors that help determine whether (and the extent to which) structural change goes in the right direction and contributes to overall productivity growth. First, economies with a revealed comparative advantage in primary products are at a disadvantage. The larger the share of natural resources in exports, the smaller the scope of productivity-enhancing structural change. The key here is that minerals and natural resources do not generate much employment, unlike manufacturing industries and related services. Even though these “enclave” sectors typically operate at very high productivity, they cannot absorb the surplus labor from agriculture.

Second, we find that countries that maintain competitive or undervalued currencies tend to experience more growth-enhancing structural change. This is in line with other work that documents the positive effects of undervaluation on modern, tradable industries (Rodrik, 2008). Undervaluation acts as a subsidy on those industries and facilitates their expansion.

Finally, we also find evidence that countries with more flexible labor markets experience greater growth-enhancing structural change. This also stands to reason, as rapid structural change is facilitated when labor can flow easily across firms and sectors. By contrast, we do not find that other institutional indicators, such as measures of corruption or the rule of law, play a significant role.

The remainder of the paper is organized as follows. Section 3 describes our data and presents some stylized facts on economy-wide gaps in labor productivity. The core of our analysis is contained in Section 3, where we discuss patterns of structural change in Africa, Asia, and Latin America since 1990. Section 4 focuses on explaining why structural change has been growth-enhancing in some countries and growth-reducing in others. Section 5 offers final comments. The Appendix provides further details about the construction of our data base.

Section snippets

The data and some stylized facts

Our data base consists of sectoral and aggregate labor productivity statistics for 38 countries, covering the period up to 2005. Of the countries included, 29 are developing countries and nine are high-income countries. The countries and their geographical distribution are shown in Table 1, along with some summary statistics.

In constructing our data, we took as our starting point the Groningen Growth and Development Center (GGDC) data base, which provides employment and real valued added

Patterns of structural change and productivity growth

We now describe the pace and nature of structural change in developing economies over the period 1990–2005. We focus on this period for two reasons. First, this is the most recent period, and one where globalization has exerted a significant impact on all developing nations. It will be interesting to see how different countries have handled the stresses and opportunities of advanced globalization. And second, this is the period for which we have the largest sample of developing countries.

We

What explains these patterns of structural change?

All developing countries in our sample have become more “globalized” during the time period under consideration. They have phased out remaining quantitative restrictions on imports, slashed tariffs, encouraged direct foreign investment and exports, and, in many cases, opened up to cross-border financial flows. So it is natural to think that globalization has played an important behind-the-scenes role in driving the patterns of structural change we have documented above.

However, it is also clear

Concluding comments

Large gaps in labor productivity between the traditional and modern parts of the economy are a fundamental reality of developing societies. In this paper, we have documented these gaps, and emphasized that labor flows from low-productivity activities to high-productivity activities are a key driver of development.

Our results show that since 1990 structural change has been growth reducing in both Africa and Latin America, with the most striking changes taking place in Latin America. The bulk of

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    The bulk of this paper was previously published as “Globalization, Structural Change and Productivity Growth” in Making Globalization Socially Sustainable (Geneva: International Labour Organization and World Trade Organization, 2011), chapter 2. This version updates that paper with recent results on Africa. We are grateful to Marion Jansen for guidance and to seminar participants and colleagues for useful comments. Rodrik gratefully acknowledges financial support from IFPRI. McMillan gratefully acknowledges support from IFPRI’s regional and country program directors for assistance with data collection.

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