A paper by Dani Rodrik summarizing his recent works on growth & development. In his view the two dynamics behind growth are 1) development of fundamental capabilities in human capital and institutions [structural reforms], and 2) structural transformation [industrialization and moving labor into high productivity industries]. The first is slow and difficult, and most successful catch-up stories follow the second method until they reach middle-income [resource rich countries exception]. At that point the first dynamic would also be needed to break into high income level.
He noted that successful economic transitions rarely grown rapidly because of across the board institutional reforms, but most marked by sequential relaxation of one binding constraint after another, using policy tools that are tailored to local circumstances.
He noted six stylized facts about economic growth: 1) Growth has increased over time. Asia growth rate is incredible/unprecedented. 2) Convergence has been the exception rather than the rule [no tendency for poor countries to growth faster than rich countries]. 3) Economic development goes with productive diversification [not specialization]. 4) Industrialization and manufacturing exports have been the most reliable levers for rapid and sustained growth in the past. 5) Manufacturing industries are special in that they tend to exhibit unconditional convergences. 6) Most successful economies have not been ones with least state intervention
He is less optimistic about catch-up in other developing economies (like Africa or India) in the future due to 1) weaker Western growth which could lead to less tolerance for industrial policies, 2) change in manufacturing industries towards more capital and skill intensive, and changes in global supply chains with less positive spill-over for developing countries, 3) increased global competition, esp. from China, and 4) increased environmental awareness/concerns.
Applying Rodrik’s framework, China needs to continue to reform its institutions to move up. I think it fares well on the human capital front. India is more concerning. Its rigid labor law & socialist policies hinder growth in the manufacturing sector. It’d need to find sectors that can help employ large numbers of relatively unskilled workers, absorb foreign technology, and build linkages with domestic economies. Otherwise it’d likely continue to perform below its potential. Opening up to multi-brand retail would be a good start, but so far no international multi-brand have entered yet, likely due to policy & political uncertainty and unclear requirements.
Abstract: Developing countries will face stronger headwinds in the decades ahead, both because the global economy is likely to be significantly less buoyant than in recent decades and because technological changes are rendering manufacturing more capital and skill intensive. Desirable policies will continue to share features that have served successful countries well in the past, but growth strategies will differ in their emphasis. Ultimately, growth will depend primarily on what happens at home. The challenge is therefore to design an architecture that respects the domestic priorities of individual countries while ensuring that major cross-border spillovers and global public goods are addressed
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