Letter IEDI n. 890–Structural change and deindustrialization: rethinking development policies
As a result of the obstacles to their processes of structural transformation, a number of developing countries are struggling to promote an income growth rhythm fast enough to reach the richest nations on the planet.
Traditionally, the economic literature argues that there is high potential for economic development for economies that diversify their productive sectors and advance in the processes of industrialization, generating greater gains in productivity and technology. This was the path traveled by the countries that today are classified as developed.
In the last decades, however, a growing deindustrialization has been observed, that is, a decline of the weight of the industry in the economic structure, not only in advanced economies but also in developing ones, such as Brazil. For this second group, deindustrialization was premature, as these countries began to lose industrial capacity before reaching a high level of per capita income, compromising their ability to constantly improve their degree of technological sophistication.
This Letter IEDI discusses the conditions for the advancement of development in the midst of deindustrialization, based on the recently published IMF work "Rethinking development policy: deindustrialization, servicification and structural transformation" by Manoj Atolia, Prakash Loungani, Milton Marquis and Chris Papageorgiou. The main arguments and conclusions of the IMF researchers will be summarized below.
The study seeks to shed new light on the paths of economic development by evaluating countries' experiences based on the role played by private and public fundamentals in the process of structural transformation. Deindustrialization and "servicification" —understood, respectively, as the loss of industry share and the increasing share of services, both in employment and value added in several economies— are part of the present context of deep challenges to development.
It should be noted that, while certain private fundamentals —such as physical capital, technology, skills and innovation— are necessary to induce growth, they are often not sufficient to initiate the process, particularly in the absence of public fundamentals such as infrastructure and institutions. Thus, according to the IMF researchers, public policies have a crucial role in the process of structural change in the economy.
The study examines the recent process of economic development of three groups of countries: those most successful in the catching-up movement, such as the Asian Tigers (South Korea, Taiwan, Singapore, Hong Kong); middle-income countries, like Brazil, Mexico, China, among others; and low-income countries, as those in sub-Saharan Africa.
It concludes that, in the light of global experiences and the current reality of globalization and deindustrialization, great difficulties face countries pursuing the traditional path of structural transformation that permeates agriculture, the industry and services as income levels rise.
According to the authors, the development option through high-productivity services can generate strong economic growth. However, there is still a lack of evidence of its potential to contribute to the large-scale absorption of labor by the most advanced sectors of the economy and, thus, promote the diffusion of income gains, as happens in the manufacturing-led growth paradigm.
In the absence of favorable forces from industrial production and/or a proven track record of services-led development, the processes of economic development and structural change have to depend, mainly, on the support of sound public policies. These must be appropriate to the generation of strong dynamic, self-sustaining incentives that strengthen private fundamentals such as technology, skills and innovation.
According to the IMF researchers, although policy prescriptions are country-specific, overcoming certain challenges must be a priority of public policies. Among the most pressing issues, the following can be highlighted:
• Inadequate infrastructure;
• Exhaustion of cheap labor and gains from imitation of products and processes;
• Insufficient human capital to compete with high-income countries in innovation;
• Lack of access to funding for risky investments in innovative technologies;
• Income inequality inhibiting the acquisition of human capital, given the limited access of low-income households to educational opportunities.
Finally, because development is a long and complex process, it is critical that policy formulations embrace a strategic and long-term perspective.