THE CHALLENGE OF PRODUCTIVITY GROWTH. Dani Rodrik FUNIDES August PDF Free Download

THE CHALLENGE OF PRODUCTIVITY GROWTH Dani Rodrik FUNIDES August 2016

Growth of per-capita GDP Since 1990 Over the long term 1400 1600 1800 2000 2200 average annual growth rate = 2.3% 1990 1995 2000 2005 2010 2015 year 1000 1500 2000 2500 3000 3500 1920 1940 1960 1980 2000 2020 year

Sources of growth: total factor productivity

Poor TFP performance not specific to Nicaragua

Where does productivity come from? Advanced countries: technological innovation, R&D, new products and processes Developing countries: adoption and adaptation of existing technologies, creation (or expansion) of industries that exist elsewhere but are new to country movement of resources (labor) from traditional to modern activities from traditional agriculture to modern industry and services from informal to formal activities

The structural change imperative (1): across sectors

Inter-sectoral labor productivity gaps in Nicaragua Source: World Bank (2013)

The structural change imperative (2): within sectors Source: McKinsey country studies, via Lagakos (2007)

Successful structural change: Vietnam 1990-2008 Source: McCaig and Pavcnik (2013)

Patterns of structural change agriculture manufacturing services informal organized

Patterns of structural change: East Asia and advanced countries agriculture manufacturing services informal organized

Patterns of structural change: low-income countries today agriculture manufacturing services informal organized

Indicators of manufacturing in Nicaragua 0.140 MVA/GDP manufacturing share in formal employment 0.138 30.0% 0.136 28.0% 0.134 26.0% 24.0% 0.132 22.0% 0.130 20.0% 0.128 18.0% 0.126 16.0% 0.124 14.0% 0.122 12.0% 0.120 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: BCN Yearbook

The headwinds: de-industrialization as a global trend 0.3 Simulated manufacturing employment shares (GGDC, 1950-2009) 0.4 Simulated industrial employment share (WDI, post- 1980 data only) 0.25 0.2 0.15 0.1 0.05 0-0.05 5 5.4 5.8 6.2 6.6 7 7.4 7.8 8.2 8.6 9 9.4 9.8 10.2 10.6 11 11.4 11.8 ln GDP per capita manufacturing share pre-1990 manufacturing share post-1990 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 5 5.4 5.8 6.2 6.6 7 7.4 7.8 8.2 8.6 9 9.4 9.8 10.2 10.6 11 11.4 11.8 ln GDP per capita industry share pre-1990 industry share post-1990 Generated from a regression of employment shares on ln population and ln GDP per capita (and their squares), country and year dummies, allowing for difference in post-1990 slope coefficients. Assumes a country with a population of 30 million.

Why services are not like manufactures Typically, two segments of services: A. High-productivity (tradable) segments of services cannot absorb lots of labor since they are typically skill-intensive FIRE, business services B. Low productivity (non-tradable) services cannot act as growth poles since they cannot expand without turning their terms of trade against themselves constrained by domestic demand (hence incomes) continued expansion in one segment relies on expansion on others limited gains from sectoral winners e.g. hyper-markets in retail

Recap: models of growth the bad, the good, and the turbo-charged External borrowing Commodity booms Public investment Accumulating fundamental capabilities human capital, institutions very few sustainable examples Structural change (esp. industrialization) European periphery in 1950-1970s; East Asia since 1960s delivers steady, but low growth

Policies: how did successful countries promote rapid structural transformation? macro fundamentals reasonably stable fiscal and monetary policies reasonably business-friendly policy regimes steady investment in human capital and institutions but more important for sustaining growth past middle income than launching it a development-friendly global context access to markets, capital and technologies of advanced countries benign neglect towards industrial policies in developing countries pragmatic, opportunistic, often unorthodox government policies to stimulate industrialization and modern activities protection of home market, subsidization of exports, managed currencies, local-content rules, development banking, special investment zones, with specific form varying across contexts today: new industrial policies (aka productive development policies )

But macro stability, market orientation and openness do not guarantee rapid growth 50.0 Exports of G&S (% of GDP) 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Structural change is impeded by both market failures and government failures Government failures generic poor labor laws, inadequate property rights, lack of contract enforcement, red tape, corruption, macro instability, high taxes, sectoral/micro specific regulations and taxes; lack of specific public inputs Market failures cost discovery failures due to incomplete information demonstration effects and learning spillovers from introduction of new products or new technologies coordination failures due to scale effects e.g., clusters, supply chains, vertical relationships

Orthodox development policy Government failures generic poor labor laws, inadequate property rights, lack of contract enforcement, red tape, corruption, macro instability, high taxes, sectoral/micro specific regulations and taxes; lack of specific public inputs Market failures cost discovery failures due to incomplete information demonstration effects and learning spillovers from introduction of new products or new technologies coordination failures due to scale effects e.g., clusters, supply chains, vertical relationships fixing these are important, but take time, and deliver moderate growth at best (e.g., Latin America since 1990)

The new industrial policy Government failures generic poor labor laws, inadequate property rights, lack of contract enforcement, red tape, corruption, macro instability, high taxes, sectoral/micro specific regulations and taxes; lack of specific public inputs Market failures cost discovery failures due to incomplete information demonstration effects and learning spillovers from introduction of new products or new technologies coordination failures due to scale effects e.g., clusters, supply chains, vertical relationships is about removing bottlenecks to new economic activities, whether due to market or government failures

Idiosyncratic specialization: luck and policy

Two styles of policy Comparative benchmarking fix areas of underperformance government agencies as providers of a package of predetermined services skills training, credit, tax exemptions (free trade zones), marketing/promotion assistance, free-trade agreements, Problem-driven, experimental, interactive ask what s blocking new activities from emerging, modern firms from expanding address specific obstacles monitor revise as needed government agencies as problem solvers for private sector Different requirements for how public and private sectors should organize themselves

Global benchmarking: useful? Source: IMF 2016

Standard remedies for improving productivity Increase innovation enhance market competition, R%D spending, human capital, nontraditional agriculture Improve education spending on education, teacher training Enhance infrastructure roads, ports, energy Improve governance better regulation, courts, administration A long laundry list of demanding tasks like saying, if you want to become Sweden, look like Sweden not helpful since country needs to generate productive jobs for today s workforce and with today s institutional capabilities

A Chinese illustration Standard reform strategy (c. 1980): liberalization (agriculture, industry, trade), privatization, tax reform, financial reform, etc. What China did instead: pragmatic, often heterodox solutions to overcome specific political constraints and second-best complications Two-track pricing insulates public finance from the provision of supply incentives Household responsibility system obviates the need for explicit privatization Township and village enterprises overcome weaknesses in legal (thirdparty) enforcement of contracts Special economic zones provide export incentives without removing protection for state firms (and hence safeguard employment) Federalism, Chinese-style generates incentives for policy competition and institutional innovation Strategic and sequential approach targeting one binding constraint at a time first agriculture, then industry, then foreign trade, then finance

Illustrations of specific bottlenecks beef animal health, certification, transport coffee credit and technological constraints for small/medium scale producers shrimp disease control, quality, certification non-existing sectors? attracting new foreign firms (such as Yazaki) identifying constraints faced by existing SEZ firms that prevent them from using domestic suppliers Source: Drawn from World Bank (2013)

A problem-driven approach Modern IP built on three ideas, each of which leads to a different institutional design feature : 1. The requisite knowledge about the existence and location of the spillovers, market failures, and constraints that block structural change are diffused widely within society => embeddedness 2. Businesses have strong incentives to game the government => carrots and sticks, discipline 3. The intended beneficiary of IP is neither bureaucrats nor business, but society at large => accountability

Embeddedness Strategic collaboration and coordination between the private sector and the government with the aim of uncovering where the most significant bottlenecks are deliberation councils, supplier development forums, search networks, investment advisory councils, sectoral round-tables, private-public venture funds IP as a process of discovery rather than as a list of policy instruments focusing on learning where the binding constraints lie, rather than on whether you should use tax breaks, R&D subsidies, credit incentives, and so on eliciting information on private sector s willingness to invest subject to the removal of obstacles (or provision of incentives)

Discipline Success in IP is determined not by picking winners but by letting losers go given uncertainty, optimal policy outcomes will necessarily lead to mistakes Solyndra vs Tesla; Chilean salmon vs other projects trick is not to avoid mistakes altogether, but to ensure that mistakes are recognized as such and entail phasing out of support a much weaker requirement than omniscience governments may not be able to pick winners, but they can recognize losers requires performance standards, monitoring, evaluation,

Accountability If bureaucrats and businesses monitor each other, who monitors both? Need for mechanisms of transparency and accountability a high-level political principal and champion for IP activities someone associated with IP activities and who can be held politically responsible as with education policy or monetary policy mechanisms of transparency publication of activities accounting of expenditures processes that are open to new entrants as well as incumbents

The many ways in which IP can fail No institutionalized dialog No clear targets Market failures? Protecting rents? Social policy? No clear instruments No clear commitments No monitoring No review/revisions Not enough coordination across government agencies No political leadership and ownership No transparency

What industrial policy cannot do Substitute for very weak fundamentals excessive corruption hostile environment for business Compensate for macro imbalances fiscal unsustainability large external deficits overvalued currency

Productive development policy as work in progress No country can get everything right East Asia, for example, typically falls short on accountability and transparency But this is not an argument for not doing it need to look at IP as a normal government function, that can be performed better or worse IP is a craft, which improves with experience importance of continuity across administrations

Additional slides

Distribution of GDP

Real exchange rate: a policy tool? Source: IMF 2016

Wage competitiveness high Source: IMF 2016

The free trade zone

Export composition

Fortuitous specialization: Yazaki

THE CHALLENGE OF PRODUCTIVITY GROWTH. Dani Rodrik FUNIDES August 2016