1. POSITION: PRO
DEBATE N°4:
"LET IT BE RESOLVED THAT IN A
GLOBAL COMPETITIVE ENVIRONMENT
STRUCTURAL CHANGE IS THE
PRECONDITION FOR LONG TERM
GROWTH IN BOTH ADVANCED AND
DEVELOPING COUNTRIES”
May 20, 2014
GIACOMO BOVA
TUDOR CARSTOIU
SZILVIA VARSZEGI

2. Everything that grows changes its structure
 As a tree changes its size, shape, and structure of its branches,
a growing economy changes the proportions and interelations
among its sectors (agriculture, industry and services)
Pattern of growth of the economy
1. Agriculture-oriented
2. Industrialization
3. Post-industrialization
INTRODUCTION

3.  Natural resources
 Finite
 Vulnerable to market value
 Eg.: Nigeria no diversification of the economy, no growth after
discovery of oil fields
 Capital resources
 Increasing stock of capital and using it more efficiently can be an
important source of growth
 BUT eg.: Japan over-investing in declining industries
 Investment has to go to new industries to achieve long-term growth
 Labor resources
 Increase in population can contribute to growth, but not necessarily
growth in income/capital
 Only the increasing quality of workforce can result long term growth
per head of the population
 Eg.: Australia great increase in population and GDP, but GDP/capita
growth lower (rate similar to Japan who has decreasing population)
Increase in single factors of production can only achieve short-term growth
SOURCES OF GROWTH

4.  Long term growth
 Growth is determined by the capacity of the economy to increase output, which
is determined by the rate of growth of productivity of BOTH capital and labor
 That is; increasing the QUANTITY and QUALITY of the factors of production in
the economy
 Only way to achive long term increase in productivity: continuous reallocation of
resources from low- to high-productivity sectors
ARGUMENT:
No long-term growth unless movement of labor and capital from
traditional into new and more productive industries.
HOW TO ACHIEVE LONG TERM GROWTH

5. Dual economy by Lewis
“An economy starts with two sectors, agriculture and industrial. Agriculture
under employs workers and the marginal productivity is very low (close two
zero). Therefore, transferring workers allows industrialization and capital
accumulation, which can be further invested to sustain the economy.“
(Focus on inter-sectorial relations and flows)
Neoclassical growth (derives from Solow)
“Different types of economic activity are structurally similar enough to be
aggregated into a single representative sector.
Growth depends on the incentives to save, accumulate physical and human
capital and innovate by developing new products and processes.”
(Growth process within modern sectors)
SCHOLAR TRADITIONS

6. Engel’s law
“Consumers increase their expenditures for food products (in % terms) less
than their increases in income (1857), so the demand for other goods
increases.”
Kuznets fact
“Strong structural change takes place during the development process. In the
early stages production factors are primarily reallocated from the
agricultural sector to the industrial sector and in later stages to the services
sector.”
Pasinetti
“It is inevitable that sectorial imbalances will arise due to the changing
structure of the demand for goods.”
IMPORTANT SCHOLARS

7.  Change in composition of PRODUCTION and EMPLOYMENT
 Main drivers:
 Change in customer demand
 Change in labor productivity (due to innovation and tech. development)
 Industrialization
 Income increases  Demand for goods other than food increases
 Technological development  Labor productivity increases
 Agricultural goods become less expensive
+ Employment opportunities in industry grow
Smaller share in GDP relative to industrial products
STRUCTURAL CHANGE AND GROWTH

8.  Post-industrialization:
 Income further increases  Less material needs, more demand for
services
 BUT labor productivity in services does not increase as fast as in
agriculture and industry
It makes services more expensive
+ Employment in service sector continues to grow
Larger share in GDP of services relative to agriculture and industry
 Service sector growth and sustainable development
 Less natural capital required  envirionmentally more sustainalbe
 More human development required  socially more sustainable
STRUCTURAL CHANGE AND GROWTH

9.  Structural change is one of
the most striking empirical
facts of the development
and growth process
 Developing countries
 Advanced countries
EMPIRICAL EVIDENCE
Sectoral structure of world economies 1995
Industrial output as a percentage of GNP 1980-1995

10.  Asia is an example of a region where structural change has
been very positive for growth
 Economies with surplus labor and very low productivity levels, which
are dependent on subsistence agriculture
 Then, new industries started to emerge, mainly in urban areas, and
although still poorly educated, farmers became more productive
factory workers
 They were able to increase their income, and could send their
children to school
 This increased productivity has also set in motion a self-sustaining
process of improvement in human capital skill
EMPIRICAL EVIDENCE
ASIA

11. STRUCTURAL CHANGE OVER THE YEARS
INDIA

12. STRUCTURAL CHANGE OVER THE YEARS
CHINA

13. Trade and globalization are important drivers of structural
change!
GLOBALIZATION AND STRUCTURAL
CHANGE

14. STRUCTURAL CHANGE OVER THE YEARS
SOUTH KOREA

15. NORTH-KOREA VS. SOUTH-KOREA

16. Productivity growth + low unemployment
= increase both in aggregate supply and demand
STRUCTURAL CHANGE OVER THE YEARS
ADVANCED COUNTRIES
Importance of
composition of sectors
Eg.: US faster long-term
growth due to the dynamic
effects of a significant
increase in investments in
IT sector

17. EMPIRICAL EVIDENCE
COMPARISION OF REGIONS

18. Structural change can be initiated by:
 Policy decisions
 Permanent changes in resources, population or the society
A general framework:
 It is overly naïve to expect that simply reducing tariffs or liberalising finance
will automatically increase growth.
 Stabilisation and macroeconomic management need to be growth-oriented.
 Governments need to be made accountable, not bypassed.
 Governments should abandon formulaic policymaking
“The very need to state them suggests how far away from common
sense the mainstream consensus had moved”
(World Bank)
POLICIES SUPPORTING STRUCTURAL
TRANSFORMATION

19. Policies characterizing “sustainable high growth” countries (average
growth rate of 7% a year for 25 years):
 investment rates of at least 25 per cent of GDP, including 5-7 % of GDP
in infrastructure, with such investment predominantly financed by
domestic savings;
 spending by private and public sectors of another 7-8 % of GDP on
education, training and health;
 inward technology transfer, facilitated by exploitation of opportunities
for trade and inward foreign direct investment;
 acceptance of competition, structural change and urbanisation;
 competitive labour markets, at least at the margin;
 the need to bring environmental protection into development from the
beginning;
 equality of opportunity, particularly for women.
(Report of the high-profile Commission on Growth and Development,
chaired by Nobel Prize-winning economist Michael Spence)
POLICIES SUPPORTING STRUCTURAL
TRANSFORMATION

20. Possible problems:
 obsessive attachment to a particular ideology
 eg.: 1960s-1970s, many African and Latin American countries took
import substitution to extremes
 Then, in the 1990s adopted the orthodoxy of a “Washington Consensus,”
which urged countries to forego any structural change policies. They
focused on the fundamentals, but structural transformation did not
follow automatically.
 Labor market imperfections discouraging formal or existing
enterprises to grow
 Credit constraint
 Poorly performing financial markets
 Political instability
WHY STRUCTURAL CHANGE DOES NOT
HAPPEN IN SOME COUNTRIES

21.  Long-term economic growth happens as a result of movement of labor and
capital from low‐ to high‐productivity sectors AND productivity
improvements within sectors
 Emergence and expansion of new industries is necessary to the dynamics
of the development process
 Therefore sectoral change (in which labor and capital flow from low- to
high productivity sectors) is a precondition to long term growth for both
advanced and developing countries
 Vast empirical evidence supporting the argument
 In the current global competitive environment globalization is an important
driver of structural change in the world economy
 Well desisgned policies supporting structural change are able to foster
long term economic growth
CONCLUSION

22. THANK YOU FOR YOUR ATTENTION!
WE ARE READY FOR DISCUSSION

23.  http://www.imf.org/external/pubs/ft/survey/so/2013/INT062813A.htm
 http://www.sss.ias.edu/files/pdfs/Rodrik/Research/Structural-Change-
Fundamentals-and-Growth-An-Overview_revised.pdf
 http://deposit.fernuni-hagen.de/2763/2/Diss_Stijepic.pdf
 http://www.worldbank.org/depweb/beyond/beyondcobeg_09.pdf
 http://www.unrisd.org/80256B3C005BCCF9/httpNetITFramePDF?ReadFor
m&parentunid=544C06A70C5098FFC1257A99005899CA&parentdoctype=
paper&netitpath=80256B3C005BCCF9/(httpAuxPages)/544C06A70C5098F
FC1257A99005899CA/$file/Ghosh.pdf
 https://lh4.googleusercontent.com/-vF8GK-rvi-
M/TWwqc8c4akI/AAAAAAAAPBo/0bDZmiecLl4/s1600/japan.jpg
 http://fiid.org/?page_id=1572
 http://bgimacro.wordpress.com
 http://www.mtholyoke.edu/~lee20d/classweb/History.html
REFERENCES