Structuralism versus the mainstream on growth and development

DSC00236aThe insightful quote below distinguishes the structural approach to economic growth from the mainstream one. Although both allow for a transformation in the structure of the economy as part of the growth process, the former leads to a stronger argument for evolving patterns of state intervention to sustain this process.

This distinction in term of policy implications probably goes some way to explaining the biases on either side of the debate, as well as some of the hypocrisy of rich country policymakers, who have often used mainstream arguments to justify non-intervention in poor countries while continuing to employ a range of industrial and technology policies at home. For me the historical record of development, in particular the limited number of countries which have successfully “caught up” with the richest, favours the structuralist approach.

“There are two views regarding the role and implication of production structure for growth. The conventional narrative is that structural change in the patterns of production, expressed numerically in terms of variations in sectoral contributions to output, employment, investment, and patterns of specialization, is just a side effect of growth. As the economy expands and markets enlarge, new demands require new production processes that come into being by attracting inputs such as labor and capital. The structural configuration adjusts to incorporate novel activities or to enlarge existing ones. Growing economies almost always move from primary to secondary and further towards tertiary sectors.

The alternative view is that these patterns of structural change are not just a byproduct of growth but rather are among the prime movers. This has inherent policy implications. Because production structure must change if growth and development are to proceed, conscious choice of policies that will drive the transformation of the system toward certain sectors is essential for long-term economic expansion.

This insight is ignored by most contemporary economic theory. But it arises from observation and analysis of economic performance of developing countries around the world in the past and present. Economists who have been trained within the structuralist tradition share this perspective, holding that development requires transformation or the “ability of an economy to constantly generate new dynamic activities”, particularly those characterized by higher productivity and increasing returns to scale of production as reflected in decreasing costs per unit of output. This logic underlies Kaldor’s growth model…

One key aspect of growth in the poorest countries is that agriculture dominates the economy. Therefore, agricultural productivity growth is crucial, as in sub-Saharan Africa now. But productivity increases in the sector are significantly constrained by lack of access to modern technology, natural factors such as low fertility land, and mostly by its intrinsic inability to offer increasing returns. Hence, per capita output growth at 2 percent requires even higher growth rates of labor productivity in leading sectors (assuming that the ratio of employed labor to the population is fairly stable).

At higher income levels, the leading sector(s) must offer increasing returns and opportunities for robust output growth in response to demand. As demonstrated in…a raft of historical studies, a clear pattern of structural change emerges from the data for economies (today mostly in East and South Asia) which sustain rapid growth. Historically, manufacturing has almost always served as the engine for productivity growth but not for job creation (India with its information processing boom is an intriguing recent exception). For a sector or the entire economy to generate employment, its per capita growth rate of demand has to exceed its productivity growth. Net job creation usually takes place in services.

…[P]atterns of international trade also shift as economies grow richer. Their exports become more technically sophisticated and shift from raw materials toward manufactured products, especially in recent decades with the explosion of assembly manufacturing around the world. Import composition also shifts in response to overall changes in the basic structure of the economy. Indeed, those changes in the pattern of specialization in international trade are an essential part of the transformation of production structures, a fact that has been highlighted by the role that the terms “import substitution” and “export diversification” have played in development debates. Concerning these changes, one key question is whether an economy can pass through the raw material and assembly export stages to sell products abroad that have a high value-added content at home.”

José Antonio Ocampo, Codrina Rada, and Lance Taylor (2009), Growth and Policy in Developing Countries: A Structuralist Approach, New York: Columbia University Press, p.8-10.

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