When a country shifts from being a largely agrarian economy to one based on services or industry, it is said to have undergone “structural change”. This has happened in some Asian countries, contributing largely to their economic development. Many low-income countries, however, have yet to undergo this
process of structural transformation.
Harvard University professor of economics, Dani Rodrik.
All sustained episodes of growth are underpinned by fundamental structural change. Of course, you can get growth spurts because of an improvement in the terms of trade or a sudden burst of capital inflows. But those tend to peter out unless there is the emergence and expansion of new industries, and movement of labor from traditional industries into modern industries. This is the essence of structural change. Without these things happening, a country is not likely to achieve long-term growth.
process of structural transformation.
Harvard University professor of economics, Dani Rodrik.
All sustained episodes of growth are underpinned by fundamental structural change. Of course, you can get growth spurts because of an improvement in the terms of trade or a sudden burst of capital inflows. But those tend to peter out unless there is the emergence and expansion of new industries, and movement of labor from traditional industries into modern industries. This is the essence of structural change. Without these things happening, a country is not likely to achieve long-term growth.
Asia has been the archetypal example of a traditional model of economic development for those 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 skills.
It has happened in many Asian countries—Japan being the earliest example of a non-western country to industrialize. South Korea and Taiwan quickly followed, and from the 1960s through late 1970s, more Southeast Asian countries became industrialized, most notably China.
These Asian countries have focused on achieving rapid industrialization through outward-oriented, or export oriented, industrialization. They have been very pragmatic and eclectic in the types of instruments they used.
What would be some barriers to structural transformation
in some African and Latin America countries—what we have seen is an obsessive attachment to a particular ideology. For example, during the 1960s and 1970s, many countries took import substitution to extremes.
in the 1990s, these countries were encouraged to focus on the fundamentals, and structural transformation would follow automatically. This did not quite work out for them.
The principle concern, then, is for a country to do its homework and figure out what are the problems that would affect structural change.
about countries that are rich in natural resources
Those countries come with a set of advantages and the belief that having natural resources can make them richer more quickly. But there is also the disadvantage of being natural resource rich, because the country can suffer from so-called “Dutch disease,” which means that non-natural resource sectors tend to be very unprofitable. For example, those countries exporting natural resources like oil or copper may find it much harder to use modern manufacturing techniques competitively.
There is really no good way out of this situation. I think the amount of diversification that can be achieved by resource-rich countries is limited vis a vis resource poor countries.
The best route for those resource-rich countries looking to diversity is to develop the fundamental capabilities and skills of their human capital to help improve productivity in the service sectors, rather than focusing solely on manufacturing. While this is a longer process, they have still the cushion of natural resource wealth in the short term.
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