Industry and policies

Industry and innovation policies in developing countries: theory and practice

Module 1: Manufacturing, structural change and economic development

Why industry matters

It’s important to define advantages and disadvantages to develop a strong and dynamic manufacturing sector because it represents also additional sectors. How industrial development matters to the well-being of the population: why innovation and manufacturing is important?

(MVA: Manufacturing Value Added) In here we can see time and values and billions on constant to $ taking prices as consent. Participation of main country blocks: China, Industrial countries, EIE emerging, LDC list developed countries, DEVOT; China is growing exponentially.

On the other hand, we have values for some countries and in Italy MVA is decreasing in 10 years. India and China had an inversion of tendency. Largest contributors of MV in the world.

A country’s level of industrial development is often reflected by its per capita which measures a countries’ level of manufacturing production relative to their population size. Value added is a sector’s net output after adding up all outputs and subtracting all intermediate inputs. It is calculated without deducting the depreciation of fabricated assets or the depletion and degradation of natural resources.

Value chains

Values for production. Production is calculated with the final gold sold to the market, final products, limited value to add at the final product.

MVA X HDI => statistical correlation: Countries more Human Developed, highly developing positive correlation: curve at a very low level, and it goes faster than ever. China, it has a higher MVA but less HDI value. Same as the CIP – Competitive Industrial Performance Index.

Poverty headcount ratio: people living at USD (US Dollar) 1.90 a day. Relationship with MVA and we see that industrial countries are around 0% in that way (if we define the concept of poverty). Negative correlation.

MPI: Manufacturing is highly related to GDP

Manufacturing is related to lower poverty and few countries have a higher level of manufacturing. Analysis on industrial development and certain aspects.

China is a strong exporter of manufacturing. Higher technology values with countries with larger manufacturing and China is experiencing a moving from a lower to a higher percentage. It is not only the factory of the world, but it is also an entering market increasing for higher technology goods. Same is not happening to LDC, we are realizing that dynamic industry and dynamic sectors are different. Industry creates employment. Manufacturing more productive, we have a higher product of industry. It increases with higher productivity.

How firms are behaving in development capabilities and the dynamic industrial set

Paper: Ghani and O’Connell. Service sector which starts with the title (Can service be a growth escalator in low-income countries?). Traditionally service sector was connected to a slow productivity sector in the manufacturing. The service sector is undergoing a revolution and several countries studied are developing service sector that provides an opportunity for these countries. The possibilities to develop a comparative advantage that expands. This is completely different from what we said before.

In this graph, we have a value added per worker, that converges in determinates countries.

Why an economy is growing going back to the Solow model: the growth of economy will depend on productivity that is not explained by labor capital, but it will be the black box in which the workers can be involved. The growth of sectors depends on new technologies and how they are used.

Convergence

Solow model will lead us that all the countries converge in the income growth rate. In the graph below we can see what’s happening in the productive sector. ln(services VA per worker) ln(services VA and whether it will change in per worker) to late 2000s. The regression line is a signal of the convergence services: countries having a higher rate of change on the vertical axe, are those that at the lower levels at the starting level. They start behind and the rate of work is increasing faster. There is a curve and a process of economic convergence in the service sector.

For manufacturing is a bit different. The significance of the regression line is almost horizontal, and the significance of the regression is lower than the other concerning services. The service sector is converging and give many opportunities.

In this sense we have a contribution of the annual rate and how faster the sectors are growing, changing the GDP. This exempt China in the manufacturing sector economy.

What happens to employment?

In this sense we can see how the large GDP per capita is changing from poor to rich and the employment share. In a nutshell, in terms of employment, service sector is more efficient.

However, some caution:

• The dividing line between manufacturing and services is becoming increasingly blurred. There is an increased unbundling of manufacturing and the divestiture of services that were once included in manufacturing value added.
• The paper does not argue that service is superior to manufacturing, or the other way round. The latecomers to development now have many more levers to pull. The service growth surge in Africa and in other low-income countries could be merely reflecting a catch-up given that services were more backward to start with.
• The landscape on the effects of technology on growth and employment patterns across different sectors is still at an early stage and rapidly evolving (Autor, 2014).

Can the service sector be an alternative engine of growth?

Arguments in favor of industrialization as the main engine of growth in economic development:

• The literature has emphasized the manufacturing sector and its empirical correlation between desirability in countries. There is an empirical correlation between the degree of industrialization and the levels of per capita income in developing countries. More industrialized developing countries tend to be richer.
• The manufacturing sectors offer special opportunities for capital accumulation compared to agriculture. Capital accumulation is one of the aggregate sources of growth. Thus, an increasing share of manufacturing and industry will contribute to aggregate growth.
• Growth will be due to structural transformation of economy to the sectors of highest levels of productivity. Productivity is higher in the manufacturing sector than in the agricultural sector. The transfer of resources from agriculture to manufacturing provides a structural change bonus (dynamically = manufacturing has higher rates of productivity growth than other sectors).
• Lowers dependence on international markets (reduced impact of fluctuations in raw materials prices, structural deterioration of terms of trade? (Prebusch – Singer…))
• The manufacturing sector offers special opportunities for economies of scale, which are less available in agriculture of services. Manufacturing isn’t developing countries’ business. Primary goods represent the higher percentage in this sector. Considering that for example KSA is strong on oil.
• The manufacturing sector offers special opportunities for both embodied and disembodied technological progress (Cornwall 1977). Technological advance is concentrated in the manufacturing sector and diffuses from there to other economic sectors such as the service sector.
• Linkage and spillover effects are stronger in manufacturing than in agriculture or mining. Linkage effects refer to the direct backward and forward linkages between different sectors, they create positive externalities to investments in given sectors. Spillover effects to the disembodied knowledge flows between sectors.
• As per capita incomes rise, the share of agricultural expenditures in total expenditure declines and the share of expenditures on manufactured goods increases (Engle’s Law).
• Manufacturing offers high quality employment (in the US in 2008 – earning in manufacturing 20% higher).
• “Production of machines by means of machines”. Machine tools as mother machines.
• Breaking technological linkages in manufacturing value chains – losing industrial commons.

The determinants of industrial development: dualism and structural change

The explanation of manufacturing growth:

• Dualism and model of the dual economy: expression of underdevelopment. You can see for example at the same time things modern with no modern.
• Structural change: the society can develop. Countries in initial stages of development employ a lot of resources in agriculture. In this diagram the GDP is made by agriculture across the GDP per capita. As the GDP per capita grows, the share of agricultural economy is shrinking. (First one: typically in developing countries)

Sectors are mainly producing different products. The modern sectors are much more productive than what is rural. In here it is important to understand how economic growth is directly connected to sectors and models. Lewis model exploits the synergy of these two different models. Of course, is different the type of productions in food and how are consumed. The main thread of the argument is the interdependence of these two kinds of under sectors in the Lewis model.

Typical unit of production in the economy sector. A to B is the production. Profits improve the MPL upwards in a second MPL. Moving labor from agriculture to industrial sector with a lower employment of labor that can feed all the population.

Karl Marx: capitalists reinvest profits in machinery pushing production forward. In Maoist theory state invest in productivity.

Answers

• Capitalists do not invest = no additional investment? Just having profits and that’s it.
• Taxes: if workers move to industry, fewer workers are in the agriculture, capital income growth => taxes. In this way wages in agriculture remain low instead staying in agriculture. They move so they can have an additional income rather than the industrial sector. In this case the attractiveness is lower. Why do I should invest in agriculture?
• Instead of causing a shift in the production, we should think on technical servings. It’s convenient to use technology and the employment of labor is different.
• No consideration for demanding of goods. If countries move from larger GDP, agriculture will go down and services will grow. Productivity is relevant because labor changes the levels of productivity. Productivity is behind the diagram, and therefore one sector is forward than the other. Common pattern of transformation characterized of countries with higher share of agriculture when they are poorer and less when they become rich.

Dualism: some labor is employed very well and others not. Productivity is employed in all the sectors.

The need of a micro-approach to explain performance

• Colors to different sectors; there is a lot of the labor productivity instead of manufacturing. In the second we have differences in the productivity level. Resources are allocated for maximizing productivity, but in the first graph we have less employability in the agriculture sector.

In this sense we have – better paid, more movement – this because we live in a free trade economy. In any economy there’s a bit of everything. Manufacturing is more productive because it produces a lot, such as better skills. The model we are studying is more productive.