Structural Change and Productivity Growth

Structural Change and Productivity Growth --in Latin America, Asia, and Turkey Dani Rodrik Merih Celasun Memorial Lecture December 2010

Structuralism is back Not in the sense of distrust of markets or underestimation of the role of incentives But greater appreciation of the role that economic structure plays in facilitating and constraining economic development As evidenced by work on: Inter-sectoral and inter-firm gaps in productivity dualism The export-diversification challenge Innovation as self-discovery rather than R&D Structural change as engine of development Developing economies are not just radially-shrunk versions of advanced economies

Labor productivity gaps: Turkey Labor productivity in relation to average productivity, 2005 6 5 4 3 2 1 0 min man pu con wrt tsc fire cspsgs

Dualism within sectors Source: McKinsey Global Institute (2003)

-.22 -.2 Inter-sectoral productivity gaps diminish over the course of development -.18 -.16 -.14 IDN IND BOL PER PHL BWA TUR BRA THAVEN COL MYS TWN NLD CHL MEX CRI ARG KOR DNK HKG SGP ESP ITA JPN SWE UKM USA FRA 7 8 9 10 11 lnrgdpch Coefficient of variation of (log) sectoral labor productivity against percapita income

How does inter-sectoral structural change contribute to overall productivity growth? P t i n t k p p, i i, t i n i, t i, t within structural change

The Latin American paradox Productivity decomposition in Latin America across different periods (annual growth rates) 1950-1975 1975-1990 1990-2005 Sectoral productivity growth Structural change -0.01-0.005 0 0.005 0.01 0.015 0.02 0.025 0.03 0.035 0.04 0.045 Based on data from Carmen Pages, ed., The Age of Productivity, IDB, 2010.

Implications Post-1990 growth constrained by adverse structural change growth reducing structural change Consequence of economic liberalization: positive within effects, negative overall effects? Empirical work on productivity consequences of trade liberalization within manufacturing What happens if displaced labor ends up in sectors with even lower productivity Informality, traditional services, etc.

A more detailed, comparative look: the data Latin America Asia High-income ARG HKG DNK BOL IDN ESP BRA IND FRA CHL KOR ITA COL MYS JPN CRI PHL NLD MEX SGP SWE PER THA UKM VEN TWN USA Sector Full name 1 AGR Agriculture 2 MIN Mining 3 MAN Manufacturing 4 PU Public utilities 5 CON Construction 6 WRT Wholesale & retail trade 7 TSC Transport & communication 8 FIRE Finance & business services 9 CSPSGS Government & public services + TUR TUR not included in this data set. I used data from TUIK to include TUR in the analysis. Marcel P. Timmer and Gaaitzen J. de Vries (2007), A Cross-Country Database For Sectoral Employment And Productivity In Asia And Latin America, 1950-2005, Groningen Growth and Development Centre Research Memorandum GD-98, Groningen: University of Groningen, August 2007.

Questions Is this something due to post-1990 global conjuncture? How does Asia compare? Where does Turkey stand in comparison to Latin America and Asia? How can we explain these patterns?

Basic results Decomposing productivity change, 1990-2005 LAC ASIA HI sectoral productivity growth structural change -0.015-0.01-0.005 0 0.005 0.01 0.015 0.02 0.025 0.03 0.035 0.04 region overall productivity growth sectoral productivity growth structural change LAC 1.35% 2.24% -0.88% ASIA 3.33% 2.81% 0.52% HI 1.46% 1.54% -0.09%

Basic results (weighted data) Decomposing productivity growth, 1990-2005 (weighted data) LAC ASIA HI sectoral productivity growth structural change -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% region overall productivity growth sectoral productivity growth structural change LAC 1.08% 1.05% 0.03% ASIA 3.28% 2.12% 1.16% HI 1.81% 1.92% -0.11%

Countries ranked by: Contribution of sectoral: country region total within structural KOR ASIA 0.038972 0.052947-0.013975 PER LAC 0.034072 0.038536-0.004465 CHL LAC 0.029252 0.038205-0.008953 SGP ASIA 0.037079 0.037853-0.000775 MYS ASIA 0.040816 0.035871 0.004946 TWN ASIA 0.039907 0.03448 0.005427 BOL LAC 0.008808 0.033657-0.024849 IND ASIA 0.042316 0.032409 0.009906 VEN LAC -0.003542 0.032048-0.03559 ARG LAC 0.023534 0.029429-0.005896 HKG ASIA 0.03272 0.020182 0.012538 TUR TURKEY 0.031586 0.017353 0.014233 IDN ASIA 0.027799 0.017228 0.010571 THA ASIA 0.030511 0.013835 0.016676 CRI LAC 0.0125 0.008725 0.003775 MEX LAC 0.01067 0.008339 0.002331 PHL ASIA 0.009455 0.00809 0.001365 BRA LAC 0.004444 0.006957-0.002513 COL LAC 0.001849 0.00529-0.00344 ETH AFRICA 0.018733 0.003935 0.014798 Contribution of structural change: country region total within structural THA ASIA 0.030511 0.013835 0.016676 ETH AFRICA 0.018733 0.003935 0.014798 TUR TURKEY 0.031586 0.017353 0.014233 HKG ASIA 0.03272 0.020182 0.012538 IDN ASIA 0.027799 0.017228 0.010571 IND ASIA 0.042316 0.032409 0.009906 TWN ASIA 0.039907 0.03448 0.005427 MYS ASIA 0.040816 0.035871 0.004946 CRI LAC 0.0125 0.008725 0.003775 MEX LAC 0.01067 0.008339 0.002331 PHL ASIA 0.009455 0.00809 0.001365 SGP ASIA 0.037079 0.037853-0.000775 BRA LAC 0.004444 0.006957-0.002513 COL LAC 0.001849 0.00529-0.00344 PER LAC 0.034072 0.038536-0.004465 ARG LAC 0.023534 0.029429-0.005896 CHL LAC 0.029252 0.038205-0.008953 KOR ASIA 0.038972 0.052947-0.013975 BOL LAC 0.008808 0.033657-0.024849 VEN LAC -0.003542 0.032048-0.03559

-1 0 1 2 3 Looking closer at structural change term: LAC Correlation Between Sectoral Productivity and Change in Employment Shares in Latin America (1990-2005) = -2.6866; t-stat = -1.17 min pu min min pu con min min pu pu pu pu min minfire fire tsc tsc man tsc man confire man man man mantsc putsc tsc man con cspsgs tsc man con con tsc con fire fire cspsgs cspsgs wrt wrt fire cspsgs wrt fire cspsgs fire wrt cspsgs cspsgs con cspsgs fire cspsgs wrt mincon wrt wrt wrt con pu wrt -.2 -.1 0.1.2 Change in Employment Share ( Emp. Share) Fitted values *Note: denotes coeff. of independent v ariable in regression equation: ln(p/p) = + Emp. Share Source: Authors' calculations with data f rom Timmer and de Vries (2007)

-2-1 0 1 2 3 Looking closer at structural change term: Asia Correlation Between Sectoral Productivity and Change in Employment Shares in Asia (1990-2005) = 3.3202; t-stat = 2.04 min pu pu pu min fire pu min pu fire min man pu min tsc man pu fire man wrt con man fire cspsgsfire tsc tsc tsc man fire fire man min con fire man tsc tsc man tsc cspsgs wrt con con tsc cspsgs wrt cspsgs cspsgs wrt wrt wrt wrt cspsgs cspsgs wrt man min cspsgs wrt con con con con con fire -.2 -.1 0.1 Change in Employment Share ( Emp. Share) Fitted values *Note: denotes coeff. of independent v ariable in regression equation: ln(p/p) = + Emp. Share Source: Authors' calculations with data f rom Timmer and de Vries (2007)

-.5 0.5 1 1.5 2 Selected countries: Argentina Correlation Between Sectoral Productivity and Change in Employment Shares in Argentina (1990-2005) = -7.0981; t-stat = -1.21 min pu man tsc con wrt fire cspsgs -.06 -.04 -.02 0.02.04 Change in Employment Share ( Emp. Share) Fitted values *Note: Size of circle represents employ ment share in 1990 **Note: denotes coeff. of independent v ariable in regression equation: ln(p/p) = + Emp. Share Source: Author's calculations with data f rom Timmer and de Vries (2007)

-1 0 1 2 Selected countries: Brazil Correlation Between Sectoral Productivity and Change in Employment Shares in Brazil (1990-2005) = -2.2102; t-stat = -0.17 pu min fire man con tsc cspsgs wrt -.1 -.05 0.05 Change in Employment Share ( Emp. Share) Fitted values *Note: Size of circle represents employ ment share in 1990 **Note: denotes coeff. of independent v ariable in regression equation: ln(p/p) = + Emp. Share Source: Author's calculations with data f rom Timmer and de Vries (2007)

-1 0 1 2 Selected countries: India Correlation Between Sectoral Productivity and Change in Employment Shares in India (1990-2005) = 35.2372; t-stat = 2.97 pu tsc min fire cspsgs wrt con man -.04 -.02 0.02 Change in Employment Share ( Emp. Share) Fitted values *Note: Size of circle represents employ ment share in 1990 **Note: denotes coeff. of independent v ariable in regression equation: ln(p/p) = + Emp. Share Source: Author's calculations with data f rom Timmer and de Vries (2007)

-1 0 1 2 3 Selected countries: Thailand Correlation Between Sectoral Productivity and Change in Employment Shares in Thailand (1990-2005) = 5.1686; t-stat = 1.27 pu min tsc man fire cspsgs wrt con -.2 -.1 0.1 Change in Employment Share ( Emp. Share) Fitted values *Note: Size of circle represents employ ment share in 1990 **Note: denotes coeff. of independent v ariable in regression equation: ln(p/p) = + Emp. Share Source: Author's calculations with data f rom Timmer and de Vries (2007)

How does Turkey compare? Decomposition of productivity growth, Turkey 1988-2008 within structural change 1990-2005 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50%

-1 -.5 0.5 1 1.5 Selected countries: Turkey Correlation Between Sectoral Productivity and Change in Employment Shares in Turkey (1988-2008) = 2.9138; t-stat = 1.14 pu tsc fire min con man wrt cspsgs -.2 -.1 0.1 Change in Employment Share ( Emp. Share) Fitted values *Note: Size of circle represents employ ment share in 1988 **Note: denotes coeff. of independent v ariable in regression equation: ln(p/p) = + Emp. Share Source: Authors' calculations with data f rom the Turkish Statistical Institute

Some intermediate conclusions Structural change in LAC contributed negatively (unweighted) or very little (weighted) to labor productivity growth compared to what happened in ASIA These economies are supposed to have become more open : yet in all cases the employment share of tradables (the sectors experiencing the most rapid productivity growth) has been shrinking. Some of this is normal, and associated with increase in incomes But also signs that some of it is pre-mature Turkey looks decidedly more Asian in terms of the contribution of structural change to overall productivity growth

Explaining differences across countries Richer countries may have less room for productivityenhancing structural change Labor market rigidities may prevent expansion of more productive sectors Trade/industrial/currency policies may: play a role in encouraging/discouraging new tradable activities expose tradables to import competition too early and excessively Comparative advantage may encourage specialization in primary products instead of manufacturing with limited potential to absorb labor

Income differences Average economy-wide labor productivity, 2000 PPP $ 60000 1990 2005 50000 40000 30000 20000 10000 0 ASIA HI LAC TURKEY

Inter-sectoral productivity gaps Dispersion of sectoral labor productivity, 2005 (coefficient of variation of log sectoral productivites) 0.16 0.14 Asia average: 0.098 LAC average: 0.098 Turkey: 0.080 0.12 0.1 0.08 0.06 0.04 0.02 0 HKG IDN IND KOR MYS PHL SGP THA TWN ARG BOL BRA CHL COL CRI MEX PER VEN TUR

-.04 -.03 -.02 -.01 0.01 Structure of exports TUR HKG THA JPN ITASWEESP FRA MEX DNKNLD IND MYS UKM USA SGP PHL CRIIDN BRA PER KOR COL ARG CHL BOL t-stat: -3.38 VEN 0 20 40 60 80 Exp_rawmat

-.02 -.01 0.01.02 The real exchange rate t-stat: 3.12 IDN TUR PER CRI THA IND DNK SWE NLD FRA ITA ESP MEX HKG BRA ARG CHL COL MYS BOL PHL JPN USA UKM SGP VEN KOR -1 -.5 0.5 1 underval

-.03 -.02 -.01 0.01 Rigidity of labor laws HKG DNK THA COL MYS JPNCHL ARG IND TUR PER IDN CRI MEX NLD SWE ITA BRA ESPFRA USA SGP UKM PHL BOL KOR VEN t-stat: -1.70 0 20 40 60 80 Employment rigidity index (0=less rigid, 100=more rigid)

Concluding comments Structural transformation is the key to economic development Structural transformation is not an automatic process We need to avoid both the dirigiste and the market fundamentalist traps pragmatism rather than preconceived ideologies strategic collaboration between government and the private sector Ingredients: Institutionalized dialogues, carrots, and sticks