Comments at the Conference on “Macro and Growth Policies in the Wake

of the Crisis”

Dani Rodrik

March 18, 2011

What’s new in the post-crisis environment

Advanced countries hobbled by high public debt

Possibly lower growth in the North

Doubts about cross-border financial flows

From a multilateral regime to a G-0?

Growth theory in one slide

Rate of economic growth is a function of convergence – closing existing gaps in knowledge and capital-labor ratios

But convergence is conditional – depends on doing the “right things”

So growth rate of rich countries largely irrelevant – unless it affects possibilities of catch-up

But not clear we have a good handle on what the “right things” are – the new consensus is about search and pragmatism rather than

ready-made of list of to-do’s

Is pre-crisis growth sustainable?

Bad news: for LAC and SSA, it was mostly making up for lost ground

Good news: “convergence gap” remains wider, for those countries, than at anytime since the 1970s

A wider convergence gap (for most)

Incomes as a ratio of high-income countries

0

0.05

0.1

0.15

0.2

0.25

1970

1971

1972

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1975

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South Asia

East Asia & Pacific (all income levels)

Latin America & Caribbean (all income levels)

Sub-Saharan Africa (all income levels)

Latin America

Sub-Saharan Africa

Two prerequisites for convergence

Economic: ongoing structural transformation from low- to high-productivity activities – key role of modern tradables – need to focus on entire economy, not just

misallocation within modern industries – “excessive” capital inflows and high commodity prices

may be good in the short-term, but not in the medium- to longer-term due to Dutch disease and governance problems

– some financial de-globalization might be good news

Political: building resilience to shocks through institutions of conflict management – key role of democratic governance

Productivity gaps are large in developing countries

MWI

ETH

ZMB

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KEN

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MYSKOR

MUS

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ESP

UKM

JPN

SWEITA

NLD

FRA

SGP

HKG

USA

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t plu

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esid

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7 8 9 10 11lnlabprod05

Relationship between inter-sectoral productivity gaps and income levels

Growth requires both new activities and

ongoing structural change

05

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00

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7 8 9 10 11ln_sumlprod

In %, = (agr_lprod_kppp00/non_agr_lprod_kppp00)*100 Fitted values

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199920002001

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19651966196719681969197019711972

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198219831984198519861987

1988

198919901991

1992199319941995199619971998

1999200020012002200320042005

20

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In %

, =

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7 8 9 10 11ln_sumlprod

IND FRA

PER

Relationship between economy-wide labor productivity (horizontal axis) and the ratio of

agricultural productivity to non-agricultural productivity (percent, vertical axis)

Growth-enhancing structural transformation is not automatic

-0.02 -0.01 0 0.01 0.02 0.03 0.04 0.05

HI

ASIA

AFRICA

LAC

within

structural

Decomposition of productivity growth by country group, 1990-2005

Productivity growth

within sectors

Productivity growth due

to structural change

Patterns of structural change: Asia versus Latin America

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-.2 -.1 0 .1 .2

Change in Employment Share(Emp. Share)

Fitted values

*Note: denotes coef f . of independent v ariable in regression equation: ln(p/P) = + Emp. Share

Source: Authors' calculations with data f rom Timmer and de Vries (2009)

= -2.6866; t-stat = -1.17

Correlation Between Sectoral Productivity andChange in Employment Shares in Latin America (1990-2005)

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Change in Employment Share(Emp. Share)

Fitted values

*Note: denotes coef f . of independent v ariable in regression equation: ln(p/P) = + Emp. Share

Source: Authors' calculations with data f rom Timmer and de Vries (2009) and China's National Bureau of Statistics

= 3.5826; t-stat = 2.20

Correlation Between Sectoral Productivity andChange in Employment Shares in Asia (1990-2005)

Asia Latin America

Large reservoir of “excess labor” helps, conditionally

SGP

HKG

USAUKM

SWENLDDNKFRA

ITAJPNESP

ARG

TWN

VEN

ZAF

MUS

KOR

CHL

MEX

BRA

MYSCRI

COLPER

BOL

PHL

TUR

NGA

IDN

ZMB

CHN

THA

GHA

SEN

IND

KEN

MWI

ETH

-.08

-.06

-.04

-.02

0

.02

Com

pon

en

t plu

s r

esid

ual

0 .2 .4 .6 .8 1Labor share of agriculture, 1990

SGP

HKG

USAUKM

SWE

NLD

DNK

FRA

ITA

JPN

ESPARG

VEN

ZAF

MUS

KOR

CHL

MEX

BRAMYS

CRI

COL

PER

BOLPHL

TUR

NGA

IDN

ZMB

CHN

THA

GHA

SEN

IND

KEN

MWIETH

-.04

-.02

0

.02

.04

Com

pon

en

t plu

s r

esid

ual

0 .2 .4 .6 .8 1Labor share of agriculture, 1990

Association between the initial labor share in agriculture and the contribution

of structural change to growth

unconditional conditional

Comparative advantage in primary products is bad news

JPN

HKG

KOR

ITASWETWN

UKMUSASGP

PHL

TUR

CHN

ESPFRA

IND

MUS

THA

MEX

MYSDNKNLD

ZAF

BRA

SEN

KENCRI

IDNETH

COLARG

GHA

PERCHL

BOL

ZMB

MWI

VEN

NGA

-.1

-.08

-.06

-.04

-.02

0

Com

pon

en

t plu

s r

esid

ual

0 .2 .4 .6 .8 1index_exp_rawmat

Partial association between the share of primary products in

exports and the contribution of structural change to growth

But policy can clearly help

JPN

DNK

SWE

NLDFRA

UKM

ITA

NGA

ESP

USA

ZMB

MEX

TWN

SGP

KOR

HKGTURPER

ARG

SEN

VEN

BRA

CRIZAF

BOL

KEN

GHA

CHL

MWI

MYSCOL

THA

ETH

PHL

CHN

IDN

IND

MUS

-.06

-.04

-.02

0

.02

Com

pon

en

t plu

s r

esid

ual

-1 -.5 0 .5 1underval

Partial association between an index of currency “undervaluation”

and the contribution of structural change to growth

Conclusions

The presence of a large convergence gap ensures significant potential for rapid economic growth in developing world, regardless of what happens in the rich countries

Fulfilling this potential requires ongoing process of diversification and structural change

This process is not automatic, especially in countries with an initial comparative advantage in primary products

It necessitates pragmatic, experimental policies that support new industries – along with an external environment that supports, rather than

misdirects, such efforts – implications for WTO rules, and for WB/IMF policy advice