Structural Change and Productivity Growth --in Latin America, Asia, and TurkeyDani 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

0

1

2

3

4

5

6

agr min man pu con wrt tsc fire cspsgs

Dualism within sectors

Source: McKinsey Global Institute (2003)

Inter-sectoral productivity gaps diminish over the course of development

Coefficient of variation of (log) sectoral labor productivity against per-capita income

INDBOL

PHL

IDN

PER

TUR

COL

THA

BWA

BRA

MEX

VEN

CRI

MYS

CHL

ARGKOR

TWN

ESPITA

UKM

SWE

FRA

JPN

NLD

SGPDNKHKG

USA

-.22

-.2

-.18

-.16

-.14

Com

pon

ent p

lus

resi

dual

7 8 9 10 11lnrgdpch

How does inter-sectoral structural change contribute to overall productivity growth?

“within” “structural change”

ni

tititini

ktit ppP ,,,,

The Latin American paradox

Based on data from Carmen Pages, ed., The Age of Productivity, IDB, 2010.

Productivity decomposition in Latin America across different periods(annual growth rates)

-0.01 -0.005 0 0.005 0.01 0.015 0.02 0.025 0.03 0.035 0.04 0.045

1990 - 2005

1975 - 1990

1950 - 1975

Sectoral productivitygrowth

Structural change

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 dataLatin America Asia High-income

ARG HKG DNKBOL IDN ESPBRA IND FRACHL KOR ITACOL MYS JPNCRI PHL NLDMEX SGP SWEPER THA UKMVEN 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

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.

TUR not included in this data set. I used data from TUIK to include TUR in the analysis.

+ TUR

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 resultsDecomposing productivity change, 1990-2005

-0.015 -0.01 -0.005 0 0.005 0.01 0.015 0.02 0.025 0.03 0.035 0.04

HI

ASIA

LAC

sectoral productivity growth

structural change

region overall productivity growthsectoral 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)

-0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50%

HI

ASIA

LAC

sectoral productivity growth

structural change

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

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

Looking closer at “structural change” term: LAC

agr con

cspsgsfire

man

min

pu

tsc

wrt

agr

con

cspsgs

fire

man

min

pu

tsc

wrtagr

con

cspsgs

fire

man

min

pu

tsc

wrt

agr

con

cspsgs

fireman

minpu

tsc

wrtagr

concspsgsfireman

min

pu

tsc

wrtagr concspsgs

fire

man

min

pu

tsc

wrt

agr

con

cspsgs fire

man

minpu

tsc

wrt

agr

con

cspsgs

fireman

min

pu

tsc

wrt

agr

con

cspsgs

fire

man

min

pu

tsc

wrt

-10

12

3

Log

of S

ecto

ral P

rodu

ctiv

ity/T

otal

Pro

duct

ivity

-.2 -.1 0 .1 .2Change in Employment Share

(Emp. Share)

Fitted values

*Note: denotes coeff. of independent variable in regression equation: ln(p/P) = + Emp. ShareSource: Authors' calculations with data from Timmer and de Vries (2007)

= -2.6866; t-stat = -1.17

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

Looking closer at “structural change” term: Asia

agr

con

cspsgs

fire

man

min

pu

tsc wrt

agr

concspsgs

fire

man

min

pu

tsc wrt

agr

concspsgs

fire

man

min

pu

tsc

wrt

agr

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cspsgs

fire

man

min

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tsc

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fire

man

min

pu

tsc

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concspsgs

fire

man

min

pu

tscwrt

agr

con cspsgs

fireman

min

pu

tscwrt

agr

con

cspsgsfire

man

minpu

tsc

wrt

agr con

cspsgsfire

man

min

pu

tsc

wrt

-2-1

01

23

Log

of S

ecto

ral P

rodu

ctiv

ity/T

otal

Pro

duct

ivity

-.2 -.1 0 .1Change in Employment Share

(Emp. Share)

Fitted values

*Note: denotes coeff. of independent variable in regression equation: ln(p/P) = + Emp. ShareSource: Authors' calculations with data from Timmer and de Vries (2007)

= 3.3202; t-stat = 2.04

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

Selected countries: Argentina

agrcon

cspsgsfire

man

min

pu

tsc

wrt

-.5

0.5

11.

52

Log

of S

ecto

ral P

rodu

ctiv

ity/T

otal

Pro

duct

ivity

-.06 -.04 -.02 0 .02 .04Change in Employment Share

(Emp. Share)

Fitted values

*Note: Size of circle represents employment share in 1990**Note: denotes coeff. of independent variable in regression equation: ln(p/P) = + Emp. ShareSource: Author's calculations with data from Timmer and de Vries (2007)

= -7.0981; t-stat = -1.21

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

Selected countries: Brazil

agr

con

cspsgs

fire

man

min

pu

tsc

wrt-10

12

Log

of S

ecto

ral P

rodu

ctiv

ity/T

otal

Pro

duct

ivity

-.1 -.05 0 .05Change in Employment Share

(Emp. Share)

Fitted values

*Note: Size of circle represents employment share in 1990**Note: denotes coeff. of independent variable in regression equation: ln(p/P) = + Emp. ShareSource: Author's calculations with data from Timmer and de Vries (2007)

= -2.2102; t-stat = -0.17

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

Selected countries: India

agr

concspsgs

fire

man

min

pu

tsc

wrt

-10

12

Log

of S

ecto

ral P

rodu

ctiv

ity/T

otal

Pro

duct

ivity

-.04 -.02 0 .02Change in Employment Share

(Emp. Share)

Fitted values

*Note: Size of circle represents employment share in 1990**Note: denotes coeff. of independent variable in regression equation: ln(p/P) = + Emp. ShareSource: Author's calculations with data from Timmer and de Vries (2007)

= 35.2372; t-stat = 2.97

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

Selected countries: Thailand

agr

con

cspsgsfire

man

min

pu

tsc

wrt

-10

12

3

Log

of S

ecto

ral P

rodu

ctiv

ity/T

otal

Pro

duct

ivity

-.2 -.1 0 .1Change in Employment Share

(Emp. Share)

Fitted values

*Note: Size of circle represents employment share in 1990**Note: denotes coeff. of independent variable in regression equation: ln(p/P) = + Emp. ShareSource: Author's calculations with data from Timmer and de Vries (2007)

= 5.1686; t-stat = 1.27

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

How does Turkey compare?Decomposition of productivity growth, Turkey

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50%

1990-2005

1988-2008

within

structural change

Selected countries: Turkey

agr

con

cspsgs

fire

man

min

pu

tsc

wrt

-1-.

50

.51

1.5

Log

of S

ecto

ral P

rodu

ctiv

ity/T

otal

Pro

duct

ivity

-.2 -.1 0 .1Change in Employment Share

(Emp. Share)

Fitted values

*Note: Size of circle represents employment share in 1988**Note: denotes coeff. of independent variable in regression equation: ln(p/P) = + Emp. ShareSource: Authors' calculations with data from the Turkish Statistical Institute

= 2.9138; t-stat = 1.14

Correlation Between Sectoral Productivity andChange in Employment Shares in Turkey (1988-2008)

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 productivity-

enhancing 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 differencesAverage economy-wide labor productivity, 2000 PPP $

0

10000

20000

30000

40000

50000

60000

ASIA HI LAC TURKEY

1990

2005

Inter-sectoral productivity gaps Dispersion of sectoral labor productivity, 2005

(coefficient of variation of log sectoral productivites)

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

HKG IDN IND KOR MYS PHL SGP THA TWN ARG BOL BRA CHL COL CRI MEX PER VEN TUR

Asia average: 0.098

LAC average: 0.098

Turkey: 0.080

Structure of exports

JPN

HKG

KOR

ITASWE

UKMUSASGPPHL

TUR

ESPFRA

IND

THA

MEX

MYS

DNKNLD

BRA

CRIIDN

COL

ARG

PER

CHL

BOL

VEN

-.04

-.03

-.02

-.01

0.0

1C

omp

onen

t plu

s re

sidu

al

0 20 40 60 80Exp_rawmat

t-stat: -3.38

The real exchange rate

JPN

DNKSWE

NLDFRA

UKM

ITA

ESP

USA

MEX

SGP

KOR

HKG

TURPER

ARG

VEN

BRA

CRI

BOL

CHLMYSCOL

THA

PHL

IDN

IND

-.02

-.01

0.0

1.0

2C

omp

onen

t plu

s re

sidu

al

-1 -.5 0 .5 1underval

t-stat: 3.12

Rigidity of labor laws

USA

HKG

SGP

DNK

UKM

COLMYS

THA

JPNCHL

ARG

PHL

IND

TUR

SWEITA

KOR

CRIPERIDN

MEXNLD

BRAESPFRA

VEN

BOL

-.03

-.02

-.01

0.0

1C

omp

onen

t plu

s re

sidu

al

0 20 40 60 80Employment rigidity index (0=less rigid, 100=more rigid)

t-stat: -1.70

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