Structural Change and Productivity Growth -20 Years later

Comments and Reflections

Luc SoeteUNU-MERIT

Maastricht University

High-Level Seminar at the 32 Second session of ECLAC, Santo Domingo, Dominican Republic, 9-13 June 2008

Old or new problems and new or old opportunities? A very interesting study in the best tradition of ECLAC:

An excellent and extensive literature overview covering many different areas;

New insights into facts and figures with respect to structural change in the ECLAC countries and world-wide;

An in-depth and systematic comparison with policies in a large number of reference countries.

From “old” to “new” problems: Globalisation, China and India and impact of ICT on global aspirations; Is current global growth sustainable?

Exploiting new or old opportunities: Learning through exports, FDI and M&A; Structural shift in terms of trade in agriculture and natural resources and

impact on technological progress and learning.

1. Old or new problems: globalization and ICT Over the last fifteen years, quite suddenly, consumption, job and life

aspirations have become globalized thanks to ICT and Internet. As the ECLAC study points out, impact of such globalization still

insufficiently brought into current policy discussions: not just ICT in high-tech manufacturing but also in low-tech industries, in services, in the formal and informal economy.

Global Gallup opinion survey, McKInsey Global Institute study on “China’s urban billion” all point to the dramatic future growth in urban consumption, also emphasized in the ECLAC study.

One might argue that GDP appears today more a measure of the industrial past of countries; by contrast population, or more specifically urban population, is becoming the indicator of future growth and future market opportunities.

Old or new: is current global growth sustainable? This exponential demand led urban consumption growth “explosion” emphasized in

the ECLAC study resembles in many ways Richard Freeman’s (2005) concerns with respect to global labour supply shock:

In Freeman’s case China, India, Russia and Central and Eastern European transition economies’ entry in the global economy represent a doubling of the world’s labour force with long term global labour/wage adjustments lasting for at least 30 years.

What is the demand impact of a doubling of urban consumption aspirations on world growth?

Macro-simulation study of Izurieta and Singh, 2008 suggests that present world growth rates are unsustainable because of resource constraints.

The natural resource constraint on global growth has become, in other words, structural, no longer primarily cyclically driven.

Impact of those structural features: Relationship with technological change on the supply and demand side becomes essential:

on supply side natural-resource expansion through more sophisticated extraction technologies and higher productivity in production versus on demand side strong incentives on developing technologies aimed at natural resource saving and substitution;

Shift in terms of trade shifts also power amongst firms operating alongside value chains in favour of natural resource extracting/producing suppliers and in disfavour of processing firms. This shift provides Hirschman type windows of opportunities for upstream entry.

2. New or old opportunities: Learning through exports The ECLAC report is still very prudent about growth and technological

opportunities through exports, FDI, mergers and acquisitions (Chapter 5). Old missed opportunities: Import substitution strategies were probably most

damaging with respect to missed learning opportunities from abroad… New opportunities:

Globalization introduces a lower bound for quality. Very clear with respect to the degree of product variety and product quality of intra-European versus extra-European trade. More product variety within Europe’s internal trade, and higher quality but less variety with respect to extra-European global trade. Firms select their best products for global markets (see also evidence in Chapter 3 on Cuba).

Particular role of users with respect to ICT use: the long tail of diversification. Particular new relevance of global “collaborative innovation”. Will niche players be global or local?

China and India: from domestic R&D to foreign M&A: acquiring developed countries technological capabilities to guarantee success in achieving the lower quality bound in international competitiveness. Quid about MNC’s from Latin American and Caribbean countries?

Structural change in agriculture A brave attempt in ECLAC study to investigate some of the structural change features

in agriculture (Chapter 3) highlighting amongst others the unused opportunities to increase the quality of agricultural products… but

Nevertheless surprising that so little attention paid in current food crisis debate on characteristics of agricultural production :in early post 2nd World war period:

Rich literature on the nature of technical improvements in agriculture production; On the role of extension schemes; On the particular contribution of publicly funded research; On the limited role of intellectual property protection of seeds; On the dominance of local production over international trade; On the limited product variety more closely linked to seasonal production; etc.

Also little in ECLAC report on how to attack the current major issues: On GMO’s and global trade restrictions On Common Agricultural Policies in developed countries and their world trade impact… Why not a CAP in ECLAC? A CAP provides strong regional identity; regional integration

might well be the second best solution for global free trade; it appears also ecolologically more justifiable and socially sustainable.

Technological change/learning in natural resources An old growth opportunity for Latin America, but also an old curse well reviewed in

the ECLAC study (from Prebish, Hirschman to Rosenstein-Rodan)… : What is new today?

Like in agriculture, a dramatic structural shift in terms of trade following globalization with winners and losers also within the group of ECLAC countries.

Offering new growth opportunities but also presenting new curse dangers… Central new curse element appears like a form of Dutch knowledge disease:

Within the framework of rising terms of trade in favor of natural resources, there are opposite sets of incentives for investments in natural resource saving technologies: strong in countries poorly endowed with natural resources (Japan, Europe); weak in countries well endowed with natural resources (Russia, Latin America, Middle East);

A new technological gap is likely to emerge in the development of new and improved industrial technologies introducing energy- and material-saving, emission-free and carbon-neutral technologies, recyclable waste treatment and cradle2cradle technologies , between Japan, the EU, the US but increasingly also China and India on the one hand and LA on the other…

To some extent already visible in the ECLAC report. Not a word on the need for such sustainable technologies and innovation…