Factories no longer the sure route to prosperity
Countries once grew rich through manufacturing – but today there is more than one way to effect structural transformation. Think about countries growing out of poverty and you probably picture something like this: underemployed workers leaving inefficient farms for factories that make textiles and clothing for domestic and export markets. Over time, this shift raises productivity and wages across the economy, while countries’ production and export baskets diversify into more sophisticated goods and services. For the past several decades, this image would have been broadly on the mark. South Korea is a prime example: through the 1950s, a large share of its population still worked in the agricultural sector. Its manufactured exports a decade later were mostly textiles, clothing, footwear and wigs. Two generations on, in 2017, Korea was the world’s fifth-largest merchandise exporter and its ninth-largest importer. Even if your mobile phone and household electronics weren’t made by a Korean company, they almost certainly contain integrated circuits that were. In varied ways, and to differing extents, countries from Bangladesh to Colombia to China have trodden this path. Since the dawn of the Industrial Revolution in late 18th century England, ‘structural transformation’– a term economists use for the process of shifting people and resources out of subsistence work into more productive activities – has begun with labour-intensive manufacturing. And starting in the 1950s, trade has been a key accelerator of structural transformation in developing countries, enabling much faster growth and poverty reduction than would otherwise be possible. Good enough to compete Trade matters in this story because in most developing countries, internationally tradable sectors are typically much more productive than the rest of the economy. Pulling more people and capital out of non-tradable activities and into firms dealing in tradable goods and services therefore makes for better jobs and a […]