
Viewpoints | Apr 30,2021
Oct 16 , 2021
By Dani Rodrik
Development policy has long been divided between two types of approaches. One approach targets poor people directly and seeks to alleviate the poverty of individual households – through income support, health and education interventions, and enhanced access to credit. The other focuses on enhancing economic opportunities and raising overall productivity – through economy-wide macroeconomic and trade policies or legal and regulatory reforms. Call the first social policy and the second growth policy.
These two types of policies are generally complementary. Aggregate growth may not always help everyone, especially the poor. Consequently, anti-poverty programmes will be necessary even when growth policy is doing its job properly. Occasionally, however, social and growth policies have been viewed as substitutes.
For example, the increased use of randomised policy experiments has allowed analysts to develop causal evidence about social policies – such as cash grants or education and health interventions – in ways that are rarely possible with macroeconomic or economy-wide policies. This, in turn, has led many academics and practitioners to downgrade the practical importance of growth policy relative to social policy.
That is a mistake, because the real determinants of poverty may lie at some distance from poor households and communities. Economic development requires productive non-farm jobs. Increasing employment opportunities in cities and encouraging migration from the countryside to urban areas may raise incomes more effectively than helping people become better farmers or providing them with cash grants.
Indeed, industrialisation has been essential to reducing poverty historically. True, the benefits of industrialisation-driven economic growth often take time to trickle down. During Britain’s Industrial Revolution, living conditions for urban workers improved very slowly, if at all, for nearly a century until the rise of labour unions and other institutional changes redressed the imbalance of power with employers. But the more recent experience with rapid, export-oriented industrialisation in the East Asian tigers and China has compressed this process and produced poverty-reduction miracles alongside growth miracles.
There are clear signs that we are now entering a new era in which industrialisation will no longer be as potent in spreading the benefits of economy-wide productivity gains. Global trends in innovation have significantly reduced the potential of manufacturing industries to absorb low-skill workers. The labour share in value-added has fallen rapidly in these branches, particularly for such workers.
And while globalisation has accelerated the transfer of manufacturing from advanced economies to developing economies, global value chains have turned out to be at best a weak vehicle for creating good jobs, because they are a transmission belt for skill- and capital-intensive technologies, and because their business model is based on imported inputs and lack of integration with the local economy. Globally competitive manufacturing industries in developing economies increasingly operate as enclaves, similar to highly capital-intensive, export-oriented extractive industries. They may spur exports and higher incomes for a narrow segment of the economy, but they bypass most workers, and especially the least educated.
This growth model falls short not only on equity or poverty-reduction grounds; it also fails to promote much growth because higher-productivity activities cannot encompass an increasing share of the economy. Just as resource-rich economies rarely grow for long (outside of terms-of-trade booms), the industrialisation model is no longer capable of generating rapid and sustained economic growth.
What, then, should today’s growth model look like?
As always, investments in human capital, infrastructure, and better institutions remain indispensable for long-term economic gains. These are the fundamentals of economic convergence with rich countries. But a growth strategy worth its name must enhance the productivity of the existing workforce, not the workforce that might emerge in the future thanks to such investments.
Developing countries retain a significant potential to increase agricultural productivity and to diversify from traditional to cash or export crops. But even with more productive agriculture – and in fact as a result of it – young workers will continue to leave the countryside and flock into urban areas. They will be employed not in factories but in informal, micro-enterprises in low productivity services with poor expansion prospects.
Therefore, next-generation growth policies will have to target these services and find ways to increase their productivity. The reality is that few informal firms will grow to become “national champions.” But by offering a range of public services – help with technology, business plans, regulations, and training for specific skills – governments can unlock the growth potential of the more entrepreneurial among them. The provision of such services can be conditioned on government monitoring and soft employment targets. This would enable positive self-selection, with only those micro-enterprises with greater capabilities choosing to sign up for government assistance.
Traditionally, East Asian-style industrial policies target the larger, more productive manufacturers most likely to become exporters. Future “industrial policies” will have to focus instead mostly on smaller, services firms, most of which are unlikely to be exporters. This new generation of industrial policies targeting lower-productivity segments can both enhance the livelihoods of the urban poor and boost productivity in the labour-absorbing sectors of the economy.
One implication is that social policy and growth policy will increasingly overlap. The best social policy – enabling sustainable poverty reduction and enhanced economic security – is to create more productive, better jobs for workers at the bottom of the skill distribution. In other words, social policy must focus on firms as much as households. And the new global and technological context implies that economic growth is now possible only by raising productivity in smaller, informal firms that employ the bulk of the poor and lower-middle classes. Development policy may become unified at last.
PUBLISHED ON
Oct 16,2021 [ VOL
22 , NO
1120]
Viewpoints | Apr 30,2021
Fortune News | Jun 01,2019
Radar | Oct 28,2023
Viewpoints | Apr 22,2023
Radar | Feb 27,2021
News Analysis | Jan 05,2020
My Opinion | Feb 11,2023
Viewpoints | Sep 10,2023
Radar | Apr 22,2022
Fortune News | Nov 29,2020
Photo Gallery | 82511 Views | May 06,2019
Photo Gallery | 74641 Views | Apr 26,2019
Fineline | 58404 Views | Oct 03,2020
Fortune News | 58236 Views | Jul 18,2020
Dec 24 , 2022
Biniam Mikru heads the department of cabinet affairs under Mayor Adanech Abiebie. But...
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Nov 25 , 2023
Ethiopia's quest to develop a functioning capital market is a demanding yet not unach...
Nov 18 , 2023
Prime Minister Abiy Ahmed (PhD) has made a fervent call for landlocked Ethiopia to ga...
Nov 11 , 2023
In November last year, a ray of hope pierced the gloomy skies of Ethiopia as the Pret...
Nov 4 , 2023
In the corridors of economic policy-making, a quote often attributed to Albert Einste...
Nov 25 , 2023
Awash International Bank (AIB) posted a striking surge in net profits, reaching 6.9 b...
Nov 25 , 2023 . By BERSABEH GEBRE
A new regulatory measure Djibouti's customs officials enforced led to importers being...
Nov 25 , 2023 . By MUNIR SHEMSU
Minister of Health Lia Tadesse (MD) has displayed her ambition of rolling out a three...
Nov 25 , 2023 . By DAWIT LIDETA
A year after the cessation of hostilities agreement was signed between the Tigray People's Liberation Front(TPLF) and the Federal government...