Many factors lead people to write about heterodox economics in development. This has obviously been greatly informed by the Eurozone debt crisis and political fiasco of the past 4 years where the good old criticism of ‘the system, man’ has gone beyond simply blaming the excesses and transgressions of the financial sector and the superwealthy, to reach at issues of basic wealth distribution and equality and discrimination in society.
The attraction of the schools of thought which reject neoclassical economic models of growth and convergence to me is that they come with concrete policy tools and prescriptions, which are drawn in many cases not from an ideological contre-posture to the Washington Consensus or the like, but tied to concrete cases of economic success. The policies that East Asian countries like Korea, Japan and Taiwan used to develop since the 1950s have been used to highlight and guide policy advice for current developing countries. In short, my appreciation for heterodox development economics has been rooted in the suggestion that it can actually achieve economic development.
So when my favorite thinker in this line, Harvard’s Dani Rodrick, starts getting pessimistic, I get worried. Rodrick has given talks and put out papers in the past year or so looking at the shifts in labor among different sectors of an economy, the productivity of those sectors, and the rate of growth of the countries. The diagnosis, apparently, is bleak.
Developing economies, Rodrik argues, are facing a triple trap of economic structural change. Convergence in productivity certain sectors of manufacturing has slowed down compared to previous decades, meaning that transitioning an agrarian labor force to manufacturing will be less effective than before at increasing productivity. However, the service sector has its own pitfalls (a leitmotif of many development economists), mainly in the high barrier to entry that it has, presented by the higher skills needed to enter this labor market and the lower number of workers that it can absorb. And the third trap is that of primary-resource-led development. The argument here is also a classic- agriculture and mining are too dependent on demand + investment in commodities, or they are simply not sustainable. Besides which, the more high productivity sectors such as mining are invariable much less labor-intensive. Much of African growth over the past decade (stellar by the way) has been led by high primary commodity prices.
The outlook is somewhat grim. African countries’s real issue according to Rodrik seems to be a mix of their high urban informal sectors, which are apparently very unproductive, and the can’t go here, can’t go there conundrum.
I wonder though. Countries like China and Korea achieved high growth in part because they first saw huge increases in factor accumulation- they brought more labor into their manufacturing sectors, and they bought and used more machines- before productivity went up much (this is Krugman’s famous ‘perspiration not inspiration‘ argument (pdf) regarding East Asia’s development). African countries haven’t seen this sort of shift (at least not into the formal sector manufacturing jobs), so it is perhaps too early to say that manufacturing cannot lead to very solid growth. We simply haven’t seen much sustained manufacturing growth- not even in inputs, forget productivity- in African countries to be able to tell what factors would push it forward. The optimists on Africa will not stop talking about the rise of an African consumer. Imagine a growing manufacturing industry which benefits from rising costs of production in China on one hand and rising demand on the continent on the other.
To achieve this, it’s clear that the large informal urban economy (think Nairobi) would have to be addressed by policymakers. Finding way to drive labor into the most productive sectors of the economy (Rodrik’s opinion on the best way forward)? This isn’t the fight-the-comparative-advantage Rodrik I know. Imagine if you raise the productivity of these informal urban micro-firms and production centres, just a little, and the effect that might have. Imagine subsidy programmes which encourage larger scale production, social protection which drives people to larger firms, and skills and business education which makes individuals more productive.Let’s see if Dani Rodrik can start proning more solutions as well.
While I am by no means an optimist of the “Africa Rising’ type, the continent has not yet had its final word.