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This chapter began with the observation that growth occurs through change. The evidence presented in subsequent sections has validated this perspective. What economies look like is not a consequence of autonomous and self-regulating processes of growth. Rather, growth materializes from the "granular" details of what countries produce and how they produce. The quest to identify "leading sectors" is perhaps pointless. Activities across an economy interact with and adapt to each other in complex ways.
Opportunities for productivity growth and catch-up can occur virtually anywhere. However, historically, and certainly in developing Asia, the most fertile areas have been in industry and manufacturing. All countries in developing Asia that are closing the productivity gap with OECD have three achievements in common: they have raised the share of industrial output; diversified their manufacturing base; and upgraded, both in terms of technology and the complexity of the export basket they produce. But services, too, have played a critical role. In countries that are moving ahead, services and industry have supported one another. Where industrialization has struggled, services have been an important buffer by providing low-productivity jobs for workers released from agriculture.
It is perilous to predict the future, and it may not be like the past. Nevertheless, to the extent that growth occurs through imitation and catch-up, the potential for future growth is still enormous. Baumol's "structural bonus" is in large measure still to come: there are hundreds of millions of agricultural workers who will move to more productive activities in industry and services. Raising agricultural productivity will ease this transition.
Services also provide opportunities for growth, but claims by some commentators that countries can safely bypass industry and leap straight into highly productive tradable services appear exaggerated. Yes, there appear almost limitless opportunities for task fragmentation and growth of trade in services tasks on a global scale. And there is no question that these new activities provide tangible benefits. But in countries like India and the Philippines, binding supply constraints now seem to be surfacing and the connectivity between high-productivity, tradable services, and the remainder of the economy seems too weak to generate trickle-down growth and the jobs that benefit the poor. There is also much in the experience of India that appears fortuitous and idiosyncratic and that may not be easy to imitate elsewhere. For those with limited education and skills, it is the creation of low- and medium-productivity jobs in industry and in services that will make the difference.
So what do countries need to do to develop the systems that can instigate and adapt to the changes that are ultimately required to grow and create jobs? While advice and approaches must be sensitive to country context, some organizing principles suggest themselves. These may guide design and practice, but do not constitute an agenda or blanket solutions.
First, mechanisms to mobilize savings and translate them into high rates of investment are needed. High investment spending is required to build, create variety in, and upgrade the activities, products, and services that mold an economy's look. As experimentation and trial and error are important parts of these processes, growth will inevitably entail waste as well as creation, and both will expend resources.
Second, high levels of investment are needed to provide the physical infrastructure that supports business and improvements in the quality of life. Good infrastructure allows firms to grow and to operate on a scale that allows efficiencies to be reaped. Developing Asia's experience suggests that industry prospers where physical infrastructure supports its expansion; but where infrastructure services are lacking, industry struggles and can get left behind. Infrastructure connects and expands markets and provides services vital for building an educated and healthy labor force. Services may do better in an environment where infrastructure is sparse, but services on their own are unlikely to support sustained rapid growth.
Third, a versatile labor force equipped with relevant skills is also part of the recipe. Institutions that can mediate tensions and provide insurance against risks are an important part of the fabric of countries that sustain growth and that have resilience to shocks. Among other things, markets need to be complemented by affordable social protection programs and opportunities for new learning. Taxing rents to pay for these services is one way of balancing growth and equity.
Fourth, as it is business that creates wealth, impediments to business shrink (potential) wealth. A large library of micro evidence and data is now available, to identify what adds to business costs and what gets in the way of business expansion. A predictable and stable policy environment, secure property rights (including intellectual property rights), consistency in contract enforcement, regulation that balances public and private interests, a level playing field, and efficient administrative processes are all part of the "social technologies" (Nelson 2005) that lubricate business. But in many countries, too much grit remains in the cogs to get the machinery working smoothly.
Fifth, imitation is an important part of success. The celebrated "flying geese" model of development is based on leader-follower principles. But to be a successful follower, countries have to be receptive to ideas, to new arrangements and designs, and to new ways of organizing and producing. For example, the presence of multinational companies in East and Southeast Asia has provided an important catalyst for change that can be seen in patterns of production and trade. Openness to trade does more than prize open a little more consumer surplus-it also provides access to complex technologies and products, adds to diversity, and can be a stimulus for the creation of new activities through multinational and other forms of investment.
Embedded within these broad principles are many possible operational approaches. Yet the idea that change and structure are instrumental to growth raises the question of whether it is possible to agitate the pace and direction of development at a more refined (or granular) level. After all, "markets" do not exist independently of an economy: they are built or developed as other elements of the institutional fabric evolve. There may be little scope for "big pushes" (Easterly 2005), but many small nudges may still have a very useful role.
Rodrik (2004) observes that the sort of diversification that has presented itself in the data for developing Asia, and that appears to be important for growth, cannot occur if markets alone are left to incubate new activities. Markets do not create adequate demand for innovation for two main reasons: there can be no information about activities that do not yet exist; and markets cannot profitably supply the upstream and downstream "infrastructure" ahead of the birth of the new activities that will ultimately provide revenue streams.
The solution to these failures, the argument runs, lies in strategic private-public sector collaboration and support to new activities, products, or services (but not to established activities or to broader sectors). In this relationship, the government is not the leader and the private sector is not the follower-both are partners in gathering information and finding solutions that work. The operational processes that promote learning and that nurture innovation and change might contain many different elements, and will have to be learned and modified as circumstances change. But success will rest on designs that reward performance, minimize risks of moral hazard, build on capabilities, balance public sector autonomy with private sector self-interest, and abandon failed experiments.
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The authors acknowledge background materials provided by the following: Roehl Briones, Michael Hobday, Matteo Lanzafame, Miguel Leon-Ledesma, Joseph Lim, Clarence Pascual, and Nagaraj Rayaprolu. |
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