Seminar in Economic Policy

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  • Seminar in Economic Policy

    1. 1. Presented by: SHAFIK ABDULLAH
    2. 2. Objectives of the presentation: <ul><li>To build an understanding of what is Structural Change </li></ul><ul><li>To know what are the components of structural change that lead to economic growth </li></ul><ul><li>How structural changes have taken place in different countries </li></ul><ul><li>What has been the effects of these structural changes </li></ul>
    3. 3. What Is Structural Change In Economy? <ul><li>Structural change of an economy is defined as: </li></ul><ul><li>Long term widespread change of the fundamental structure </li></ul><ul><li>Not changes on micro-scale or short term output & employment </li></ul><ul><li>Structural change is a long term change initiated by: </li></ul><ul><li>Changes in policy decisions </li></ul><ul><li>Permanent changes in resources </li></ul><ul><li>Permanent changes in production patterns </li></ul>
    4. 4. <ul><li>According to Classical Development Economics, structural change plays a vital role in economic growth. </li></ul>What Is Structural Change In Economy? Thus, Structural Change is a long term process to make the economy grow or to achieve economic growth.
    5. 5. What are the components of Structural Change? <ul><li>Economic growth will happen when the following structural changes take place: </li></ul><ul><li>Focus of economy shifts from agriculture sector to modern industrial sector </li></ul><ul><li>Countries move towards high-productivity sectors </li></ul><ul><li>Reallocation of labour from low- to high-productivity activities </li></ul>Classical Development Economics states that structural change is: “… a process of transformation from a traditional subsistence agriculture sector to a modern, urbanized industrial sector.”
    6. 6. <ul><li>Development of modern industrial sector will contribute more to overall output growth because of its: </li></ul><ul><li>higher productivity growth </li></ul><ul><li>gains from innovations </li></ul><ul><li>learning by doing </li></ul><ul><li>underemployed labour force of the urban informal sector and rural sector </li></ul>Why Industrial Sector
    7. 7. The Structural Change Process
    8. 8. Structural changes in different countries: <ul><li>We will observe the structural changes of 57 developing economies divided into 10 geographical groups: </li></ul><ul><li>First-tier newly industrialized economies (3): Republic of Korea, Singapore and Taiwan Province of China </li></ul><ul><li>China (1) </li></ul><ul><li>South-East Asia (5): Indonesia, Malaysia, Philippines, Thailand and Viet Nam </li></ul><ul><li>South Asia (4): Bangladesh, India, Pakistan and Sri Lanka </li></ul><ul><li>Low to-middle-income Latin American countries (3): Bolivia, Ecuador and Peru </li></ul><ul><li>Central America and the Caribbean (5): Costa Rica, Dominican Republic, El Salvador, Guatemala and Jamaica </li></ul><ul><li>Central and Eastern Europe (6): Bulgaria, Czech Republic, Hungary, Poland, Romania, and Slovakia </li></ul><ul><li>Commonwealth of Independent States (2): Russian Federation and Ukraine </li></ul><ul><li>Sub-Saharan Africa (10): Cameroon, Ivory Coast, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Uganda, United Republic of Tanzania and Zimbabwe </li></ul><ul><li>Middle East and Northern Africa (10): Algeria, Egypt, Iran (Islamic Republic of), Iraq, Jordan, Morocco, Saudi Arabia, Syrian Arab Republic, Tunisia and Yemen. </li></ul><ul><li>The group of semi-industrialized countries (8): Argentina, Brazil, Chile, Colombia, Mexico, South Africa, Turkey and Venezuela. </li></ul>
    9. 9. Outline of Analysis <ul><li>Patterns of growth and structural change from 1970-2003 </li></ul><ul><li>Investment patterns and structural change </li></ul><ul><li>Employment productivity and structural change </li></ul>
    10. 11. <ul><li>China is the most important case in point </li></ul><ul><li>Starting around 1978, its economic system went through a gradual change from Soviet-style central planning towards greater market orientation </li></ul><ul><li>Between 1970 and 2003, the share of manufacturing and mining in overall output increased from 28% to 60% </li></ul><ul><li>While the share of agriculture dropped from 49% to 12% </li></ul><ul><li>This was backed by aggressive investment policies inducing infrastructure development supporting export industries </li></ul><ul><li>The infrastructure development lifted the main constraints on growth and helped unleash previously untapped economic forces </li></ul><ul><li>Leveraging these trends was the policy of gradual opening to world markets </li></ul>CHINA:
    11. 12. <ul><li>This set of countries, which include Korea, Singapore and Taiwan, witnessed substantial industrial growth in the 1960s </li></ul><ul><li>This growth was result of following initially a strategy of import substitution. </li></ul><ul><li>Through out its transition period import substitution policies were maintained for the development of new sectors. </li></ul><ul><li>By the mid-1980s, these economies had switched to high tech manufacturing production and strengthened the development of modern services. </li></ul><ul><li>Their success of making this dynamic structural change was fostered to some extent by external events. </li></ul><ul><li>For eg. the appreciation of the yen. </li></ul>The First-Tier Newly Industrialized Economies:
    12. 13. South Asia: <ul><li>South Asia showed less dynamism and structural change relative to the first-tier newly industrialized economies in East Asia. </li></ul><ul><li>The share of manufacturing and mining peaked at 22 % of total output in the region in the 1990s, up from 14 % in 1970. </li></ul><ul><li>India’s growth has been driven by a fast-growing service sector. </li></ul><ul><li>The same trend is observed in Pakistan. </li></ul><ul><li>By the traditional standards of patterns of structural change, this trend implies a premature shift into services. </li></ul><ul><li>Still, services has become important sector employing a large pool of underemployed skilled labour. </li></ul>
    13. 14. <ul><li>The Latin American countries had shown strong growth in 1950s and 1960s based on it’s strategy of import-substituting industrialization. </li></ul><ul><li>However, Industrial growth came to a halt in most countries during the 1970s and the decades that followed. </li></ul><ul><li>Premature trade liberalization led to strong declines in industrial output in the 1970s. </li></ul><ul><li>Furthermore, Industrial development was strongly affected by the lack of foreign financing and debt crisis of the early 1980s. </li></ul><ul><li>Successive trade and financial reforms turned exports into the engine of growth in most Latin American countries during the 1980s and later years. </li></ul><ul><li>But this export growth was not built on dynamic industrialization. </li></ul><ul><li>Furthermore, recurrent financial crises led to more volatile growth and deficient long-term investment for dynamic structural change . </li></ul><ul><li>As a result, the share of manufacturing and mining in total output declined during 1970-2003. </li></ul>Latin America:
    14. 15. <ul><li>Countries in these regions had witnessed fast growth of GDP per capita during the 1960s and 1970s, showing average annual rates of 6.2 and 4.4 %. </li></ul><ul><li>Industry was the main engine of economic growth during these periods. </li></ul><ul><li>Most of the investment strategies focused in particular on the development of heavy industries. </li></ul><ul><li>This however eventually failed to produce sustained growth. </li></ul><ul><li>Reason being that the priorities of the development policy were mainly agriculture and ‘heavy’ branches of manufacturing sector (shipbuilding, heavy armaments such as tanks, basic chemicals such as fertilizers). </li></ul>European States and Commonwealth of Independent States :
    15. 16. <ul><li>Problem started in the 1980s. </li></ul><ul><li>The inefficient industrial giants were incapable of producing competitive goods that were sellable in the international markets. </li></ul><ul><li>At the same time, European countries faced increase in oil prices imported from the former Soviet Union. This greatly affected manufacturing, construction and transportation sectors. </li></ul><ul><li>Russian Federation and Ukraine also faced output collapse in the first part of the 1990s. Share of the manufacturing and mining sectors decreased from 35 to 30 per cent. </li></ul><ul><li>Manufacturing and mining started to recover at the end of the century and their share reached 33 per cent by 2003. </li></ul>
    16. 17. <ul><li>Most countries in the Middle East and Northern Africa show continued high dependence on the extraction of oil and minerals. </li></ul><ul><li>Trends in oil market largely influenced the growth in these economies. </li></ul><ul><li>The variation in this region’s output was directly related to the variation in oil prices. </li></ul><ul><li>The share of the manufacturing sector had increased to 12 % of total output by 2003, from just 8 % in 1970. </li></ul><ul><li>Tunisia was an exception in the region, as it witnessed a much stronger development of the manufacturing industry. </li></ul>Middle East and Northern Africa
    17. 18. <ul><li>Most of the countries in sub-Saharan African have not been able to break away from their low-growth development trap. </li></ul><ul><li>This is also visible in the lack of structural change that took place in these economies. </li></ul><ul><li>Agriculture remains the mainstay of these economies, but per capita output of the sector declined during the period 1970-2003 </li></ul><ul><li>Market-oriented structural adjustment policies adopted in the 1980s and 1990s failed to improve growth performance and, in fact, produced very little structural change. </li></ul><ul><li>Because of these constraints, the economies failed to diversify and saw declining terms of trade and growth. </li></ul><ul><li>The only country in this region which experienced high average growth rates in manufacturing was Nigeria which was largely driven by Nigeria’s oil sector </li></ul>Sub-Saharan Africa:
    18. 19. Investment patterns and structural change
    19. 20. Importance of Capital Investment: <ul><li>In combination with other factors, capital accumulation also sets off structural changes. </li></ul><ul><li>Capital investment is essential to economic development and growth . </li></ul><ul><li>It plays a crucial role in the development of infrastructure which benefits manufacturing and services sector. </li></ul><ul><li>The first-tier newly industrialized economies and China, which had experienced the most dynamic structural change, recorded the largest increases in investment. </li></ul><ul><li>Investment levels doubled in South Asia and tripled South-East Asia, while they were low or virtually stagnant in other regions. </li></ul>
    20. 23. Annual growth rate in investment per capita versus change in the shares of agriculture output
    21. 24. Annual growth rate in investment per capita versus change in the shares of industry output
    22. 25. <ul><li>Thus: </li></ul><ul><li>Capital accumulation is a catalyst of structural change </li></ul><ul><li>Changes in manufacturing output are strongly associated with investment growth </li></ul><ul><li>This is proved by rapid accumulation of investment capital in the successful Asian countries </li></ul>
    23. 26. Employment productivity and structural change
    24. 27. Contribution of the industrial sector to economy-wide labour productivity growth
    25. 28. <ul><li>Fast-growing Asian regions were able to make large and speedy transitions out of agriculture and into industries and services. </li></ul><ul><li>Economies with little structural change lagged behind. </li></ul><ul><li>Fast growth in China and South-East Asia was associated with a rapid decline in the importance of agriculture and strong expansions of industry and services. </li></ul><ul><li>In other groups, growth was generally concentrated in the services sector with the share of agriculture in output also declining or remaining stagnant. </li></ul><ul><li>Capital investment and structure of investment is important for growth </li></ul><ul><li>Sustained increases in labour productivity and reallocation of labour from low- to high-productivity sectors are characteristics of the fast-growing economies. </li></ul>CONCLUSION:

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