Economic Structural Change Vital to Successful Development

Structural change involves emergence, expansion of new industries

A diversified economy is critical for sustained economic growth

Strategies to improve human capital skills enhances productivity

How then, can countries undertake structural change and diversify their economies? Harvard University professor of economics, Dani Rodrik, spoke to IMF Survey, and explained why structural change is so critical to development.

IMF Survey: What are the key ingredients for sustained growth in a country?

Rodrik: I think all sustained episodes of growth are underpinned by fundamental structural change. Of course, you can get growth spurts because of an improvement in the terms of trade or a sudden burst of capital inflows. But those tend to peter out unless there is the emergence and expansion of new industries, and movement of labor from traditional industries into modern industries. This is the essence of structural change. Without these things happening, a country is not likely to achieve long-term growth.

IMF Survey: Asia is an example of a region where structural change has been very positive for growth.

Rodrik: That is correct. Asia has been the archetypal example of a traditional model of economic development for those economies with surplus labor and very low productivity levels, which are dependent on subsistence agriculture.

Then, new industries started to emerge, mainly in urban areas, and although still poorly educated, farmers became more productive factory workers. They were able to increase their income, and could send their children to school. This increased productivity has also set in motion a self-sustaining process of improvement in human capital skills.

It has happened in many Asian countries—Japan being the earliest example of a non-western country to industrialize. South Korea and Taiwan quickly followed, and from the 1960s through late 1970s, more Southeast Asian countries became industrialized, most notably China.

What is key to their success, I believe, is their pragmatism. That is, these Asian countries have focused on achieving rapid industrialization through outward-oriented, or export oriented, industrialization. They have been very pragmatic and eclectic in the types of instruments they used. It is equally the capabilities of the state, their pragmatism, and the willingness of the government in each of those counties to enter into collaborative arrangements with the private sector. So, a lot of factors have colluded...