New Products, More Value Can Advance Economic Take-Off

Introducing new products—and raising quality of existing ones—are critical

Low agricultural productivity often reflects policy distortions

Policies should stimulate economy’s core capabilities, not target specific products

In much of the developing world, sustained economic take-off remains elusive, and growth often relies on traditional, commodity-producing sectors, noted participants at the conference “Diversification and Structural Transformation for Growth and Stability in Low-Income Countries,” which was jointly organized by the IMF and the UK’s Department for International Development.

“What are the obstacles to diversification, the development of modern activities, and improvements in product quality?” asked IMF Deputy Managing Director Min Zhu in his opening remarks. “How can policy overcome such obstacles? Those are the key questions.”

Disparate growth

Zhu pointed to the huge, unexplained differences across countries in the pace of economic development. Sustainable development critically involves the transformation of a country’s economic structure: diversifying into new sectors, upgrading the quality of existing products, and reallocating resources towards more productive firms.

But much remains unclear about the process. What precisely are the barriers to transformation? Do low- and middle-income countries face different challenges? What new opportunities and risks does globalization present for attempts to diversify? And what is the appropriate role for government policy? These questions served as the basis for discussion at the one-day conference.

Developing capabilities

Ricardo Hausmann (Harvard University) argued that development and diversification are best thought of in terms of “capabilities”—that is, the key inputs needed to produce goods (for instance, specific skills or public goods). Advanced economies have more capabilities, and can therefore produce a wider range of more complex products. Low-income countries are less diversified because they have few productive capabilities and, as a result, make a few, simple products that generate less income.

But such capabilities are developed only incrementally, by moving into new products that are similar to the existing product base. Developing radically different capabilities, and entering completely new markets, requires the complicated coordination of many different economic actors, and is therefore likely to fail, Hausmann explained.

In many low-income countries...