Structural transformation and the evolution to higher productivity and

living standardsDuncan Campbell

Director, Global Mega-Trends TeamResearch Department

ILO

Some definitions, some received wisdom

A few definitions

• using World Bank groupings based on GNI per capita, i.e. low income, middle-low income, middle-high income, high income. a labour market discussion of each is warranted !

• « emerging », as defined by Antoine van Agtmael (IFC)– Embarked on economic development and reforms– Have begun to open their markets and « emerge »– Fast-growing economies, in relative terms

First, the Lewisian basics

• Development occurs through inter-sectoral change – from agriculture to light industry, to more advanced industry, and the growth of services

• The inter-sectoral shift yields economies of scale unavailable in traditional agriculture

• This in turn results in higher incomes that inter alia fuel the growth of services

The decomposition of services

• Manufacturing had embodied services that have been been outsourced (e.g. custodial or restaurant services)

• Thus, in causal terms, manufacturing creates services initially … but the causality is dual

• Many services are local – a point to which we return

• And many services are tradeable, thus not unlike manufacturing

Where do we stand empirically?

Let’s take a look at what is happening empirically

• Yes, development theory has an empirical foundation, particularly in Asia

• No, it is not capturing all of inter-sectoral change dynamics

a first distinction between « employment-led » and « growth-

led » demand for labour

much economic activity in developing countries is the search for demand

creation rather than demand derived from product markets

The “Dual Economy” is divided into a “traditional” and a “modern” economy

The “traditional” Economy The “Modern” Economyis relatively more …

informal Formal

Vulnerable in employment status Likely to have a higher share of wage-earners

Rural Urban

Likely to be less productive Likely to more productive

Credit-insufficient Access to credit

Likely to have a low capital-to-labour ratio Likely to have a higher capital-to-labour ratio

Oriented to domestic, even local markets Oriented to domestic and international markets

Sheltered from the impact of macroeconomic policies

Exposed to macroeconomic policies

Deficient in the quality of jobs Deficient in the quantity of jobs

Likely to be less or un-protected Likely to have at least de jure protection

Prone to greater earnings instability Stable and predictable in earnings and income

4.8

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

140

150

160

170

180

190

200

210

220

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unemployment rate (per cent)Un

emplo

ymen

t (milli

ons)

Total unemployment Unemployment rate

Regional economic and labour market prospects

12

Regional economic and labour market prospectsEast Asia

• ...as the economies in the region become more mature• Sharp increase in unemployment expected in the region from earlier low levels...

Economic Growth and the Service Sector

Low i ncome countries (<$735) Lower middle income countries ($736-2935) Upper middle income countries ($2936-9075) High income countries (>$9076)

World Bank Classification Index

20 40 60 80

Service (% of GDP)

0

10000

20000

30000

40000

GN

I pe

r C

ap

ita (

US

$)

GNI p er capita and imp ortance o f services

The middle class ($4-$13 ppp) per day is growing in the developing world

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

300,000

600,000

900,000

1,200,000

1,500,000

1,800,000

2,100,000

2,400,000

2,700,000

Empl

oym

ent b

y ec

onom

ic cla

ss (t

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ands

)

Above middle class

Middle class

Near poor

Moderately poor

Extremely poor

A couple of upshots

• Agriculture declines as share of GDP output, but much less as share of employment

• Industrialization stymied in many countries (e.g. Philippines)

• Industrialization when it occurs is capital intensive and less labor absorbing

Why all this matters to the status of employment

a typology of status in employment

• paid employment is a developed-country phenomenon, except at its lowest end (casual wage labour by the rural landless)

• self-employment, with a significant share being « survivalist » is a developing-country phenomenon

• various forms of unpaid work, and non-market work, are developing-country characteristics

y = -8.92ln(x) + 43.876R² = 0.457

0

10

20

30

40

50

0 20 40 60 80 100

Agricu

lture

, val

ue ad

ded

(%

of G

DP)

Share of workers with secondary education or above (% of total labour force)

Structural transformation is important because it alters status in employment

A few (very few) words on Viet Nam

Growth but not many jobs?

Why? The view from ILO and MOLISA in 2010

• The pace of restructuring is too slow, from rural to urban, from agriculture to manufacturing, from public to private

• Growth has been capital accumulation with little innovation … and capital intensive

• Demographics: a population surge coinciding with a shortage of skilled labor

• Consider also exogenous constraints to productivity growth

But Viet Nam has not fared poorly relative to its neighbors

What, in conclusion, seems to matter?

«no country has made the arduous journey from widespread rural poverty to post-industrial wealth without employing targeted and selective government policies to modify its economic structure and boost its economic dynamism.»

In short, vertical and horizontal industrial policies

So, what matters is….

• Investment• Innovation• Capabilities• Productivity• Protection• And a pro-active state

Thank you!

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