Transcript Poverty, Inclusive Growth and Development Strategy

Poverty, Inclusive Growth and
Development Strategy
Justin Yifu Lin
Senior Vice President and Chief Economist
December 3, 2008
Introduction
• Poverty is the main social, economic problem in most
developing countries
• A sustainable and inclusive growth is the key to
reduce poverty and to achieve the MDGs
Most economists agree now that the economic
performance in a country is determined by the
quality of its institution
Development Strategy Matters
But what determines the quality of
institution?
My hypothesis is that the government’s
development strategy matters for the
quality of institution and, hence, the growth
performance in a country
Development Strategy and
Advantage of Backwardness
• Continuous technological innovation and industrial upgrading
are the foundation for sustainable, dynamic growth in the
modern world.
• If a developing country adopts a comparative advantage
following (CAF) strategy, it can benefit from the “advantage of
backwardness” and catch up the developed countries. It can
also achieve the ideal situation of growth with equity.
• Most developing countries adopt a comparative advantage
defying (CAD) strategy, which leads to various distortions and
results in poor growth performance as well as worsening of
income distribution in the developing countries
Modernization attempt
• The political leaders in developing countries had the
dream of modernization.
• The political leaders viewed the development of capitalintensive, technologically advanced heavy industries that
prevailed in the developed countries as the symbol of
modernization.
• The developing countries were capital-scarce economies
and capital-intensive industries were not their comparative
advantages.
• The attempt to develop capital-intensive industries in a
capital-scarce economy is a comparative-advantage
defying strategy.
Endowment Structure
and Industrial Structure
• The optimal industrial structure
Capital
K1
K
J2
CAD strategy for
developing countries
J1
J
I1
I
Labour
of an economy is
endogenously determined by
the economy’s endowment
structure.
• The attempt to develop capitalintensive, heavy industry is a
comparative advantage
defying (CAD) strategy
• The firms in the CAD
industries are nonviable in an
open, competitive market and
the government’s
supports/protections are
required for the nonviable
firms.
Viability Problem and Distortions
• The government’s measures to protect/subsidies the nonviable
firms in the priority sectors of CAD strategy included:
1. Regulations of the entries to give the firms in the priority
sectors a monopoly position so that they could charge high
prices
2. Distortions of interest rates, foreign exchange rates and so on,
and using administrative measures to allocate capital, foreign
exchanges, and other materials to lower their costs of
investment/operations
• Those interventionist measures lead to rent seeking, crony
capitalism, low efficiency, and poor development performance
CAF strategy and Market Institution
Alternative to the CAD strategy is a comparative advantagefollowing (CAF) strategy, which attempts to facilitate the
firms to follow the economy’s comparative advantage
determined by the economy’s endowments.
Firms in the CAF strategy will be viable and the economy will
be competitive.
Capital accumulation and upgrading of the endowment will
be fast and the economy can benefit from the advantage of
backwardness in the upgrading of technology/industry
Firms will follow the economy’s comparative advantage if the
factor prices reflects the relative abundance of each factor in
endowments.
Competitive markets are required for relative prices to reflect
the relative abundances of factors in the economy’s
endowments.
CAF Strategy and the Facilitating State
The government in a developing country that adopts the CAF
strategy may play a more active role than that of a minimal
state.
When the government pursues a CAF strategy, the
endowment structure will upgrade very fast and it is desirable
for the government to play certain role to facilitate the
country’s industrial upgrading.
1.
2.
3.
Information
Coordination
Externalities
CAD Strategy and Income Distribution
• The main asset that brings income to the poor is their own labor
while the rich derive their income mainly from their capital.
• CAD strategy is most detrimental to the poor, especially those
in the rural areas, because the strategy would not create
enough non-farm job opportunities for the poor, causing:
1. the wage rate to be repressed
2. the government to restrict out-migration or many of the outmigrant workers to become jobless
• The CAD strategy eventually leads to various crises and the
poor are the major victims
CAF strategy and growth with equity in
a labor-abundant economy
• The CAF strategy is pro-poor
1. It facilitates the development of labor-intensive industries when
the economy is relatively labor abundant, upgrading the
economy to more capital-intensive industries only when capital
become more abundant.
2. There will be more jobs for the poor and the wage rate will
increase when the economy upgrades to more capital intensive
industries.
3. On the development process, capital turns from relatively
scarce to relatively abundant and labor from relatively
abundant to relative scarce. The returns to the poor’s specific
asset, labor, increase and the returns to the rich’s asset,
capital, declines .The result is growth with equity.
Development Strategy in a resource
abundant economy
• CAD strategy is bad for a resource-abundant economy
• If such an economy follows CAF strategy to exploit its
natural resources, should it develop labor-intensive
manufacturing industries in the early stage of its
development?
– Most labor forces are in agriculture and are poor
– Labor intensive industries
• provide jobs for absorbing labors from the rural sector
• pave the basis for industrial upgrading
• Resource abundance is a double-edge sword.
– If the wealth from natural resources is used to invest in human
capital and infrastructure, the industrial upgrading will be much
faster than a resource-poor country.
– The wealth may be captured by powerful groups and the
economy is prone to adopt CAD strategy
Testable Hypotheses
H1: Over an extended period of time, the country that adopts
a CAD strategy will have a poor growth performance.
H2: Over an extended period of time, the country that
adopts a CAD strategy will have less equitable income
distribution.
The Proxy of Development Strategy
The more a country pursues a CAD Strategy, the
higher is TCI in the country.
H1: TCI and Growth
Dependent Variable: Average Per capita GDP growth rate in 1962-1999
Model
1.1
(OLS)
Model 1.2
(OLS)
Model 1.3
(2SLS)
Constant
7.32***
(1.60)
4.66**
(1.87)
3.26
(2.15)
TRADE1
ln TCI1
-1.25***
(.20)
-.66***
(.18)
-.92***
(.19)
ln DIST
.20
(.16)
.47***
(.16)
ln GDP60
-.54***
(.20)
-.99***
(.18)
-.59***
(.21)
ln POP1
.33***
(.09)
.22**
(.09)
LANDLOC
K
.07
(.32)
.46
(.38)
RL01
.58***
(.21)
.22
(.41)
INST
ln OPEN1
.70***
(.22)
Model
1.1
(OLS)
Model 1.2
(OLS)
Model 1.3
(2SLS)
.93**
(.43)
AdjustedR2
.36
.56
.44
Observatio
ns
85
83
83
H2: TCI and Income Distribution
Dependent Variable: GINI coefficient Sample: 261
observations from 33 countries
Model 4.1r
Model 4.2r
Model 4.3f
Model 4.4r
Model 4.5f
CONSTANT
6.46
(4.72)
8.18***
(2.40)
31.5***
(1.75)
8.09***
(3.16)
32.6***
(0.97)
TCI
1.32***
(0.33)
1.35***
(0.31)
1.84***
(0.48)
1.35***
(0.32)
1.72***
(0.46)
IGINI
0.73***
(0.08)
0.71***
(0.07)
GDPPC
-0.89
(11.3)
0.43
(12.6)
0.74
(10.8)
GDPPC_1
0.40
(1.84)
1.91
(2.11)
3.21
(16.6)
CORR
1.03*
(0.58)
BQ
-0.84
(0.58)
OPEN
0.12
(1.68)
0.71***
(0.07)
• It is possible to achieve a sustained and
inclusive growth in a developing country if
the government has the right strategy for
development!
Concluding Remarks
•
•
•
•
•
•
1.
2.
3.
4.
The CAF strategy is the key to a sustainable, inclusive and equitable
growth in a developing country
Many developing countries adopted a CAD strategy because their political
leaders did not understand a country’s industrial structure was endogenous
to the country’s endowment structure.
Many distortions in developing countries are endogenous to the viability
issue of firms in CAD strategy’s priority sectors.
It is imperative for a developing country to eliminate the distortions so as to
shift from a CAD strategy to a CAF strategy
A dual-track gradual approach to reforms will be more effective than a
shock therapy because the endogeneity of distortions.
With a CAF strategy, among others, the government should
Supporting the development of labor-intensive SMEs
Provide education to the poor to facilitate their adaptability to job
requirements
Invest in agricultural technology and rural infrastructure
Improve legal, financial, social and political institutions to facilitate the
transition to modern, industrial society.
Thank you