Double dividends and mixed blessings

What would the pioneers of development economics make of new trends in developing economies?

Today, we see clear trends in developing countries of a potentially troubling ‘new normal’ for economic development. We see tertiarization with rising inequality. We see urbanization without growth. And we see the expansion of the globally-integrated sector of the economy with little direct job creation.

These contemporary trends would have surprised the founding folks of post-Second World War development economics — people like W. Arthur Lewis, Simon Kuznets, and Nicholas Kaldor, among many others — whose academic careers focused on questions of economic growth, inequality, employment and development. 

Lewis, Kaldor, and Kuznets all saw industrialization and manufacturing growth as the drivers of economic development. Lewis received a Nobel Prize in Economics and is well known for his dual/sector model of economic development. Kuznets too received a Nobel, and his curve is one of the best known in economics for his analysis of what happens to levels of inequality as economies transform. 

What’s supposed to happen?

Countries are supposed to gradually shrink agriculture and grow manufacturing as they get richer. But that traditional view is looking shaky. Could any of the famous thinkers above have predicted that today’s latecomers to development might experience a phenomenon of premature deindustrialization, early exhaustion of the benefits of manufacturing, or simply skip the development of a nationally-rooted and dynamic manufacturing sector altogether? Could they have predicted that developing countries might stake their hopes on the development of a globally competitive services sector instead, with consequences for economic growth, inequality, and employment?

At UNU-WIDER, together with the ESRC Global Poverty and Inequality Dynamics Network, we have been taking a closer look at the trends. Here I highlight three new papers, recently published for a special section of the Journal of Development Studies, that break new ground on understanding contemporary economic development. 

A potentially troubling ‘new normal’ for economic development 

The main takeaway is this: First, there is significant heterogeneity in pathways of economic development with implications for growth, inequality, and employment. Second, we are seeing less progressive forms of economic development empirically in many contemporary developing countries, notably tertiarization often occurs with rising inequality, urbanization without growth, and the expansion of the modern sector without job creation.

A deeper look at the findings

The first paper in the set, by Baymul and Sen, focuses on movements of workers between economic sectors and the consequences of this on income inequality. It would be a surprise to Kuznets (and Lewis and Kaldor) that contemporary structural transformation has primarily consisted of labour moving from the agricultural sector to the service sector for many poor countries, rather than from agriculture to manufacturing. 

It would be particularly surprising to Kuznets that Baymul and Sen find that when workers move into manufacturing, the effect is to reduce income inequality (contradicting Kuznets’ curve which predicts upward pressure on inequality). By contrast, when agricultural workers move to services, inequality is increased in some developing countries and falls in others. 

Baymul and Sen (and no doubt the ghosts of Lewis, Kaldor, and Kuznets too) lament that the vast majority of low-income countries are now on the trajectory of an unequalizing structural transformation as labour transitions from agriculture to services.

The second paper, by Castells-Quintana and Wenban-Smith, focuses on geographical sectors, or urban versus rural. By doing so, the paper deals with the spatial aspects of economic development, including urbanization and urban concentration. The authors note that in developing countries today, and in sub-Saharan Africa in particular, the shift from rural to urban areas may not necessarily be associated with economic development. Countries with a high population growth can instead face rapid urbanization with falling productivity, or urbanization without growth.

Finally, the third paper by Pahl and Timmer looks at economic development through a Lewisian lens and focuses on developments in manufacturing activities. Pahl and Timmer’s contribution is to assess whether a country’s participation in global value chains (GVCs) is associated with employment creation and productivity growth in the formal manufacturing sector (that is, the Lewisian ‘modern’). 

They find strong evidence of the positive impacts of GVC participation on productivity growth in formal manufacturing, but no evidence of employment generation. Pahl and Timmer hypothesise that this is because modern technologies create a bias towards production that requires skilled labour in manufacturing firms that participate in GVCs.

In short, Pahl and Timmer conclude that on average, GVC participation is a mixed blessing for long-term development of poor countries. This finding does not preclude the possibility that GVC participation has been growth-enhancing for some countries. However, it does point to the fact that there are many cases in which GVC participation may have engendered a modern sector expansion with little job creation (leading Lewis to turn in his grave, one would think).

What would Lewis, Kaldor, and Kuznets make of these findings if they were alive today? 

As our overview paper shows this set of papers points to one big idea: structural transformation can take both progressive and regressive forms. It can come with or without employment growth, with rising or falling inequality, and with or without economic development. 

Lewis, Kaldor, and Kuznets would have been surprised at the persistence of economic dualism some fifty to sixty years after their writings — baffled that tertiarization had become the default pathway for many developing countries, and taken aback by the fact that the very idea of deep industrialization had shrunk to specialization in a limited set of production tasks. It is certain that they would advocate further development of new models and theories to help explain these new findings. 

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.