Only productivity change, structural transformation and innovation can secure development in the long-run. A low-income country (LIC) that doesn’t increase the level of productivity in its economy will eventually limit its own growth and income-generating potential, and find it difficult to navigate health challenges and environmental constraints. It may well fail to make the transition from a LIC to a middle income country (MIC). You would expect, therefore, that productivity would be at the forefront of the debate on the future of development. Unfortunately, I don’t see that happening right now.
Current discussions on the future of development goals seem preoccupied by lots of issues such as equity, governance and resilience. And these are good goals – several of them are merit goods, after all. But in the meantime, the Least Developed Countries (LDCs) are busy thinking about how to sustain economic growth of 7% per year ‘by strengthening their productive capacity in all sectors through structural transformation’.
In a recent speech, the UK development secretary Justine Greening set out to ‘shift DFID’s work to include a much stronger focus on economic development’. This raises some key questions: what do we know about the challenges of economic development, what do we still need to know, and how can developed countries such as the UK help to shift the debate towards economic development?
Why productivity matters for development
African economies are growing. Most turned a corner in the mid-1990s (see our advice to the 2005 Commission for Africa and this briefing), but some major challenges remain. How can African countries sustain growth rates, transform structurally and create jobs?
We already know plenty about what drives growth in LICS, what may have caused recent gains in growth (e.g. commodity booms through growth in emerging markets) and what sorts of shocks are holding back economic growth. In a recent letter to the Financial Times, business leaders highlighted the role of human capital in economic growth.
But how can countries sustain growth whilst creating employment? The key lies in the speed and pattern of innovation and productivity change. Whilst factor accumulation alone has its limits in terms of generating higher living standards, countries that raise productivity create more added-value from a given set of factors of production and (imported) inputs (e.g. African farmers are more productive when they use mobile phones to plug informational gaps or fore financial services) and improve living standards in the long-run. Recent academic research and analysis at the firm level suggest that innovation can promote growth and create employment in the long-run. Some argue there is an important role for markets and competition in in driving productivity change, others make the case for inclusive economic and political institutions, the role of the state, industrial policies and state-business relations in facilitating and guiding the pattern and speed of technical change.
In her speech, Greening mentioned some welcome initiatives to understand what causes growth and productivity change in LICs, such as funds for the International Growth Centre to provide technical advice. But further exploration is needed. The DFID-ESRC Growth Research Programme, now in its second phase, is asking for research proposals on growth in LICs in the areas of agriculture, finance, and innovation and productivity change.
How can developed countries help?
Developed countries can provide an enabling framework that allows LICs to strive for structural change and job creation. In our advice to the Commission for Africa a decade ago, for example, we suggested 10 ways in which developed countries could help growth, including the promotion of responsible investment and the provision of investment-related aid, rather than tied aid. Support for supply-side activities that foster domestic capacities, such as Aid for Trade, is likely to provide a fast route out of poverty indirectly through its support for productivity change, economic growth and increased tax revenues. We have also argued for a G20 – LIC 20 point charter for transformative growth, which emphasises skills, infrastructure and investment. The issues on the G8 agenda this year – tax, trade and transparency – could add to the list of ways in which developed countries can support growth and productivity in LICs. The provision of certain global public goods (e.g. trade rules, coordination on economic and environmental policies, knowledge) are particularly helpful for economic development – a message for the Bali meeting at the end of this month.
In all of this, the precise role of development finance institutions (DFIs) that use financial instruments (alongside aid) to help private sector development may have been understated. Greening does suggest that DFIs such as CDC and PIDG support lots of jobs. While it is challenging to obtain precise estimates of the jobs (direct, indirect and induced) generated by DFIs, or their effects on structural transformation, our previous research and current research we will be discussing this week suggests DFIs are already creating significant numbers of direct and indirect jobs (some 2.5 million) and promoting labour productivity (an average shift of 3-15% in developing countries) and structural transformation.
Conclusion
A real shift is needed in the development debate towards economic development. Current development debates often fail to even mention structural transformation, productivity change, investment, or skills (e.g. post-primary education and training). Contrast this with the 48 least-developed country (LDC) governments who charted a way forward for development priorities to 2020 when they did talk about these issues.
The promotion of productivity and structural transformation in LICs is in the interest of both low income and developed countries. For example, Aid for Trade helps to lower trade costs and increase productivity, which helps both recipients and providers. It can also be seen in the context of other flows that are increasing rapidly, such as DFIs that can help promote and leverage in capital flows for job creation and structural change.
In a separate speech, Greening has argued that development is good for the UK too, echoing our evidence that it can help both recipients and providers. Africa, for example, hosts 2.8% of the UK’s outward stock of foreign direct investment, but is responsible for 6.2% of the UK’s foreign earnings net of tax. A radical shift in support for productivity, investment and skills benefits LDCs directly and other countries, such as the UK, indirectly.
