Development policy metamorphosis as circumstances change

These two types of policies are generally complementary. Inclusive development may not always help everyone, especially the poor. Consequently, anti-poverty programs will be necessary even when development policy is doing its job properly. Sometimes, however, social and development policies have been seen as alternatives.

For example, the increasing use of randomized policy experiments has allowed analysts to develop causal evidence about social policies – such as cash grants or education and health interventions – in a way that is consistent with macroeconomic or economy-wide policies. Hardly possible. In turn, this has led many academics and practitioners to downplay the practical importance of development policy relative to social policy.

This is a mistake, because the real determinants of poverty may be at a distance from poor families and communities. Economic growth requires productive non-farm jobs. In fact, increasing employment opportunities in cities and encouraging migration from rural areas to urban areas can increase income more effectively than helping people become better farmers or providing them with cash grants.

Industrialization has historically been necessary to reduce poverty. True, it often takes time for the benefits of industrialization-induced economic growth to wear off. During Britain’s Industrial Revolution, living conditions for urban workers improved very slowly, if at all, for almost a century, until the rise of labor unions and other institutional changes caused an imbalance of power with employers. did not resolve. But recent experience with East Asian tigers and rapid, export-oriented industrialization in China has narrowed this process and created development miracles as well as poverty reduction miracles.

There are clear signs that we are now entering a new era in which industrialization will no longer be as powerful in spreading the benefits of economy-wide productivity gains. Global trends in innovation have significantly reduced the ability of manufacturing industries to absorb low-skilled workers. There has been a sharp decline in the value-added labor share in these branches especially for such workers.

And while globalization has accelerated the transfer of manufacturing from advanced economies to developing economies, global value chains have become the most vulnerable vehicles for creating good jobs, as they are a transmission belt for skill- and capital-intensive technologies. , and because their business model is based on imported inputs and a relative lack of integration with the local economy. Globally competitive manufacturing industries in developing economies increasingly operate as enclaves, similar to highly capital-intensive, export-oriented extraction industries. They may promote exports and higher incomes for a narrow segment of the economy, but they sideline most workers, and especially the least educated.

This development model falls short of not only equality or poverty reduction; It also fails to promote greater growth because high-productivity activities cannot engage a growing part of the economy. Just as resource-rich economies rarely grow for long periods of time (outside of booming trade terms), the industrialization model is no longer capable of generating rapid and sustained economic growth.

So, then, what should today’s development model look like? As always, investment in human capital, infrastructure and better institutions is essential for long-term economic gains. These are the basic principles of economic convergence with rich countries. But a growth strategy to its name should increase the productivity of the existing workforce, not the workforce that may grow in the future thanks to such investments.

Developing countries hold significant potential to increase agricultural productivity and diversify from traditional to cash or export crops. But with more productive agriculture—and indeed as a result—young workers will continue to leave rural areas and flock to urban areas. They will be employed not in factories but in informal, micro enterprises with poor expansion prospects in low productivity services.

Therefore, next generation development policies will have to target these services and find ways to increase their productivity. The reality is that some informal firms will grow to become “national champions”, but by offering a range of public services—including technology, business plans, regulations and training for specific skills—governments can unleash greater entrepreneurial growth potential. can unlock. from them. The provision of such services may be conditioned on government oversight and easy employment targets. This will enable positive self-selection, with only those micro-enterprises opting to sign up for government assistance.

Traditionally, East Asian-style industrial policies target large producer manufacturers who are most likely to become exporters. Future “industrial policies” will have to focus mostly on small service firms, most of which are unlikely to be exporters. This new generation of industrial policies targeting low-productivity areas can enhance the livelihoods of the urban poor and increase productivity. labor-absorbing sectors of the economy.

One implication is that social policy and development policy will increasingly overlap. The best social policy enabling sustainable poverty reduction and increased economic security is to create more productive, better jobs for workers at the bottom of the skill delivery.

In other words, social policy should focus as much on firms as on households. And the new global and technological context means that economic growth is now only possible by increasing productivity in small firms, which employ most of the poor and lower-middle class. Development policy may finally be integrated. ©2021/Project Syndicate

Dani Roderick is Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government and author of ‘Straight Talk on Trade: Ideas for a Sensible World Economy’.