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In my view: Any developing country can undergo dynamic structural transformation, starting now

3 October 2014

Peking UniversityToday’s post from Justin Yifu Lin, Honorary Dean at the National School of Development (NSD), Peking University, and former Chief Economist of The World Bank, is one in a series of ‘In my view’ pieces written by prominent authors on issues covered in the Development Co-operation Report 2014: Mobilising resources for sustainable development.

Any developing country – even those with poor infrastructure and a weak business environment – can start on a path to dynamic structural transformation and growth today. How? By facilitating technological innovation and development in industries where it has a comparative advantage.

Take China. At the time of its transition to a market economy in 1979, the business environment was poor, infrastructure was very bad and China lacked the capacity to take advantage of its cheap labour market to produce goods for export. To overcome these obstacles, the Chinese government – at all levels and in all regions – encouraged foreign investment in special economic zones and industrial parks. This enabled China to rapidly develop labour-intensive light manufacturing and become the world’s factory.

The same approach can work in other developing countries. For instance, in August 2011 the late Ethiopian Prime Minister Meles Zenawi visited China. Aware of Ethiopia’s labour cost advantages and China’s plans to relocate its shoe industry because of rising wages, he invited Chinese shoe manufacturers to invest in Ethiopia. Managers of Huajian, a designer shoe manufacturer, visited Addis Ababa in October 2011 and – convinced of the opportunity – opened a shoe factory near Addis in January 2012, employing 550 Ethiopians. Huajian more than doubled Ethiopia’s shoe exports by the end of 2012 and by December 2013, the workforce had expanded to 3 500 (by 2016 it is expected to reach 30 000).

Before this, like almost all other African countries, Ethiopia had found it difficult to attract export-oriented foreign direct investment in light manufacturing. The immediate success of the Huajian shoe factory transformed foreign investors’ impression of Ethiopia, helping them to see it as a potential manufacturing base for exports to global markets. Over just three months in 2013, 22 factory compounds in the new industrial park of Bole Lamin were leased to export-oriented factories.

As long as it is carefully embedded within the broader economy so as to avoid creating isolated ‘enclaves’ of productivity and growth, this type of investment can help to fuel modern economic growth, funding improvements in infrastructure and institutions as well as structural changes in technology and industries to reduce costs of production and increase output values. In any country, these enhancements in labour productivity can fuel a continuing increase in per capita income.

In my view, development finance can have the largest possible impact on accelerating a developing country’s structural transformation, job generation and poverty reduction when the country uses these flows to remove infrastructure bottlenecks and develop industries that draw on the country’s comparative advantages. This pragmatic approach will allow these countries to capture China’s relocation of 85 million labour-intensive manufacturing jobs, allowing them too to grow as dynamically as the East Asian economies.

Useful links

Getting Globalization Right: China Marches to its Own Beat by Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University, on OECD Insights.