Globalization, structural change and productivity growth

 
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As nations undergo economic development and open their markets, they will see necessary structural change within their labor sectors. One key assumption about globalization is that it will uniformly force economies to become more productive and efficient as competition exerts pressure. However, local conditions may significantly alter globalization’s impact, particularly as it relates to the nature and quality of employment.

A 2011 paper for the National Bureau of Economic Research, “Globalization, Structural Change and Productivity Growth,” used data from the Groningen Growth and Development Center (GGDC) database, with employment statistics for 27 countries across 10 sectors, to track structural changes and overall labor productivity over time. The researchers, based at Tufts University and the Harvard Kennedy School, focused on how jobs available for workers shifted into different sectors as countries developed.

The study’s findings include:

  • Comparisons of different global regions show very different results: since 1990, “structural change has been growth reducing in both Africa and Latin America, with the most striking changes taking place in Latin America.”
  • Asia, however, demonstrated a 60% growth advantage over Latin American and Africa: “Asia’s labor productivity growth in 1990-2005 exceeded Africa’s by 3 percentage points per annum and Latin America’s by 2.5 percentage points.”
  • This gap between regions “is accounted for by differences in the pattern of structural change — with labor moving from low- to high-productivity sectors in Asia, but in the opposite direction in Latin America and Africa.”
  • For nations with extensive natural resources, the structural changes may be growth reducing. This is primarily because these resource extraction industries are not as labor intensive as manufacturing industries are, and thus cannot absorb excess labor from the agricultural sector.
  • The economic policy of undervaluing the national currency serves to promote economic growth as the nation undergoes structural changes. The “undervaluation acts as a subsidy on those [growing] industries and facilitates their expansion.” Asian countries have benefited from employing this policy, while Latin American countries typically have not.
  • Nations with flexibility across labor markets enjoyed more growth-promoting structural change, as labor could move freely between sectors. Surprisingly, however, measures of the “rule-of-law” and corruption were not found to have significant impacts on whether or not structural changes would promote or reduce economic growth.

The study’s authors conclude that “an economy’s overall productivity depends not only on what’s happening within industries, but also on the reallocation of resources across sectors. This is where globalization has produced a highly uneven result. Our empirical work shows that countries with a comparative advantage in natural resources run the risk of stunting their process of structural transformation. The risks are aggravated by policies that allow the currency to become overvalued and place large costs on firms when they hire or fire workers.”

Tags: economy, Asia

    Writer: | Last updated: July 26, 2011

     

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