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Trade and Development Report 2016

Structural Transformation for Inclusive and Sustained Growth

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Development is a transformational process, combining a series of interactive and cumulative linkages to create a virtuous circle of enhanced resource mobilization, higher incomes, expanding markets and investment, leading to more and better jobs. Such a structural transformation requires selective government policies to shift a country's productive structure towards activities and sectors with higher productivity, better paid jobs and greater technological potential ‒ what is commonly called "industrial policies". The Trade and Development Report (TDR) 2016 highlights the central role of industrialization, given the higher productivity of manufactures in relation to other sectors. Manufactures can also generate strong cross-sectoral linkages (e.g. backward, forward, income and knowledge linkages) and complementarities that enhance productivity and employment growth in the primary and tertiary sectors. Countries that have been able to narrow the productivity and income gap with developed countries are those (mostly in Asia) that managed to expand investment, employment and productivity in their manufacturing sector in a sustainable way, which contrasts with other countries and regions affected by "stalled industrialization" or "premature de-industrialization". Successful structural transformation requires a comprehensive policy approach. This includes strategic policies for international trade, pro-growth macroeconomic policies to ensure high levels of aggregate demand and investment and a stable and competitive exchange rate, policies in support of the profits-investment nexus to provide finance for structural transformation, and closing tax loopholes through fiscal and regulatory measures that would bring greater transparency to corporate decision making and finance public expenditure that provides an enabling context for production upgrading and economic diversification.

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Globalization, convergence and structural transformation

In the classical development literature, and its related policy advice, the relationship between economic growth and changes in the structure of production took centre stage. While there were differences across this literature, particularly on policy detail, there was general agreement that successful industrialization in a small group of “Northern” countries had created, and perpetuated, an international division of labour involving a high-income and technologically sophisticated “core” that exported mainly manufactured goods and a low-income and technologically weak “periphery” that was largely dependent on primary exports. Industrialization in the South was seen as the key to rebalancing the international division of labour, maximizing the gains from international trade and delivering “prosperity for all” (UNCTAD, 1964).

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