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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The catch-up challenge: Industrialization and structural change

In recent years there has been a renewed interest in the role of industrialization in promoting sustained economic growth and development, reflected in Goal 9 of the 2030 Agenda for Sustainable Development which calls for promoting inclusive and sustainable industrialization. Five important factors have contributed to this revival of interest. First, many developing countries have failed to deepen and diversify their existing industrial capacity in a more open global economy; indeed, several of them have experienced a premature decline in the share of manufacturing in their gross domestic product (GDP). Second, there is a perception that export-led growth strategies in developing countries face more constraints than in the past, in particular due to the slower growth of global demand, especially from industrialized countries. Third, many developing countries continue to remain vulnerable to external trade and financial shocks. Fourth, and related to the latter point, there has been an end to the enormous windfall gains from primary exports generated by the commodity price boom during the first decade of the 2000s, which saw accompanying growth and investment spurts. And lastly, further deindustrialization in several developed countries is being observed with growing concern.

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