A Little More on Transformation

For many economists, transformation doesn't mean much more than Optimus Prime turning into a truck.

In my last post, I spoke about wanting transformation to take a more central role in development thinking and policy. My argument was that large swathes of developing countries remain pre-capitalist, and as such are fundamentally less dynamic than the (varied) capitalist structures that have been adopted by the developed world in its pursuit of economic development.

This is a point that is more commonly noted by historians than economists, but in an excellent article for Project Syndicate Dani Rodrik points out that it isn’t entirely foreign to economists:

In fact, this “dualism” is one of the oldest and most fundamental concepts in economic development, first articulated in the 1950’s by the Dutch economist J.H. Boeke, who was inspired by his experiences in Indonesia. Boeke believed in a stark separation between the modern, capitalist style of economic organization that prevailed in the West and the pre-capitalist, traditional mode that predominated in what were then called “underdeveloped areas.” Although modern industrial practices had penetrated underdeveloped societies, he thought it unlikely that they could make substantial inroads and transform such societies wholesale.

Rodrik goes in a different direction to how I would from here, though.  He starts looking at the possibilities for productivity gains from movement from the less productive section of the economy to the more productive section. He has been preoccupied of late with trying to understand the apparent failure of African economies to pursue this Lewisian path of economic development, pointing out that Asian economies have found great success by shifting workers from low to high-productivity sectors.

His explanation is, in part, that many of the high productivity areas in many African economies are technology-intensive, rather than labour-intensive; as such, growth in these sectors may generate wealth, but will not contribute directly to the economic position of many workers. It’s a very good and interesting point. It also goes some way to explaining why some African countries are growing fast without correspondingly reducing poverty. Coincidentally, I was in a meeting with an IMF official here who made precisely this point: Tanzania has experienced very impressive economic growth in the last ten years, but this has barely put a dent in poverty rates.

While Rodrik’s arguments and explanations are all very sound (particularly his statement that natural resource-rich countries can be victims of specialisation in an industry with limited absorptive capacity), I feel that there’s a big chunk of analysis that’s missing, one that looks at why the unproductive sectors of the economy stay that way. In other words, where Boeke suggest modern economic structures cannot fully penetrate developing economies, I believe they can and must and we need to explore how.

In the developed world, there was a lot of movement of labour towards highly productive industry during various industrial revolutions. But one of the important characteristics of the other main sector, agriculture, was that this became heavily capitalist as well, and was able to increase production and let labour go relatively quickly. One large reason for this was a change in ownership patterns of land, stimulating large-scale agricultural production – something that remains elusive in most of Africa, and which neither donors nor Government want to touch, as it’s a political landmine. In the developed world, this process was completed through land-grabs (such as the enclosures movement) and a reimagining of property rights based on improvement and ‘tomahawk’ claims (as in the US) – both of which prompted bitter struggle. I’m not saying either of these things are to be sought in the developing world, but that we need to address the question head-on and establish how it can occur without the strife that has historically accompanied it.

Ultimately looking at productivity gains can tell us a lot, as Rodrik shows, but understanding why dynamism emerges or doesn’t emerge in different sectors is just as important.