INDUSTRY Poverty and vulnerability can be potentially avoided via rural – urban migration But we know that formal –sector jobs may be scarce if investment in physical capital is low In today’s class: How can government policies trigger rapid industrialization and modernization? How can the investment “climate” affect investment, growth, and poverty reduction?

Rapid Industrialization Due to acceleration of growth rates, in turn due to positive externalities A comparison between investment decisions taken by a benevolent planner who owns all the firms, and an scenario where firms are separately owned: → Firms tend to underinvest in capital accumulation relative to what is considered optimal by a benevolent planner →Constant or even decreasing returns to scale at the level of the firm can co-exist with a macroeconomic production function that may exhibit increasing returns (Romer 1986)

Due to complementarities: When a single individual or firm takes an action and this action increases the incentives for others to take the same (or similar) action In the particular case of investment, individual firms choose how much to invest by reacting to the projected average level of investment by other firms Individual investment rates Economy wide anticipated investment rates

Investment Climate, Growth, and Poverty Reduction Governments have strong influence on the costs, risks, and barriers to competition faced by firms. Costs: Taxation Corruption Regulatory burdens, red tape Infrastructure Labor market regulation

Risks: Policy predictability and credibility Macroeconomic stability Rights to property Contract enforcement Expropriation

Barriers to competition: Regulatory barriers to entry and exit Competition law and policy Functioning finance markets Infrastructure

The cases of China, India, and Uganda → Next class: Murphy- Shleifer- Vishny (1989)