1. China, India, and the Developing World

2. A remarkable reversal in fortunes since 1990s Growth trends in developed and developing countries, 1950-2011

3. Growth was widespread, for once Developing country growth trend by region, 1950-2011

4. Growth has been good for poverty reduction Source: http://siteresources.worldbank.org/INTPOVCALNET/Resources/Global_Poverty_Update_2012_02-29-12.pdf

5. Two narratives on what drives economic growth Orthodox view: economic growth is conditional on “good fundamentals” – defined in practice in terms of policies such as openness, deregulation, privatization, protection of property rights, contract enforcement, low inflation and budget deficits, … Structuralist view: economic growth is conditional on rapid structural change – which requires policies that stimulate employment in manufacturing industries (and modern services), including industrial policies and undervalued currencies While there is overlap between the two sets of policies, there are also tensions and differing priorities

6. Disappointments of orthodox policy reform Growth rates of Brazil and Mexico by period

7. Why structure of employment matters: Large productivity gaps

8. Why structure of employment matters : some sectors are special

9. How structural factors explain growth slowdown in Latin America Data from Pages, Carmen ed., The Age of Productivity, Inter-American Development Bank, Washington, D.C., 2010. Productivity growth within sectors Productivity growth due to structural change

10. … and the difference between slow and rapidly growing regions Decomposition of productivity growth by country group, 1990-2005 Productivity growth within sectors Productivity growth due to structural change

11. The policy context: what does it take to move resources in the right direction? Government failures: poor “institutions” – Which takes long time to fix Market failures: learning spillovers and coordination failures – Which require pro-active interventions even when pro-market reforms are in place What has worked in practice – Macro stability and broad market orientation, plus – Shortcuts to compensate for above failures, such as: Trade protection Directed credit Other forms of IP Undervalued currencies

12. Questions Why economic convergence, where it has taken place, has been more rapid than before – Productive diversification and the role of manufactures in particular Why convergence has been so rare – The process of structural transformation is rife with market and government failures that are hard to overcome What is special about countries that have managed rapid and sustained convergence – Ability to deploy effective shortcuts that compensate for market and government failure What does all this imply about the future of convergence – Not as bright as it’s often made out to be, both because of above and because requisite policies demand global environment permissive of heterodoxy

13. The Chinese case Pragmatic, often heterodox solutions to overcome political constraints and second-best complications that block structural change – Two-track pricing insulates public finance from the provision of supply incentives – Household responsibility system obviates the need for explicit privatization – Township and village enterprises overcome weaknesses in legal (third-party) enforcement of contracts – Special economic zones provide export incentives without removing protection for state firms (and hence safeguard employment) – Federalism, “Chinese-style” generates incentives for policy competition and institutional innovation – “Exchange-rate protection” subsidizes manufactures following WTO entry Strategic and sequential approach targeting one binding constraint at a time – First agriculture, then industry, then foreign trade, then finance… Remaining institutional challenges – Switch to domestic consumption from foreign demand – Building up political democracy and the rule of law

14. Problems Even the shortcuts are hard to implement and come with their own problems – Standard arguments against IP: information and politics – Institutional lock-in They require dealing with successive bottlenecks over time They require permissive global environment – Benign neglect on the part of U.S. and Europe versus narrowing of the policy space

15. Conclusions The presence of a large convergence gap ensures significant potential for rapid economic growth in developing world, regardless of what happens in the rich countries Fulfilling this potential requires ongoing process of diversification and structural change This process is not automatic, especially in countries with an initial comparative advantage in primary products It necessitates pragmatic, experimental policies that support new industries – These are often unconventional policies – Require a supportive external environment – Doubtful that such an external environment will exist during the next phase of the global economy