In my view: Any developing country can undergo dynamic structural transformation, starting now
Today’s post from Justin Yifu Lin, Honorary Dean at the National School of Development (NSD), Peking University, and former Chief Economist of The World Bank, is one in a series of ‘In my view’ pieces written by prominent authors on issues covered in the Development Co-operation Report 2014: Mobilising resources for sustainable development.
Any developing country – even those with poor infrastructure and a weak business environment – can start on a path to dynamic structural transformation and growth today. How? By facilitating technological innovation and development in industries where it has a comparative advantage.
Take China. At the time of its transition to a market economy in 1979, the business environment was poor, infrastructure was very bad and China lacked the capacity to take advantage of its cheap labour market to produce goods for export. To overcome these obstacles, the Chinese government – at all levels and in all regions – encouraged foreign investment in special economic zones and industrial parks. This enabled China to rapidly develop labour-intensive light manufacturing and become the world’s factory.
The same approach can work in other developing countries. For instance, in August 2011 the late Ethiopian Prime Minister Meles Zenawi visited China. Aware of Ethiopia’s labour cost advantages and China’s plans to relocate its shoe industry because of rising wages, he invited Chinese shoe manufacturers to invest in Ethiopia. Managers of Huajian, a designer shoe manufacturer, visited Addis Ababa in October 2011 and – convinced of the opportunity – opened a shoe factory near Addis in January 2012, employing 550 Ethiopians. Huajian more than doubled Ethiopia’s shoe exports by the end of 2012 and by December 2013, the workforce had expanded to 3 500 (by 2016 it is expected to reach 30 000).
Before this, like almost all other African countries, Ethiopia had found it difficult to attract export-oriented foreign direct investment in light manufacturing. The immediate success of the Huajian shoe factory transformed foreign investors’ impression of Ethiopia, helping them to see it as a potential manufacturing base for exports to global markets. Over just three months in 2013, 22 factory compounds in the new industrial park of Bole Lamin were leased to export-oriented factories.
As long as it is carefully embedded within the broader economy so as to avoid creating isolated ‘enclaves’ of productivity and growth, this type of investment can help to fuel modern economic growth, funding improvements in infrastructure and institutions as well as structural changes in technology and industries to reduce costs of production and increase output values. In any country, these enhancements in labour productivity can fuel a continuing increase in per capita income.
In my view, development finance can have the largest possible impact on accelerating a developing country’s structural transformation, job generation and poverty reduction when the country uses these flows to remove infrastructure bottlenecks and develop industries that draw on the country’s comparative advantages. This pragmatic approach will allow these countries to capture China’s relocation of 85 million labour-intensive manufacturing jobs, allowing them too to grow as dynamically as the East Asian economies.
Getting Globalization Right: China Marches to its Own Beat by Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University, on OECD Insights.
“You don’t know how lucky you are; when I was young we were so much poorer/sicker/less educated than people today” – a fairly common comparison, but one that relies on individual memory and can only take us back a few decades . And even then, we may not have much detail. We might know where our grandparents lived and worked, how much education they had and whether they had a long and healthy life, but what of our great-grandparents? And was their wellbeing solely determined by how much money they had, or were other factors at play? Can we get a sense of how people’s lives have improved over the past two centuries beyond the monetary?
Our view of economic and social development since the Industrial Revolution is to a large extent based on estimates of gross domestic product (GDP) per head such as those published in Angus Maddison’s History of the World Economy. But trends in GDP per head do not capture what life was like for individuals, their life expectancy, education, personal safety or inequality across society. Increasingly, we are using wellbeing to measure human development, but can we do the same for the lives of our forebears?
Following in the footsteps of Angus Madison, a group of historians got together with the OECD and OECD Development Centre to map the history of wellbeing across the globe, mirroring the approach of the OECD’s present-day Better Life Initiative.
The result, How Was Life? Global Trends in Wellbeing since 1820, looks at 10 dimensions of wellbeing from 1820 to the present day: real wages, educational attainment, life expectancy, height, personal security, political institutions, environmental quality, income inequality and gender inequality, as well as economic growth in the form of gross domestic product (GDP) per head.
So how can we tell how healthy people were over the past 200 years? How Was Life uses two different approaches. Life expectancy, a common element with the OECD’s modern day BLI, is relatively easy to source from historical records, but provides information only on how long people lived – not how healthy they were while alive. Since we cannot go back and ask 19th century men and women about the state of their health, How Was Life uses height instead. Height is a good indicator of general health and nutrition, particularly in childhood, and can be measured from prison and army records, and even the bones of people long dead.
Using literacy and data on years in education, the authors found that while only 20% of people in the world were able to read in 1820, by 2000 the figure was 80%. The rising trend in education followed trends in GDP fairly closely.
But in other cases the relationship between wellbeing and GDP was perhaps more surprising. Life expectancy, for example, continued to improve around the world even when GDP per capita stagnated. The reason? Advances in medical technology and its spread across the globe. Overall, life expectancy around the world more than doubled between 1880 and 2000, from below 30 years to almost 70, and today in OECD countries it is up to 80 years on average.
What does it all mean? Overall, wellbeing has improved over the past two centuries, but not always in the ways or for the reasons we might have thought. The industrial revolution sometimes meant workers were worse off and worse fed than before, for example. Income inequality generally fell from the end of the 19th century until about 1970, but then it rose again. Taking the full range of indicators covered in the report into account reveals an interesting pattern. Before the 1970s global inequality in well-being was higher than global inequality in GDP per capita, but since the 1970s the reverse is true, with the other dimensions of well-being (such as health) more equally distributed across the world than incomes.
Today is the UN International Day of Older Persons and the theme this year is “Leaving No-One Behind: Promoting a Society for All”. Monika Queisser, head of the Social Policy Division in the OECD’s Employment, Labour and Social Affairs Directorate, argues that the best policy for older people must focus on the young.
What will matter to you in old age? A healthy body and mind, above all. But also a comfortable home in a nice place to live. Family and friends close by. And enough money to benefit from all those good things in life, like travel, books, movies and museums and the other pleasures one never has enough time to enjoy while working and bringing up a family.
Chances are that if you were fortunate enough to get good education and the skills you needed, and if you found and kept a good job, both in terms of pay and working conditions, your life in retirement will be pleasant. Even if you need long-term care and personal help, you are likely to have access to good quality services because you are insured and you can pay for them.
But what about those among us who had a less fortunate start to their working lives, who lost their jobs once or more during their active years, who worked part-time and were paid little, who had physically demanding jobs taking a toll on their health? For all these people, retirement and old age risks being much less enjoyable.
OECD data from Pensions at a Glance 2013 show that today, the majority of pensioners enjoy as good living standards as the average population. Of course, this is not the case for everybody, but at the moment, elderly groups are the least unequal part of the population. This is not surprising: most of today’s retirees, at least men, have worked all their lives in stable jobs. However, a “job for life” and even a “career for life” are rare commodities for people starting out today. These future retirees will be a much more diverse group, some will have experienced long spells of unemployment and low wages, while others continue to enjoy stability and higher earnings. Capital income, such as interest from savings, shares and other investments, is more concentrated and the gap between high earners and low earners is widening.
Poorer people are also less healthy and die younger than rich people. Many of the future elderly may move into older ages with disabilities, in bad health, and a limited ability to keep working and contributing to society. The experience of old age for today’s younger generations could change dramatically compared to their parents, with improved living standards and a longer life for some, and a shorter, sicker and more poverty-ridden life for others.
Society should tackle increasing inequality as populations age. Apart from a moral imperative not to leave older persons by the wayside, there are also hard economic reasons why letting unequal ageing happen is bad policy. A growing divide in the well-being of older people will increase the stress on social protection. And it will jeopardize the effectiveness of recent reforms of labour markets, pension and long-term care systems. Governments could make substantial savings if income, wealth and health inequalities were picked up earlier and tackled as they occur.
Today’s young people are the older people of tomorrow. The best policy for older persons is a policy that addresses problems when they start. Asking social protection and health systems to fix the situation late in life is not the best option – systems are ill-equipped to compensate for everything that went wrong during a working life if they wait until the problems have accumulated. Identifying and tackling risks as they arise will enable governments to design sustainable and cost-effective policy approaches towards demographic ageing.
Youth unemployment is at record levels today in many OECD countries. This could have long-term consequences for young people’s future careers and well-being at all ages, including in old age. We need to give young people the best chances to realise their full potential. We need to rethink our systems of social protection to accompany people throughout their increasingly diverse life courses and thus make retirement a well-earned reward.
Chapter 8 of OECD’s Health at a Glance 2013 is on Ageing and Long-term Care