This blog post is adapted from Justin Lin’s paper (New Structural Economics) that outlines a framework for sustainable growth strategies for developing countries. Here is a bit more detailed discussion and the source of this blog post.
- First, identify those tradable goods and services that have existed for a period of about 20 years in dynamically growing countries that have similar endowment structures but with a per capita income that is about double their own.
- Second, among the industries on that list, identify those that have attracted domestic private firms and try to pinpoint:
- any obstacles that may be preventing them from upgrading the quality of their products, or
- any barriers that may be discouraging other private firms from entering.
This could be done using value chain analysis or the Growth Diagnostic Framework suggested by Hausmann, Rodrik, and Velasco (2008). The government can then implement policies to remove the constraints at home, and carry out randomized controlled experiments to test their effectiveness in eliminating the constraints before scaling those policies up to the national level.
- Third, some of the identified industries may be new to domestic firms. The government could encourage firms in the higher-income countries identified in the first step to invest in these industries, since those firms have the incentive of relocating their production to the lower income country so as to reduce labor costs. The government could also set up incubation programs to assist the entry of private domestic firms into these industries.
- Fourth, unexpected opportunities for developing countries may arise from their unique endowment and from technological breakthroughs around the world. Developing country governments should therefore pay close attention to successful discoveries and engagement in new business niches by private domestic enterprises and provide support to scale up those industries.
- Fifth, in countries with poor infrastructure and unfriendly business environments, special economic zones or industrial parks can help overcome barriers to firm entry and foreign investment. These can create preferential environments which most governments, because of budget and capacity constraints, are unable to implement for the economy as a whole in a reasonable timeframe. Industrial clusters could also be encouraged.
- Sixth, the government can compensate pioneer firms through time limited tax incentives, co-financing of investments, or access to foreign exchange. To avoid rent seeking and the risk of political capture, these incentives should be limited both in time and in financial cost, and should not be in the form of monopoly rent, high tariffs, or other distortions. Policy makers in all developing countries could take this approach to help their economies follow their comparative advantages, tap into the potential advantage of backwardness, and achieve dynamic and sustained growth.