What is economic transformation?

Economic transformation  involves moving labour from low to higher productive activities This includes between sectors to higher value activities (for example, from agriculture to manufacturing) and within sectors (for example, from subsistence farming to high-value crops). It is widely accepted that poverty reduction and economic growth cannot be sustained without economic transformation and productivity change but, despite this obvious point, the development community has traditionally paid relatively little attention to these long-term determinants of development. Following ODI’s work on structural transformation and employment generation earlier this year, I set down my opinion lamenting this lack of attention. So what has happened since? And what does this mean for the debate in 2014, a crucial year for defining post-2015 development goals?

Who is talking about it?

In 2013, developing countries, and regional and global institutions have increasingly focused on economic transformation towards greater productivity and higher value activities. For example, a recent African Development Bank (AfDB) strategy places the bank at the heart of Africa’s transformation. Other international organisations, such as the IMF in February and the OECD more recently, have also discussed the importance of economic transformation, diversification and growth for African countries. Recent and forthcoming reports by UNIDO IDR2013, UNCTAD’s LDC2013 report and the European Report on Development 2013 look specifically at economic transformation and job creation. And the report of the High-Level Panel on post-2015 also presents a set of transformations including inclusive growth and job creation. This all indicates that key players are starting to take a long-term view of poverty reduction through transformation of the economy, which is to be welcomed.

The DFID-ESRC Growth Research Programme (DEGRP) brought together a range of high-level developed and developing country academics for a series of events and publications to debate the topic from various angles. This included two sessions on state–business relations and industrial policy, as part of the UNU-WIDER Conference in May, which recognised that appropriate industrial policy and supporting country-specific institutional settings may have an important role in economic transformation. This also led to a set of essays from experts such as Dani Rodrik and John Page, which highlight conditions under which governments might be able to best support industrialisation.

Whilst international organisations and researchers take note, the agenda is often led by developing countries. This autumn, discussions have continued at the country level; a DEGRP Debate in Accra, with the Governor of the Bank of Ghana, examined what it could take to build an efficient and stable financial sector for sustained growth and structural transformation. The debate, bringing together a range of financial sector officials and academics from Africa, Asia and Europe, kick started a number of debates on the importance of microfinance regulation, the role of good development banks and the need for efficient financial sectors with low interest rate spreads for economic transformation.

This was followed up at a public debate at ODI in October with DEGRP and DFID, where Margaret McMillan argued that structural transformation in Africa has led to economic growth in recent years and that its growth has been inclusive. Francis Mulangu, from the African Centre for Economic Transformation (ACET), also highlighted ACET’s forthcoming annual report on the drivers of transformation in Africa, which emphasises that the continent ‘is growing rapidly, transforming slowly’. Finally, the December ACET/IFPRI conference in Nairobi gathered leading policy-makers and researchers to focus on this crucial issue: particularly, how much is growth really transforming African economies from their longstanding dependence on commodity exports, and promoting higher labour productivity; and how much is growth ultimately reducing poverty?

Practical steps for economic transformation

Hence, there seems to be more momentum behind the use of the term ‘economic transformation’ than at any time since the 1960s. This is encouraging, but the practicalities and implications of this for the development community in moving forward are complex. Therefore, what needs to be done in 2014?

• Researchers need to scale up their examination of the drivers and implications of economic transformation and productivity change in low-income countries, e.g. what are the direct and indirect links with development and poverty; what is holding back or promoting transformation in LICs; what is the role of both domestic and researcher actions; and how can the global community support this?
• Post-2015 goals need to consider economic transformation more seriously (whether through industrial development, as suggested by UNIDO, or through trade, as suggested in these ODI podcasts). So far, a range of sub-goals in relation to economic development are being developed (jobs, infrastructure etc.), but are these seen in context of economic transformation?
• Structures, instruments and policies for economic transformation need to be designed and put in place. This means both domestically – in terms of market-friendly industrial policies, an appropriate financial sector that can allocate new financial resource and long-term development needs – and globally, in terms of appropriate ‘aid for trade’ instruments (see this ODI-COMSEC book I co-edited, which includes contributions by a range of experts such as Prof. Stiglitz) and/or other financial and tax instruments. New instruments (e.g. use of guarantees) are being developed and new opportunities are being exploited (sovereign bonds) but are they being developed and implemented as part of an economic transformation strategy?

None of this is necessarily easy, and signals a challenging year ahead in 2014. DEGRP will continue its emphasis on economic transformation and the next edition of the European Report on Development (2014) may also address some of these issues, with a focus on financing and other means of implementation in a post-2015 world. ACET are finalising country-level indices on five dimensions of transformation, for release in February 2014. We are developing an index of structural transformation for the LDC IV Monitor. Ultimately, ideas need to translate into domestic action in low-income countries, with research and global frameworks only really playing a supportive role.