UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

GENEVA

TRADE AND DEVELOPMENT

REPORT, 2016
Structural transformation for
inclusive and sustained growth

Chapter II

GLOBALIZATION, CONVERGENCE AND

STRUCTURAL TRANSFORMATION

UNITED NATIONS
New York and Geneva, 2016
 Globalization, Convergence and Structural Transformation 31

Chapter II

GLOBALIZATION, CONVERGENCE AND

STRUCTURAL TRANSFORMATION

A. Introduction

In the classical development literature, and workforce, which would further reinforce this virtu-
its related policy advice, the relationship between ous circle. While there were differences in opinion
economic growth and changes in the structure of over what was holding back structural transformation
production took centre stage. While there were dif- in developing countries, there was broad agreement
ferences across this literature, particularly on policy that their potential for catching up would, under the
detail, there was general agreement that successful right conditions, allow for a convergence in incomes,
industrialization in a small group of “Northern” and the closing of other economic and social gaps
countries had created, and perpetuated, an interna- between the North and the South.
tional division of labour involving a high-income and
technologically sophisticated “core” that exported This case for industrialization highlighted the
mainly manufactured goods and a low-income and limits of relying on market forces for advancing
technologically weak “periphery” that was largely structural transformation and called on active State
dependent on primary exports. Industrialization in involvement. In particular, following a path well-
the South was seen as the key to rebalancing the trodden by almost all developed economies, domestic
international division of labour, maximizing the gains industries needed to be supported and protected in
from international trade and delivering “prosperity their early stages, until they developed their own
for all” (UNCTAD, 1964). capacities to compete. In addition, and more so
than for earlier generations of late industrializers,
The case for making industrialization the key additional targeted support would be needed to pro-
to sustained development in the South rested on its mote manufactured exports from the South, given
capacity to generate and combine a series of linkages, productivity gaps with leading industrial economies,
complementarities and externalities that together and the relative smallness of their domestic markets
could trigger a virtuous circle of resource mobiliza- (UNCTAD, 1964: 14). This approach became con-
tion, rising productivity growth, increasing incomes ventional wisdom throughout the developing world
and expanding market demand, both at home and in the 1950s and 1960s and helped draw attention to
abroad (Toner, 1999). Moreover, industrialization weaknesses in the governance of the international
was linked with a demographic transition towards economy that could hinder efforts at catching up,
a more urban, more educated and more productive with various measures proposed to ease the balance of
32 Trade and Development Report, 2016

Table 2.1

INDUSTRIAL GROWTH RATES, SELECTED COUNTRIES AND REGIONS, 1870–2014

(Per cent)

1870– 1890– 1913– 1920– 1938– 1950– 1973– 1990– 2007–

Groups 1890 1913 1920 1938 1950 1973 1990 2007 2014

Germany, United Kingdom

and United States, 3.1 3.4 1.4 1.9 0.9 5.2 1.1 2.1 0.2
Germany, Japan and United States . . . . . 7.9 2.4 2.2 0.3
European periphery 4.7 5.0 -6.5 4.7 3.6 8.9 3.3 2.8 0.0
Asia 1.5 4.2 5.2 4.2 -1.7 8.5 5.8 4.2 4.1
Latin America and the Caribbean 6.4 4.4 3.4 2.8 5.3 5.7 2.7 2.2 1.0
Middle East and North Africa 1.7 1.7 -5.8 4.9 6.0 6.2 6.1 4.5 3.2
Sub-Saharan Africa . . 13.4 4.6 8.6 5.5 3.5 3.9 4.1

Source: Bénétrix et al., 2012, for the period 1870–2007; UNCTAD secretariat calculations, based on UNCTADstat for 2007–2014.
Note: The table reports unweighted average industrial (or manufacturing when available) growth rates by region. In this table, the
country groups comprise the following: European periphery: Albania, Austria, Belarus, Bosnia and Herzegovina, Bulgaria,
Croatia, Cyprus, Czech Republic, Czechoslovakia (for the period prior to 1993), Estonia, Finland, Greece, Hungary, Iceland,
Ireland, Italy, Latvia, Lithuania, Malta, Montenegro, Poland, Portugal, Republic of Moldova, Romania, the Russian Federa-
tion, Serbia, Slovakia, Slovenia, Spain, the former Yugoslav Republic of Macedonia, Ukraine and Yugoslavia (prior to 1995).
Asia comprises the developing economies of East Asia, South-East Asia and South Asia, plus Georgia, Japan, Kazakhstan,
Kiribati, Kyrgyzstan, Papua New Guinea, Samoa, Solomon Islands, Tajikistan, Tonga, Uzbekistan and Vanuatu. Middle East
and North Africa comprises: Algeria, Bahrain, Egypt, Iraq, Islamic Republic of Iran, Israel, Jordan, Kuwait, Lebanon, Morocco,
Oman, Saudi Arabia, Sudan, Syrian Arab Republic, Tunisia, Turkey, United Arab Emirates and Yemen.

payments constraint on faster growth and to mobilize on their initial transformation gains, in many other
more international resources to boost investment. cases, changes from the late 1970s in the economic
and ideological landscape encouraged a very different
The pattern of structural transformation pre- approach to structural transformation in developing
dicted (and prescribed) by development economists countries. In particular, the debt crisis of the early
was followed by most developing countries in the 1980s provided an opportunity for a new policy con-
post-war period, with economic and, particularly, sensus, often disseminated through the attachment of
industrial growth rates registering historical highs in a reform agenda to multilateral lending programmes,
most regions (see chapter III and table 2.1). However, in which the focus shifted from changing the struc-
catch-up did not follow in most cases, as developed ture of production and trade to redistributing tasks
countries enjoyed their own remarkable period of and responsibilities between the State and market
economic growth and technological progress, and (through privatization, liberalization and deregula-
income gaps widened further. Moreover, the early tion measures), and with a particular emphasis on
(and relatively easy) successes of import substitution reducing the costs of doing business (through tariff
industrialization in many developing countries brought reductions, wage compression and tight macroeco-
their own “growing pains” (whether in the form of bal- nomic policies). Not only did this approach deny
ance of payments problems, productivity slowdowns, the advantages of industry for driving development,
inflationary pressures or rising inequality) that proved it also rejected the role of public policies to support
increasingly difficult to address (Hirschman, 1995). any specific sector: it was believed that this should be
left to competitive pressures in deregulated markets
Whilst some developing countries (notably the on the grounds that globalized market forces should
East Asian first-tier industrializers) did find ways to shape countries’ specialization according to their
manage these growing pains and were able to build existing comparative advantages (World Bank, 1991).
 Globalization, Convergence and Structural Transformation 33

On the basis of this logic, along with some structural transformation could be foregone, leav-
new thinking about the determinants of growth and ing competitively determined prices to unlock the
a plethora of econometric exercises, the new policy opportunities of a globalizing world.1
consensus promised stronger and more stable growth
at the national and global levels. It also promised The next section considers whether this strong
a rapid closing of income gaps between rich and convergence narrative accurately describes growth
poor countries, as international market forces were trends in the global economy over the last three and
expected to naturally augment the specific economic a half decades. Section C discusses how structural
advantages found in the developing world. The idea transformation fits into a convergence narrative and
that self-regulating market forces would tame the where advances have been made. Section D looks for
business cycle and accelerate income convergence possible sources of dissonance between the current
implied that the policy space deemed necessary to set global environment and the process of structural trans-
priorities and manage the trade-offs that accompany formation. The final section draws some conclusions.

B. Globalization and convergence

For a brief period after the start of the new discussed in previous TDRs, this is not a plausible
millennium, the combined influence of a “great assessment, in part because the growth surge in devel-
moderation” in the macroeconomic environment oping countries from the start of the millennium was
(Bernanke, 2004) and a “great convergence” in the outcome of strong export growth supported by
global incomes (Wolf, 2011) seemed to support the mounting debt levels in developed economies, the
idea of a new international economic order emerging rebound was closely linked to policy actions adopted
around self-regulating international market forces. In by developed economies in response to the crisis
particular, following the fast rebound from the burst- and partly because the rebound has not recovered
ing of the dot-com bubble in 2000, a combination of the growth momentum achieved prior to the crisis.
sophisticated capital market engineering by financial
institutions and astute central bankers, freed from The World Bank (2016: 34) has suggested that
political oversight, had, it was believed, finally solved the great convergence has stalled thanks to a com-
the challenge of what Federal Reserve Chairman Alan bination of weakening growth, heightened risks and
Greenspan (2005) called “risk transfer and financial restricted policy space in developing economies. And
stability”; the business cycles had been tamed. it has warned that it could falter altogether with a drift
towards protectionism and slowing globalization. As
The financial crisis of 2008 exposed the limits discussed in the previous chapter, rising protection-
of this reasoning in terms of macroeconomic stabil- ism cannot explain the slowdown in global trade, or
ity, but it gave further momentum to the convergence the weakening of output growth. The idea of slowing
story as developing countries bounced back unexpect- globalization is more difficult to assess given that
edly strongly from the crisis,2 raising the possibility globalization tends to mean different things to differ-
that growth in the South, which had strongly outpaced ent people, and economic historians, having roundly
that in the developed economies over the preceding rejected the idea that it is a linear and autonomous
decade, had become more self-sustaining and, on process, continue to debate how and why its ebbing
some counts had even “decoupled” from that in the and flowing over time has had varying consequences
North (Akin and Kose, 2007; Canuto, 2010). As for different regions, countries and communities.3
34 Trade and Development Report, 2016

Chart 2.1
In general terms, globalization exhibits three
overlapping but distinct dimensions which are often
TRADE AND FINANCIAL OPENNESS, treated synonymously: a policy dimension, referring
SELECTED COUNTRY GROUPS to the reduction of barriers to goods, services, peo-
ple, capital and information flowing across national
borders; an economic dimension which refers to the
A. Average tariff rates, 1980–2014
(Per cent)
increasing scale of these flows and the extent to which
25 countries are thereby integrated into an international
division of labour; and an institutional dimension
20 which refers to the nature, reach and influence of
rules, norms and structures designed to manage the
15
expanding network of international activity and
transactions.
10
A good deal of the contemporary debate about
how these dimensions fit together is driven by a
5 highly stylized picture of an ideal global economy in
which the decisions of households, firms and financial
0 institutions are not impeded by obstacles generated
1980 1985 1990 1995 2000 2005 2010 2014 by national boundaries. In such a world, which claims
Developed economies Developing economies strong technical backing from conventional economic
theory, goods, factors of production and financial
assets are almost perfect substitutes everywhere (bar-
B. Chinn-Ito index of capital account
liberalization, 1970–2013 ring cultural idiosyncrasies) and economic welfare
1.0 depends on the response of households and firms to
global market incentives, given inherited endow-
0.9
ments, demographic pressures and technological
0.8 progress. Differences in living standards across this
world depend primarily upon the pace of adjustment
0.7
to changes in these “exogenous” factors.
0.6
The world economy is still a long way from
0.5
this flat supranational landscape. However, increased
0.4 openness has certainly been a prominent feature of
the past 30 years in both developing and developed
0.3 economies(chart 2.1). Looking at the evolution of
0.2
average tariffs as a measure of trade openness since
the Tokyo Trade Round (which ended in 1979), these
0.1 have been on a broadly downward trend, but with a
particularly marked drop in developing countries in
0.0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2013
the first half of the1990s. Financial openness meas-
ured, for example by the de jure Chinn-Ito index,
Developed economies Transition economies has also been the general trend, led by the developed
Developing Asia All developing economies
Africa Latin America
economies, albeit flattening out since the financial
crisis of 2008.4

Source: UNCTAD secretariat calculations, based on WTO, Charts 2.2, 2.3 and 2.4 provide a familiar depic-
Integrated Data Base; GATT Tariff Study files; tion of the evolving pattern of economic integration
International Customs Tariff Bureau (BITD); UNCTAD,
TRAINS database; and Chinn and Ito, 2006, update over the past few decades using the ratios between
May 2015. global exports, net international capital flows (as
Note: Regions’ Chinn-Ito index are compiled with a simple measured by the sum of national current account sur-
weighted average. 0 indicates fully closed, while 1
indicates a fully opened financial account. pluses or deficits) and foreign direct investment (FDI)
 Globalization, Convergence and Structural Transformation 35

Chart 2.2 Chart 2.3

GLOBAL EXPORTS AS A SHARE OF GLOBAL CURRENT ACCOUNT SURPLUSES

WORLD OUTPUT, 1960–2014 AND DEFICITS AS A SHARE OF WORLD
(Per cent) OUTPUT, 1980–2014
(Per cent)

35
3

30
2
25 Surpluses

1
20

0
15

10 -1 Deficits

5 -2

0 -3
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2014 1980 1985 1990 1995 2000 2005 2010 2014

Source: UNCTAD secretariat calculations, based on World Bank, Source: UNCTAD secretariat calculations, based on IMF,
World Development Indicators database (1960–1969); Balance of Payments Statistics, and International
and UNCTADstat (1970–2014). Financial Statistics.

Chart 2.4

STOCKS AND FLOWS OF INWARD FOREIGN DIRECT INVESTMENT AS A

SHARE OF GLOBAL OUTPUT BY COUNTRY GROUP, 1970–2014
(Per cent)

25 4

20
3

15

10

1
5

0 0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2014

Developed economies – stocks Developed economies – flows (right scale)

Developing economies – stocks Developing economies – flows (right scale)

Source: UNCTAD secretariat calculations, based on UNCTADstat.

36 Trade and Development Report, 2016

flows, to global GDP. A cursory examination of these in the South expecting a particularly strong growth
charts suggests that there have been two distinct dividend. The combination of increased capital
periods: the first exhibiting a measured recovery in formation (thanks to a more efficient allocation of
integration from the low level that resulted from the global savings) and rapid technological catching up
economic and political dislocations of the 1930s, fol- (thanks to the heightened influence of foreign firms
lowed by a period in which international integration as carriers of more advanced technologies) along with
started to grow very quickly, and achieved histori- widespread efficiency gains (thanks to a reshaping of
cally high levels. production and investment activities in developing
countries in line with comparative advantage) would
As a general characterization, while globaliza- drive these outcomes.5
tion during the first three decades after 1945 can be
described as trade-led and organized around strong Conventional growth models, both in their
public institutions at the national and international closed and open variants, have provided analytical
levels, globalization after 1980 has been finance- support for the idea that there is an inverse rela-
led and organized around more open markets and tionship between per capita income (or level of
corporate actors (UNCTAD, 2011a). In the earlier productivity) and its future growth, i.e. economic
period of managed globalization, growth in both convergence. Testing this idea has generated two
developed and developing countries accelerated empirical findings, which have animated recent dis-
sharply. To a significant extent, this reflected the cussions about globalization. The first is the apparent
policies of “welfare Keynesianism” implemented in uniformity of conditional convergence rates, namely
many developed countries, as well as the State-led controlling for other factors, convergence in per
development strategies applied in many developing capita income was predicted at around 2 per cent a
countries in the context of a relatively stable global year (Barro, 2012). A second finding has suggested
economy. In both respects, sufficient policy space that among all the possible conditioning variables the
was a prerequisite for the success of both strategies most fundamental is how open an economy is to the
(Helleiner, 2014; TDR 2014). world economy (Sachs and Warner, 1995).6

As discussed in previous Reports (see for There are, however, serious methodologi-
example TDR 2014), the post-war multilateral cal difficulties in trying to capture empirically the
arrangements were founded on the assumption link between openness, growth and convergence.7
that adverse influences emanating from the global Moreover, even assuming that a positive link between
economy should be countered with policy measures openness, integration and growth can be established
(at both the domestic and international levels) that in some cases, this still leaves open the direction of
preserve growth and development. The policy space causation, with plenty of reasons to suppose that this
this implied has been eroded by the spread of unregu- runs from domestic success in raising productivity to
lated global market forces and various international increased trade, and to further liberalization, rather
agreements. Consequently, in the absence of global than the other way round.
economic governance reform that would balance
the increasing influence of global market forces, The evolution of the global economy has not
many countries, particularly but not only developing followed the simpler predictions of a globalizing
countries, find themselves having to adjust to inter- world. In the first place, global growth has been on
national imbalances and shocks through domestic a steadily downward trend since the 1960s (with the
retrenchment. In fact, they have had to alter domes- brief exception of the 2000s) (chart 2.5). There is no
tic policies, structures and regulations to reconcile consensus on why this slowdown has happened but
with and conform to international market pressures there is little doubt that it originates in trends in the
(Lawrence, 1996). developed economies. Their slowdown over the last
three decades opened the door for a resumption of
Governments that ceded more and more influ- convergence if growth in developing countries sim-
ence over national economic prospects to international ply maintained the pace achieved during the earlier
market forces, and cross-border financial flows in period.8 Moreover, this period cannot be described in
particular, generally expected to be rewarded with a blanket terms as an era of catching up for developing
trajectory of high and stable growth, with governments countries.
 Globalization, Convergence and Structural Transformation 37

Chart 2.5

WORLD OUTPUT GROWTH RATE, 1951–2015

(Per cent)

7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2015

Source: UNCTAD secretariat calculations, based on The Conference Board, Total Economy Database, May 2015.

Since the 1980s and for the group as a whole, many countries in the developing world have settled
growth of GDP per capita did accelerate, and in the back closer to the rates experienced in the 1960s and
2000s, every developing region grew more quickly 1970s, and in some cases below those rates.
than the developed-country average, in many cases
by a considerable margin. So it is no surprise that in Moreover, taking the period 1980–2015 in
recent years talk of global income convergence has its entirety, developing countries and regions have
become more widespread. However, two features not shown similar trajectories, with only the Asian
of the past three and a half decades stand out from region showing a consistent pattern of convergence.
table 2.2: first, the varying phases of convergence and The East Asian region has been able to maintain the
divergence between developed and developing coun- momentum it built up during the previous era with
tries; and second, the growing disparities within the South Asia joining in more strongly from the start
developing world, with some countries and regions of the millennium. However, in terms of per capita
growing much more rapidly than others.9 income, given their initial starting points and the
pace of convergence, only the economies of East
Average annual GDP per capita growth in the Asia have made noticeable strides in terms of closing
developing world during the 1980s and 1990s was the absolute income gap with those countries at the
actually lower than in the 1960s and 1970s, with top of the development ladder (chart 2.6). Growing
convergence resulting from economic slowdown in diversity among developing countries is a second
the developed economies and accelerating growth in striking feature of this entire period.
East Asia.10 The first decade of the 2000s stands out as
a period of rapid and generalized growth in all devel- Taking a more granular perspective down to the
oping regions. The first half of the current decade country level can help add some further detail to these
already indicates, however, that this may have been broad processes. Chart 2.7 depicts the correlation
something of an anomaly, as average growth rates in between the income gap with respect to the United
38 Trade and Development Report, 2016

Table 2.2

GROWTH OF REAL GDP PER CAPITA AT PURCHASING POWER PARITY,

SELECTED REGIONS AND ECONOMIES, 1951–2015
(Average annual growth, per cent)

1951– 1981– 1951– 1961– 1971– 1981– 1991– 2001– 2011–

1980 2015 1960 1970 1980 1990 2000 2010 2015

Developed economies 3.5 1.8 3.1 4.2 2.6 2.5 2.1 1.2 1.1
United States 2.3 1.8 1.3 3.4 2.2 2.6 2.4 0.9 1.4
Developing economies 2.7 3.8 2.7 2.6 3.0 2.1 3.2 5.8 4.0
Africa 1.8 1.2 1.5 1.9 1.2 -0.4 0.7 3.0 1.8
America 2.6 1.3 2.4 2.4 3.0 -0.4 1.6 2.4 1.1
Asia 2.8 5.0 2.8 2.7 3.3 3.6 4.2 7.0 4.9
East Asia 3.0 7.1 4.2 3.4 4.1 6.7 5.8 9.6 6.5
China 2.3 7.7 4.1 2.7 3.1 6.5 6.2 11.1 7.2
South-East Asia 2.6 3.5 2.3 1.6 4.0 2.6 3.0 4.2 4.0
South Asia 1.4 4.1 1.5 1.5 1.2 3.1 3.7 5.7 4.1
West Asia 4.4 1.4 3.2 4.9 3.4 -1.6 1.6 3.3 -0.1
Transition economies 3.2 0.5 3.7 3.7 2.0 0.5 -4.9 6.2 2.1
World 2.7 2.1 2.6 3.1 2.0 1.5 1.7 3.1 2.5
Memo items:
Developing economies, excl. China 2.7 2.4 2.4 2.5 2.9 1.1 2.3 3.6 2.3
Developing economies, excl. East Asia 2.6 2.3 2.3 2.4 2.7 0.6 2.1 3.7 2.4
Developing economies, excl. East and
South-East Asia 2.6 2.0 2.3 2.5 2.5 0.2 2.0 3.6 2.0
Developing economies, excl. East,
South-East and South Asia 2.8 1.1 2.4 2.8 2.7 -0.8 1.2 2.5 0.6

Source: UNCTAD secretariat calculations, based on The Conference Board, Total Economy Database, May 2015.
Note: The Islamic Republic of Iran is included in West Asia. Real GDP corresponds to Geary-Khamis PPP.

States computed in 1990 and in 2014.11 The existence the recent period of globalization show no signs
of a clear positive correlation suggests that those of improving and have, if anything, weakened. On
economies that were more distant from the income some counts this has become a particular concern for
frontier in 1990 tend to remain more distant in 2014. middle-income economies (see box 2.1) but it is more
Most developing economies did not show any sign of widespread. Building on the recent work of Arias
strong convergence with the United States economy and Wen (2016), table 2.3 uses the Maddison Project
and some of them rather diverge, becoming relatively Database (Bolt and van Zanden, 2014) to estimate
poorer in income per capita terms (i.e. those that lie chances of catching up over the periods 1950–1980
above the 45-degree line). Between 1990 and 2014 and 1981–2010.12 The dataset uses real GDP per
the income gap increased in many low- and middle- capita at chained purchasing power parity (PPP)
income economies, and in 2014 the gap was 0.9 or rates. In both periods, the United States is identified
higher (i.e. income per capita was at most 10 per cent as the target lead economy. Countries are divided
that of the United States) in a significant number of along three relative income groups: low (between
countries. Therefore, although many countries have 0 and 15 per cent of the hegemon’s income), middle
experienced persistent economic growth in the last (between 15 and 50 per cent) and high (above 50).
25 years, they have, to a significant extent, been una- The table reports transition probabilities for the two
ble to close their income gap with the United States. sub-periods and the three income levels.

The chances of moving from lower to middle- Two observations from table 2.3 are note-
and from middle- to higher income groups during worthy. First, convergence from the low- and the
 Globalization, Convergence and Structural Transformation 39

Chart 2.6

RATIO OF GDP PER CAPITA OF SELECTED COUNTRIES AND COUNTRY GROUPS

TO GDP PER CAPITA OF THE UNITED STATES, 1950–2015
(Per cent)

90 90

80 80

70 70

60 60

50 50

40 40

30 30

20 20

10 10

0 0
1950 1960 1970 1980 1990 2000 2010 2015 1950 1960 1970 1980 1990 2000 2010 2015

China First-tier NIEs Latin America and the Caribbean

South-East Asia South Asia North Africa Sub-Saharan Africa

Source: UNCTAD secretariat calculations, based on The Conference Board, Total Economy Database, May 2015.
Note: First-tier newly industrializing economies (NIEs) are Hong Kong (China), the Republic of Korea, Singapore and Taiwan
Province of China.

Chart 2.7

GDP PER CAPITA GAP BETWEEN DEVELOPING COUNTRIES

AND THE UNITED STATES, 1990 AND 2014
(Per cent)

100

90

80
GDP per capita gap, 2014

70

60

50

40

30

20

10

0
0 10 20 30 40 50 60 70 80 90 100
GDP per capita gap, 1990

Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.
40 Trade and Development Report, 2016

Box 2.1

MIDDLE-INCOME TROUBLES

The development literature is full of warnings about traps, gaps and curses, many of them linked to integration
into the global economy. On closer inspection these often turn out to be less a matter of destiny and more of policy
decisions and institutional design. However, in an increasingly interdependent world economy the link between
the national and international division of labour is raising new policy challenges for many developing countries.
Attention has been devoted in recent years, in both academic and public debate, to what has been described
as the middle-income trap (MIT). Although economic growth over the last half century has allowed many
developing countries to reduce levels of absolute poverty, very few among them have been able to close the
per capita income gap with the developed economies, let alone to catch up. Moreover, the frequency of growth
slowdowns in the post-war period seems to be higher in middle-income than in low- or high-income countries
(Aiyar et al., 2013). This evidence raises concerns about the validity of standard growth theory which predicts
a relatively smooth growth path with fluctuations around a stable trend (see, for example, Barro and Sala-i-
Martin, 1998) and implies an inverse relation between levels of income and subsequent growth rates allowing
for strong income convergence between rich and poor economies (TDR 1997: 72–73).
In the real world, “hills, plateaus, mountains and plains” are much more the norm of global growth dynamics
than the exception (Pritchett, 1998) and the cases in which low- or middle-income countries have successfully
converged to the level of income of developed economies have been very few. The World Bank (2013) estimates
that out of the 101 economies classified as middle income in 1960, only 13 had graduated to high income in the
five decades that followed: Equatorial Guinea, Greece, Hong Kong (China), Ireland, Israel, Japan, Mauritius,
Portugal, Puerto Rico, the Republic of Korea, Singapore, Spain and Taiwan Province of China. Most countries
in Latin America, as well as in the Middle East and North Africa, reached middle-income status during the 1960s
and 1970s, and have remained there. Even in East Asia, the second-tier of new industrializers, such as Malaysia
and Thailand, has experienced growth slowdowns in recent years that could be conceived as an MIT. However,
it should also be borne in mind that several countries have experienced growth slowdowns well before they
have reached a threshold level of per capita income that could be seen as “middle income” even when using PPP
based estimates; thus the explanations for such slowdowns must be sought in a wider context (see chapter III).
A clear and widely shared definition of the MIT is missing in the literature. This reflects both classification
and conceptual issues. According to the World Bank, middle income covers a broad range of economies from
some very poor sub-Saharan commodity exporters to relatively wealthy members of the European Union. The
13 countries noted above by the World Bank as escapees from the trap cover a remarkably diverse group of
economies with little in common other than fast and sustained growth over a prolonged period. Spence (2011)
refers to the middle-income transition as countries in the $5,000–$10,000 per capita income range that face the
challenge of replacing labour-intensive sectors with a new set of industries of a more capital-, human capital-
and knowledge-intensive nature. Felipe (2012a) distinguishes between lower and higher MITs; a country falls
in the first category if it has been in the $2,000–$7,500 income range for over 28 years, and in the second if it
has been within a range of $7,500–$11,500 for more than 14 years.a
The stagnation of middle-income economies emerges even more strikingly once their performance is compared
to that of high-income economies (Kozul-Wright and Fortunato, 2016). Arias and Wen (2015) and Athukorala
and Woo (2011) refer to a “relative income trap” in which income levels measured against those of the world
economic leaders remain constantly low and without a clear sign of convergence, based in terms of each country’s
income per capita as a percentage of the United States level of income per capita. Arias and Wen (2015), using
transition probability matrices for a sample of 107 countries between 1950 and 2011, suggest that the probability
of remaining in an MIT (or a low-income trap) is persistent over time and across regions; the Asian tigers being
the exception. However, as discussed in this chapter, breaking this period up between 1950 to 1980 and 1980
to 2010 actually indicates that it has become more difficult for developing economies to catch up but easier
for them to fall behind during the latter period. Eichengreen et al. (2011), for example, construct and analyse
sample cases where fast-growing economies begin to slow down. They find that the probability of slowdown
is highest when per capita GDP reaches $16,740 (2005 international PPP dollars) but also when the ratio of per
capita income to the lead country (United States) is around 58 per cent. Moreover, the probability of slowdown
is highest when the share of manufacturing employment reaches 23 per cent. An exceptionally low consumption
share of GDP is positively associated with the probability of slowdown. Thus, the issue is broader, cannot be
limited to brackets of income levels and needs to be discussed in the context of structural transformation.
Conceptually, the notion of an MIT implicitly (or explicitly) accepts the idea that low-income countries are, in
general, prone to convergence through faster growth than the richer countries, and that this process continues
until a certain ceiling is reached. Yet the absence of such a general convergence trend (barring an explosive
but short period from the start of the new millennium, which was not exclusive to low-income countries) as
opposed to episodic convergence stories has been a striking feature of economic history over the past century.
Middle-income countries are those that did indeed show faster rates of growth over some periods, which is what
 Globalization, Convergence and Structural Transformation 41

Box 2.1 (concluded)

enabled them to move out of low-income status in the first place, but the question of why they then slow down
requires sharper analysis than association with a particular level of income.
One argument used to explain the MIT is the so-called “developmental turning point” described by Lewis
(1954), when the pool of surplus labour from the traditional sector finally gets absorbed into the modern sector,
so that further expansion generates rising wages. This has been interpreted as a problem in a more open global
economy because of the threat posed by rising wages unless they are accompanied by at least commensurate
productivity increases. Paus (2012: 116) therefore argues that “many middle-income countries find that they can
no longer compete in the production of low-wage commodities but that they have not developed the capabilities
to compete on a broad basis in higher productivity activities. Middle-income countries now run the risk of
being trapped, of being pushed onto the low road to development, where declining wages form the basis for
competitiveness and growth.”
However, while unchecked competitive pressures run the danger of a “race to the bottom” (see chapter IV),
identifying this Lewisian turning point with the MIT is likely to be misleading. First, it is based on a notion
of reaching full employment that causes rising wages and makes aggregate productivity indicators relevant,
rather than productivity in trade-competing activities alone. Yet it is evident that countries can be “trapped” at
low incomes or with decelerating growth rates well before they reach full employment. Second, it implicitly
assumes that external demand is the main impetus for growth, whereas if internal demand is considered, then
rising wages can offer new profit opportunities as markets expand domestically. In such a case, higher production
costs may not be the defining constraint on export growth in middle-income countries (Kanchoochat, 2015).
Other possible constraints that may be more binding arise from inadequate or inappropriate educational provision
(particularly at higher levels) or weak technological support or an insufficiently sophisticated export basket that
results in a tightening balance of payments constraint. In most of the successful catch-up economies identified in
the World Bank study, higher productivity activities were sequentially developed in industries (e.g., iron, steel
and electronics) using new skills and capabilities, some of which were transferred and adapted from existing
industries, and others that were nurtured with more targeted government support. This strategic increase in high
“connectivity” sectors allowed for a managed transition towards more sophisticated and higher value-added
activities, especially those requiring similar technology and production techniques (Jankowska et al., 2012).
Yet the phenomenon of the MIT cannot be boiled down to merely an issue of reaching the limits of growth via
capital accumulation such that technological upgrading must become the driver. In fact in most middle-income
countries, the bulk of the labour force is low skilled. Technological upgrading of the modern sector, on the other
hand, utilizes mostly high-skilled labour, and there is no guarantee that productivity gains will spill over into
other sectors. Economies with surplus labour and sizeable informal sectors continue to face the challenge of
ensuring aggregate economy-wide labour productivity increases, even when attempts to improve productivity
in more sophisticated activities are successful. Thus, innovation on its own cannot be an easy solution to the
complex phenomenon of growth deceleration.
From this perspective, economic diversification plays a key role in the process of development. Imbs and
Wacziarg (2003) show that, until relatively late in the process of development, as income per capita rises
sectoral production and employment become less concentrated and more diversified. It is only when the per
capita income reaches a certain level (around $9,500 for their data set) that the sectoral distribution of economic
activity starts concentrating again. Felipe (2012b) finds that those countries that have attained high-income
status were substantially more diversified at the time of their transition than countries that remained in the
middle-income group.
The possibility of a link between lack of diversification and growth slowdown is confirmed by Aiyar et al. (2013)
who find evidence that sectoral diversification is associated with a lower probability of growth slowdowns.
Diversification can be seen as a form of insurance against idiosyncratic shocks to a particular sector: to the
extent that sectoral shocks could lead to slowdown and stagnation in a concentrated economy, diversification
reduces the probability of such an event.
Traps and landmines exist at all stages of development, and their impacts vary not just according to per capita
income levels but the specific external and internal conditions facing each country. While the MIT may not
capture the dynamics associated with growth slowdowns that appear to occur at very different levels of per
capita income, it is also the case that the problems facing more diversified countries at broadly “middle” levels
of per capita income are somewhat different from the concerns of less diversified countries with lower per
capita income. The fact that many of them tend to be manufacturing exporting and importing countries that have
become more closely integrated with global financial markets over the past two decades adds to the complexities.
The problems of many such economies come about not because of their levels of per capita income and the
associated relationship between wages and productivity, but because of the multidimensional effects of the
external environment operating in conjunction with domestic political economy.

a
These thresholds represent the median number of years that the sample countries spent in their income categories.
42 Trade and Development Report, 2016

Table 2.3

PROBABILITY OF CATCH-UP WITH THE UNITED STATES, BY INCOME GROUP,

1950–1980 AND 1981–2010

1950–1980 1981–2010
Ending position Low Middle High Low Middle High
Starting position income income income income income income

Low income 0.85 0.15 0.00 0.91 0.07 0.01

Middle income 0.12 0.70 0.18 0.21 0.71 0.08
High income 0.00 0.06 0.94 0.00 0.19 0.81

Source: UNCTAD secretariat calculations, based on the Maddison-Project database. Available at: http://www.ggdc.net/maddison/
maddison-project/home.htm, 2013 version.
Note: Countries are classified in three income groups: low income (with their per capita income below 15 per cent of that of the United
States); middle income (15–50 per cent); and high income (more than 50 per cent). Probabilities (ranging between 0 and 1)
present the observed relative frequency of a change between income groups within the two considered periods.

middle-income groups has become less likely over most successful economies engaged in trade integra-
the last 30 years (1981–2010) relative to the previ- tion strategically rather than in a general manner. Just
ous period (1950–1980). As reported in the table, the two members of the group (Oman and Sudan) are
probability of moving from middle- to the high-income oil exporters – a surprisingly small number. Some
status decreased from 18 per cent recorded between others include a few tiny economies that found
1950 and 1980 to 8 per cent for the following 30 years. specific niches in the world market (such as Bhutan,
Analogously, the probability of catching up from the Lao People’s Democratic Republic and Saint
the low- to the middle-income group was reduced Vincent and the Grenadines). The larger category
approximately by the same factor, from 15 per cent to includes economies (such as China, the Republic of
7 per cent. Second, and perhaps more strikingly, the Korea, Taiwan Province of China) that use deliberate
probability of falling behind has significantly increased development strategies, including industrial policy,
during the last 30 years. Between 1950 and 1980 the typically alongside pursuing strategies that maintain
chances of falling into a relatively lower income group competitive exchange rates (see chapter VI on the
amounted to 12 per cent for middle-income econo- significance of exchange rates).
mies and only 6 per cent for high-income countries.
These numbers climbed to 21 per cent and 19 per cent The other important point about the growth
respectively in the subsequent period. story of the last three decades or so is that building
a stable growth path has also not become any easier
Further insight into these developments can be compared with the past, again with Asia being the
gained by focusing on the top 20 performers between exception (chart 2.8). Rather, increased instability
1980 and 2013 (Dullien, 2016). These countries have of growth across all regions appears to be a feature
enjoyed an average per capita growth rate of at least of the current era of globalization.
3.2 per cent over the period, almost twice the figure
for the United States.13 This implies that these econo- These longer term trends in per capita income
mies at least tripled their GDP per capita with the have both determined and been affected by the evolv-
top performer, China, seeing a 16-fold increase. This ing patterns of structural transformation across the
is an extremely diverse group, ranging from small developing world. These are considered in greater
island economies to large former empires. There is detail in chapter III, with reference to regional dif-
considerable variation across these countries in terms ferences, but the next section outlines some of the
of openness and trade integration, and some of the general issues at stake.
 Globalization, Convergence and Structural Transformation 43

Chart 2.8

REAL GDP GROWTH IN SELECTED COUNTRY GROUPS, 1971–2014

(Annual growth rate and standard deviation, per cent)

1971–1980 1981–2014

China

Asia

Asia, excl. China

All developing and

transition economies

All developing and transition

economies, excl. China

Africa

Latin America

0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10

GDP annual average growth rate Standard deviation

Source: UNCTAD secretariat calculations, based on United Nations Department of Economic and Social Affairs (UN DESA), National
Accounts Main Aggregates database.
Note: Calculations are based on GDP in constant 2005 dollars.

C. Structural transformation: The missing link(s)

From 1950 to 1980, structural change in all been replicated before or since. In the subsequent
developing regions more or less followed the pat- periods, manufacturing industry’s shares increased
tern that development economists both predicted and only in Asian countries, both for value added and
prescribed. The share of agriculture in value added for employment. They both fell in Latin America. In
and employment fell, while that of manufacturing Africa, while manufacturing’s share in value added
increased, along with that of other industries (utili- tumbled, the employment share barely moved (see
ties, construction and mining). There was, of course, chapter III).
considerable variation across countries reflecting
differences in initial conditions and policy choices, Data on labour productivity provide more telling
but the classical pattern was most pronounced in evidence of this pattern and of the break in the pro-
East Asia (TDR 2003: 93–94). Perhaps not surpris- cess of structural transformation for several regions
ingly, these structural changes coincided with a after 1980. Chart 2.9 shows the productivity gap
period of particularly fast industrial growth rates (see between manufacturing industry in the three devel-
table 2.1) which, with one or two exceptions, has not oping regions and the United States. As expected,
44 Trade and Development Report, 2016

Chart 2.9

LABOUR PRODUCTIVITY IN THE MANUFACTURING SECTOR AND IN THE

OVERALL ECONOMY IN SELECTED DEVELOPING REGIONS, 1960–2010
(As a percentage of United States productivity)

A. Manufacturing B. Aggregate
45 45

40 40

35 35

30 30

25 25

20 20

15 15

10 10

5 5

0 0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Africa Asia Latin America

Source: UNCTAD secretariat calculations, based on Timmer et al., 2014.

Note: Figures in 2005 constant prices in national currencies were converted using 2005 exchange rates. Weighted averages across
regions.

Asia’s productivity gap shrank continuously over which they are able to exploit them. Differences in
the period, most sharply in the late 1960s. However, the generation of such linkages largely explain the
it is more surprising (given the criticisms directed at often sharply divergent patterns of structural trans-
Latin America’s and Africa’s development policies formation of different countries over the course of
in this period) to find that, in both regions, labour the past few decades.
productivity increased, keeping pace with the United
States in the 1960s and in the 1970s. Conversely, from Looking at the broad sweep of history, it does
the early 1980s, there appeared to be a trend towards appear that the later a successful catch-up process
increasing divergence in labour productivity. A similar has begun the greater the investment push required
picture describes the evolution of labour productivity to sustain that process (chart 2.10). In today’s devel-
in market services (Timmer et al., 2014: 13). oped economies in the West, and Japan and the Asian
tigers in the second half of the twentieth century,
Trends in structural transformation in differ- sustained and diversified industrialization based on
ent regions and economies since 1970 indicate that a strong investment drive was also supported by a
these have been closely related to patterns of capital rapid increase in both exports and domestic demand
accumulation, as well as income, production and (TDRs 1996, 1997 and 2003). To some extent, this
learning linkages. These are considered in greater virtuous pattern has also been exhibited in recent
detail in the next chapter which suggests that the decades in China although, as noted earlier, China
process of diversification towards greater shares of is still at a much lower level of income.
higher value-added activities, especially in manufac-
turing industries, in both income and employment, It also appears that the later the countries have
is ultimately about the ability of specific economies embarked on a successful industrialization path, the
to develop these various linkages and the degree to greater has been the emphasis given to manufacturing
 Globalization, Convergence and Structural Transformation 45

Chart 2.10

FIXED INVESTMENT IN SELECTED RAPIDLY GROWING COUNTRIES, 1860–2015

(As a percentage of GDP)

50 50

40 40

30 30

20 20

10 10

0 0

-10 -10
1860 1880 1900 1920 1940 1960 1980 2000 2015 1930 1940 1950 1960 1970 1980 1990 2000 2010 2015

Germany Sweden China India

United Kingdom United States Japan Republic of Korea

Source: UNCTAD secretariat calculations, based on Deane and Cole, 1962; Liesner, 1989; IMF, International Financial Statistics;
and China National Bureau of Statistics.
Note: Investment figures for Germany between 1885 and 1938 refer to net fixed capital formation. Data for 1950–1990 are for the
Federal Republic of Germany only. In the United States, investment figures up to 1947 refer to private gross fixed capital
formation only.

exports. From the mid-twentieth century, the most export shares or translate those into sustained
successful cases of economic expansion have also increases in per capita incomes.
been those that dramatically increased their shares
of global merchandise exports, as indicated in As global trade picked up pace from the early
chart 2.11. 1990s, the belief grew that it was becoming easier
for more developing countries to follow a similar
In the immediate post-war period, the big story catch-up path to that of East Asia. As discussed in
was the dramatic increase in the share of global greater detail in chapter IV, this does not appear to
exports of the then Federal Republic of Germany, have been the case. Moreover, and as considered in
a rise commensurate with rapid increases in that previous TDRs, this is, in part, because there is not
county’s income. The export success of Japan, only an automatic link between exports and growth. Any
somewhat more moderate, followed, becoming more efforts to strengthen that link are contingent on a vari-
significant in the 1970s. The 1980s can be seen as ety of factors, of which two, in particular, stand out.
the period when the first-tier newly industrializing
economies – Hong Kong (China), Republic of Korea, First, as was noted above, and is evident from
Singapore, Taiwan Province of China – achieved their charts 2.10 and 2.11, successful exporting countries
export-oriented industrialization success, while the have also experienced very substantial investment
period after 2000 has been marked by the emergence pushes, which were critical in enabling such expan-
of China. Yet these stories, remarkable as they have sion and providing the synergies that led to rising
been, remain exceptions among the vast number of productivity and improved competitiveness. In most
developing countries that have not shown the same developing regions exports as a share of GDP have
capacity, or had the same opportunity, to improve been rising steadily (or sharply) in the recent period
46 Trade and Development Report, 2016

Chart 2.11

SHARE IN GLOBAL MERCHANDISE EXPORTS, SELECTED ECONOMIES, 1950–2015

(Per cent)

15

12

0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

China Germany Japan First-tier NIEs Second-tier NIEs

Source: UNCTAD secretariat calculations, based on UNCTADstat.

Note: First-tier NIEs are Hong Kong (China), the Republic of Korea, Singapore and Taiwan Province of China. Second-tier NIEs
are Indonesia, Malaysia, the Philippines and Thailand. Germany comprises Federal and Democratic Republics prior to 1990.

(see chapter IV); however, the extent to which this effects. For example, there appears to be a close
did or did not pull up economic growth commensu- relationship between the evolution of the structure of
rately appears to have depended heavily on whether exports and the inter-industry pattern of investment
investment was strongly connected to this export drive. in major Latin American economies, with no sig-
Indeed, it can be argued (Patnaik and Chandrasekhar, nificant shift towards technology-intensive industrial
1996) that the causation has typically run from invest- activities (TDR 2002).14 Under these circumstances,
ment to exports, with subsequent linkages creating the exposure of economies to international competi-
positive synergies for growth. The second factor tion, whether through rapid trade liberalization or
supporting industrial catch-up was the close link through efforts to attract FDI, may simply lead to the
between export activities and the accumulation of the creation of enclaves of manufacturing exports with
knowledge, skills and capabilities needed to sustain varying degrees of technological sophistication or to
the non-price factors of competitiveness. This link industrial rationalization whereby rising productiv-
was essential for sustaining the process of structural ity through job cuts allows some sectors to maintain
transformation as it enabled producers in targeted price competitiveness and market shares. In some
export industries to identify and exploit opportuni- cases, this may involve substituting domestic inputs
ties for change, and to invest in productive capacities with imported ones or reverting to a greater reliance
and technologies with greater productivity potential on existing advantages from extraction and process-
(Abramovitz and David, 1996; Nübler, 2014). ing of primary commodities, even as employment
falls in sectors with potential for strong productivity
A weakening of linkages between investment, growth and greater technological dynamism (chap-
exports and learning has produced the opposite ter III; see also TDR 2003).
 Globalization, Convergence and Structural Transformation 47

D. A global enabling environment?

Understanding the evolution of different economies from East Asia. Its success reflects not
transformation paths at the country level requires simply a maximalist growth path but a continuous
considering specific local institutional conditions one which has, to date, avoided severe and lasting
and histories as well as to policy choices. However, setbacks. That continuity has been underpinned by
the global environment will also have a bearing on a successful transformation path which has seen a
how local efforts to manage structural transforma- steady reduction of the weight of the rural economy
tion processes evolve. In particular, the appropriate and population, an industrialization push built around
macro­economic conditions are needed for govern- rising productivity in the manufacturing sector and
ments and firms to build, expand and improve the tied to an expanding urban economy, and a strong
linkages that underpin inclusive and sustainable link between exports and investment. There seems
industrialization and development. little doubt that changes in the global economy sup-
ported this process, but they did so in the context of
The current global environment has certainly a very strong developmental State and expansion of
helped to enable increases in cross-border flows of domestic markets. The record in other developing
goods, services and capital, including FDI. Trade regions, and indeed in some other parts of the Asian
flows in particular have played a major role in chang- region, is less positive, even for large economies
ing growth prospects for a small but significant set of such as Brazil, India, Indonesia, Mexico, Nigeria and
countries. The mobility of labour across borders has South Africa (chapter III).
increased to some extent since the mid-1980s, but
has not matched capital movements to any signifi- It is worthwhile, in this context, to identify
cant degree. Moreover, while capital has definitely some features of the global economy and of the
become much more mobile across borders, capital international economic and financial architecture that
flows have been more volatile for most developing have proved a good deal less enabling for a sustained
countries, and have not always been sustained over process of structural transformation.
sufficiently long periods to enable for desired changes
in accumulation and productive structures. A first concern with today’s global economic
environment is the declining trend in growth, led by
It is not entirely clear whether the global envi- a persistent slowdown in the developed economies.
ronment has enabled or hindered the kind of structural It could appear that this has made catching up easier,
transformation that has been at the heart of success but convergence under such conditions is obviously
stories of development. Many of the successful less desirable than in a broader context of overall
catch-up economies established their paths in the dynamism. Further, this slowdown in developed
previous era of globalization, under very different economies has been associated with a series of mac-
international arrangements than currently prevail, and roeconomic imbalances and inequities that are likely
which also allowed for more comprehensive State to prove an obstacle to structural transformation in
intervention in the form of trade and industrial poli- many developing countries. Most importantly, the
cies and greater control over finance. China, which lack of aggregate demand at a global level, resulting
has been the outstanding growth story of this – indeed at least in part from wage restraint and attempts at
of any – era, has followed a path which is familiar fiscal austerity in most developed economies, has
from a previous generation of newly industrializing had cascading effects on the developing world. This
48 Trade and Development Report, 2016

Chart 2.12
A second (and related) area of concern is the
tendency of the current era to give rise to periodic
NUMBER OF SYSTEMIC BANKING CRISES shocks and crises. The initial perceptions of a “great
BY COUNTRY GROUP, 1970–2012 moderation” relied heavily on trends in developed
economies, whereas for much of this period, develop-
ing countries experienced heightened vulnerability to
40
economic shocks of varying origin, at least compared
35 with the previous period (chart 2.12). The period
from 2002 to 2008 was an exception, but this ended
30
with the largest global economic crisis since the
25 1930s, the continuing effects of which still hold back
growth in the developed economies and have belat-
20
edly generated instability in developing countries.
15 Such an environment is unlikely to support the kind
of long-term strategy which can guide a successful
10
structural transformation path.
5
A third feature is the slowdown of capital accu-
0 2012
1970 1975 1980 1985 1990 1995 2000 2005 2010 mulation across most regions in the global economy.
There are obvious and close links between a robust
Developed countries
Transition economies process of capital formation and structural transfor-
Developing countries
Five-year moving average, developing countries mation; indeed, a strong investment climate was a
central promise of the policy changes which ushered
in the new era of globalization. The expectation
Source: UNCTAD secretariat calculations, based on Laeven and was that capital would flow from a global pool of
Valencia, 2012.
savings to finance trade imbalances in fast-growing
economies and provide more resources for capital
formation, particularly in capital-scarce, poorer
countries where potential returns would be highest,
has certainly become apparent with the recent slow- and add depth to domestic financial markets. This
down of international trade discussed in the previous expectation has not been borne out (TDR 2008). As
chapter. But the very rapid expansion of trade during chart 2.13 shows, there has been little connection
the decade of convergence at the start of the millen- between the trajectory of global capital flows, which
nium was itself heavily dependent on the massive have been very volatile, and the relatively dismal
accumulation of public and private debt in developed performance of gross capital formation.16
countries with deficits, which was never a sustainable
process.15 It is true that an important factor behind Another component of the current global land-
higher and sustained growth in the East Asian econo- scape that is likely to have a bearing on the pattern of
mies was a relatively high level of domestic credit structural transformation at the national level is the
to GDP (Priewe, 2015). However, that was mostly way in which markets are organized at the international
achieved within a heavily regulated financial system level, and the processes of greater concentration in
and linked to a vibrant profit-investment nexus as a several areas of production and distribution.
key feature of these economies (TDR 2003). More
recent trends in many emerging economies display a In a world of increasing returns, fast-moving
greater reliance on credit-fuelled expansions in more technological change and first-mover advantages, large
deregulated financial contexts, which have already firms emerge with the aim, in part, of increasing their
given rise to concerns in many countries, as discussed control over market forces. The assumption that prices
in chapter V. A more generalized pattern of debt reflect underlying cost conditions is questionable
dependent growth in the context of greater financial where monopoly conditions are present or where there
deregulation and the absence of a strong international are significant externalities or incomplete markets.
financial safety net appears to be an unreliable basis The emergence of global financial institutions with
for a sustainable path of structural transformation. potentially considerable influence over the markets
 Globalization, Convergence and Structural Transformation 49

Chart 2.13
in which they operate has been a prominent, and
much discussed, feature of the current globalization
era. This is a well understood trend in the banking INTERNATIONAL CAPITAL FLOWS AND
sector, where banks that were too big to fail became FIXED INVESTMENT AS A PROPORTION
part of the environment leading to financial crisis, OF WORLD OUTPUT, 1980–2014
assisted partly by a wave of mergers and acquisi- (Per cent)
tions in the 1990s (Santillán Salgado, 2011). But this
trend was also true of other parts of the non-banking
28 25
financial system. For example, a study by the Federal
Reserve Bank of New York (Cetorelli et al., 2007),
just before the financial crisis, found that in the period 20
26
1990–2004, there were significant increases in con-
centration in the United States markets for certain 15
financial services such as securities underwriting and 24
initial public offerings (IPOs) and mergers and acqui-
10
sitions advisory services, as well as increased global
concentration in equity-linked over-the-counter mar- 22
kets. At the same time, competition across financial 5

institutions became more intense as the lines between

market segments were eroded by deregulation. The 20 0
relatively halting attempts at re-regulation of the 1980 1985 1990 1995 2000 2005 2010 2014

financial systems in developed economies since the Gross capital formation

financial crisis have not made too much of a dent in Gross capital formation, excl. China
International capital flows (right scale)
the highly concentrated financial system globally: the
countries with the highest degree of concentration in
the financial sector – Japan, Switzerland, the United Source: UNCTAD secretariat calculations, based on IMF,
Balance of Payment Statistics; and UN DESA, United
Kingdom and the United States – are all home to Nations Statistics Division.
transnational banks and other financial institutions
with very significant international presence.

It is more difficult to gather empirical evidence It is probably no coincidence that, as the Council
on patterns of market concentration in other parts of Economic Advisers shows, the ratio between the
of the global economy. Nevertheless, a significant returns on investment capital of the 90th percentile
increase in market concentration has been observed in firm and of the median firm, which was stable at
the case of the United States using two different meth- approximately two times from the 1960s to the mid-
odologies (Council of Economic Advisers, 2016; and 1980s, increased to more than five times in the 2000s.
The Economist, 2016). The Economist (2016), using As sectors with “abnormal” profits have increased
the top four firm’s share in total industry revenue, their shares, the share of post-tax profits in GDP has
found a significant increase in market concentration also soared since 1980, being now close to record
from 1997 to 2012 following a decline in the 1980s. levels. The counterpart of this is the declining share of
Indeed, it increased in two thirds of 893 industrial wages in national income which has been discussed
and services activities. Markets in which the top in previous TDRs. The impact of these trends on
four firms account for at least two thirds of sales are structural transformation will be examined in greater
considered to be “oligopolies”. Those in which such detail in chapter V.
firms account for between a third and two thirds are
“concentrated” and those in which this account for The internationalization of production has also
less than a third are “fragmented”. The share of the seen both heightened concentration and competition
“oligopolistic corner” in the economy increased from trends. Big firms dominate the world of trade and
4 per cent in 1997 to about 10 per cent in 2012. The foreign direct investment. Moreover, liberalization
share of concentrated industries rose from 24 per and technological progress have made it easier for
cent to 33 per cent, implying a fall in the share of these firms to locate abroad and to further extend their
fragmented industries from 72 per cent to 58 per cent. global reach, including through non-equity modes
50 Trade and Development Report, 2016

of operation, such as international outsourcing of garments), but becoming steadily more and more
production, licensing of knowledge to host-country common. Nolan (2012: 18–19) found that in more
companies, management contracts and franchising than 20 industrial sectors in which GVCs are organ-
(UNCTAD, 2011b; 2016). Moreover, the waves of ized, a few “system integrator firms” tend to dominate
cross-border mergers and acquisitions since the early the chains; developed countries’ corporations18 still
1990s have certainly added to that reach. There is plenty held, in 2013, the biggest market share in 20 out
of anecdotal evidence about the dominant global role of of 25 broad sectors, including cars, business and
a handful of companies in particular products and ser- personal services, chemicals, electronics, financial
vices, from cars to brewing to mobile phones (Norfield, services, heavy machinery and media (Starrs, 2014).
2016: 121–123), and from just a few host countries.17
The impact of these trends on structural trans-
However, the links from increasing firm size at formation is examined in greater detail in chapter IV.
the national level to patterns of global ownership and However, a related feature has been the heightened
the degrees of control such firms have over markets is competition closely linked to the emergence of a
far from a direct one, given that multinational enter- global pool of labour, to be freely tapped by foot-
prises (MNEs) are, in a more open global economy, loose capital and by system integrator firms which
bound to face the competitive challenge of foreign can easily shift parts of their global value chains,
rivals both in their home and third markets. Still, the arbitraging labour cost differentials across countries.
trend is discernable. One recent study, which con- The increased bargaining power of capital – further
structed the networks of ownership and control around enhanced by institutional and technological changes
43,000 MNEs, taken from the Orbis 2007 global com- (ILO, 2013) – lies at the root of the decline in the
pany database, found that less than 150 core firms held global wage share since 1980, both in developed and
nearly 40 per cent of the control over the economic developing economies (see chart 1.7 in chapter I; see
value of MNEs in the world, via a complicated web also TDR 2012; Karabarbounis and Neiman, 2014).
of ownership relations (Vitali et al., 2011: 6). While This tendency is often accentuated by various trade
such a pattern may have multiple causes ranging from and economic partnership agreements that increase
reducing transaction costs, to risk sharing to increasing competition across countries in the production stage
trust, the likelihood is that it will impact on market that involves more labour, even as they tighten
structure. Given that even small cross-shareholding intellectual property rights that increase monopoly
structures at a national level can affect the operation control over the pre- and post-production stages
of markets, the implications for competition (and com- (like design and distribution). Although still missing
petition policy) in key sectors in the global economy important details, multilateral initiatives such as the
could be significant (Singh, 2002). 2030 Agenda and the Addis Ababa Action Agenda
(AAAA) point towards an alternative approach to
These factors have, most recently, come together building an international environment which would
around global value chains (GVCs), initially restricted enable developing countries to reap the potential
to a few industries (such as semiconductors, cars and benefits of an increasingly integrated global economy.
 Globalization, Convergence and Structural Transformation 51

E. Conclusions

A combination of greater openness, techno- developing countries, and enable them to rapidly catch
logical progress and increased capital mobility has up with the levels of income, productivity and welfare
increased the degree to which most economies are prevailing in the developed economies. That some
now integrated into the global economy, to the point countries have been able to do this is undoubtedly
where no policymaker or business can ignore the the case. However, the review of the evidence offered
influence of events and policies in other parts of the above suggests that successful countries have been
world or the reaction of other actors – such as foreign very heavily concentrated in the East Asian region,
governments and large internationalized firms – to that their growth paths have long roots back to the
their own actions. previous era of managed globalization, and that they
have fostered a sustained process of structural trans-
The “universal interdependence of nations” is formation. Elsewhere the record is more chequered
not, in itself, a new feature of the global economy. with episodes of both convergence and divergence
Nor is the spread of market forces, which have ebbed and with fewer signs of the structural transformation
and flowed at the global level over past centuries. needed to underpin sustained rises in productivity,
Rather, what makes today’s globalization something even in periods when growth has picked up.
of a new departure is the way in which economic,
social and political factors interact to shape the rules Closing gaps is made all the more challenging
of the game by which incomes and jobs are generated. because policymakers are chasing a moving target
In particular, weakened State regulatory authority with the graduation of a small number of successful
and diminished policy space have meant that those newly industrializing economies and the evolution of
forces are increasingly managed through uncontested richer countries. Even as growth has slowed in the
and increasingly unaccountable private institutions developed economies, in several dimensions, such
and market structures, often with a high concentra- as years of schooling or urbanization levels, middle-
tion of economic control and financial leverage, and income (and even some lower income) countries have
with the ability to impose penalties on countries that already reached the point that today’s rich countries
seek to circumvent or bend those structures. Rodrik attained only once they had crossed the high-income
(2011) has described this as a shift towards deeper threshold. But in the meantime, high-income coun-
integration at the expense of democratic representa- tries have moved on. In consequence, catching up
tion or policy space, though it is probably a mixture today requires even more capital, education, inno-
of both. Recognizing this is an important correction vation, infrastructure, as well as closer cooperation
to the view that globalization is an autonomous, between the public and private sector, than was the
irresistible and irreversible process driven by purely case in the past.
impersonal forces. Such forces are important, but
they are instigated and directed by specific political After three decades of pushing toward a more
choices and private interests. open global economy, a key question is whether the
kind of international trade, financial and production
The case for choosing globalization as the relations that have emerged are able to support the
framework for designing policy is based on the structural transformation needed for inclusive and
argument that it will stimulate entrepreneurship, sustainable growth and catching up. In this respect,
investment and economic growth, particularly in and as argued extensively in previous Reports, when
52 Trade and Development Report, 2016

currency and financial markets are dominated by the presence of footloose corporations, exogenous
speculative transactions, herd behaviour and recur- shocks and balance of payment difficulties.
rent crises, and when there is virtually no coordination
at all of macroeconomic policies in the systemically Institutional developments in the international
important developed economies, a stable global arena have further constrained developing countries
economy that supports a strong pace of capital forma- with rules and restrictions that did not apply to late
tion is unlikely to emerge. Similarly, an international developers in the twentieth century (TDR 2014).
trading system that generates greater volumes of Thus, as developing countries gear up to implement
trade but without commensurate increases in income a new and more ambitious development agenda, they
and employment, and which reinforces existing are facing not only a more complex and unstable
structures of production and first-mover advantages, global environment, but also one in which various
leaves weaker countries increasingly anxious about instruments have been expunged from their policy
their future economic prospects. As their resources toolkit. Many of these instruments have historically
are increasingly stretched at home, poorer countries been critical for managing the process of structural
find it difficult to bargain effectively in pursuit of transformation, and, in particular, industrialization.
their own efforts to catch up and they remain highly This is an issue taken up in the subsequent chapters
vulnerable to the vagaries of international finance, of the Report.

Notes

1 This new policy consensus has been given various restriction on cross-border financial transactions (see
names – globalism, neo-liberalism, market fun- Chinn and Ito, 2006): (i) The presence of multiple
damentalism, market triumphalism, Washington exchange rates; (ii) Restrictions on current account
Consensus, etc. – none of which are entirely satisfac- transactions; (iii) Restrictions on capital account
tory. For accounts of its rise, see Kozul-Wright and transactions; and (iv) Requirement of the surrender
Rayment, 2007, chap. 1; Mazower, 2012, chap. 12; of export proceeds. Eventually the index is the first
and Toye, 2014, chap. V. standardized component of the four above mentioned
2 The IMF’s World Economic Outlook 2009 predicted variables using a principal components analysis
average growth for emerging and developing econo- methodology. However, the source IMF data do not
mies of 4 per cent, it turned out to be 7.4 per cent. capture the extent of all financial regulations that could
3 In his 2000 Prebisch Lecture in UNCTAD, the either strengthen or weaken the financial system. For
Canadian economist Gerald Helleiner argued “the instance, they do not account for macroprudential
very term globalization has become so slippery, so measures that could be taken to avoid bailing out
ambiguous, so subject to misunderstanding and politi- domestic financial institutions (leverage ratio, core
cal manipulation, that it should be banned from further capital, etc.) and other microprudential regulations
use”. For historical accounts of the changing nature of (consumer protection against over indebtedness, etc.).
globalization and its impact, see Bairoch, 1993; Bairoch In this regard, the IMF offers only a partial overview
and Kozul-Wright, 1996; Bayly, 2004; Hopkins, 2002; of a country’s financial regulation, addressing mostly
O’Rourke and Williamson, 2002; and Panic, 2011. the interaction between residents and non-residents.
4 This measure of financial openness is a de jure and 5 While a vast academic literature has provided sup-
not a de facto measure, i.e. the Chinn-Ito index does port to these ideas, the World Bank’s 1987 World
not measure the actual financial openness but only Development Report was amongst the first attempts
financial openness according to the regulations in to offer a synthetic vision.
place in each country as reported in the IMF, AREAER. 6 Two types of convergence have been distinguished
To this end, the Chinn-Ito index is based on the four in this literature: absolute and conditional. Under
binary dummy variables that codify the tabulation of absolute convergence, backward regions actually do
 Globalization, Convergence and Structural Transformation 53

grow faster on average than more advanced ones, 11 It is possible to compute the income gap as
so catching up is observed in reality. However, this GAP = 1 − (Yi/YUS), where Yi denotes the real
result rests on a rather simplistic perception of the income per capita of a country i, and YUS the real
narrow determinants of growth. Theories of condi- income per capita of the United States (Felipe, 2012a).
tional convergence broaden the set of determinants 12 For an earlier discussion on the use of transition matri-
of growth and recognize that economies may have ces in the convergence debate, see Kozul-Wright and
different steady states. So backward regions still Rowthorn, 2002.
have the potential to grow faster than the more 13 Bhutan, Botswana, Cabo Verde, China, Hong Kong
advanced ones, but this potential would be real- (China), India, Indonesia, the Lao People’s Democratic
ized only if they satisfy certain conditions. If not, Republic, Malaysia, Maldives, Mauritius, Oman, the
then the growth rate in backward regions may be as Republic of Korea, Saint Vincent and the Grenadines,
slow as, or even slower than, in advanced regions. Singapore, Sri Lanka, Sudan, Taiwan Province of
Moreover, because economies converge on their China, Thailand and Viet Nam.
own steady states there is no assumption about a 14 Note that exported goods may be classified as inten-
final state where all income levels are identical. For sive in skills and technology, and yet not result from
an earlier assessment of this literature, see Rowthorn technology-intensive activities within the country,
and Kozul-Wright, 1998. when the export-oriented firms mostly assemble high-
7 See variously, Dullien, 2016; Levine and Renelt, tech imported inputs (e.g. in the maquila industry).
1992; Moral-Benito, 2012; Pritchett, 1996; Rodriguez 15 Even where some major deficit developed countries
and Rodrik, 1999. with internationally accepted currencies (such as the
8 The 1970s was also a period of convergence largely United States and the United Kingdom) had the space
because growth in the developed economies slowed to finance external deficits, the corresponding internal
sharply thanks to a series of shocks. disequilibria eventually led to the financial crisis.
9 While table 2.2 describes per capita incomes measured 16 The average rate of investment attained in the 1970s
in terms of PPP conversion factors, it should be noted has never been recovered in subsequent periods in
that there are both conceptual and empirical problems several regions and countries (as in Africa, Europe,
with the use of PPP-based comparisons of per capita Latin America and Japan) – not even in the 2003–2007
income, including lack of comparability across different global boom (2005 constant prices and exchange
time periods and a tendency to overstate the incomes of rates, United Nations Statistics Division data).
the poor. This would obviously also affect conclusions 17 UNCTAD, 2013, annex table 28, online only. Available
with respect to convergence and divergence. at: unctad.org/Sections/dite_dir/docs/WIR2013/
10 However, if China is excluded, the average growth WIR13_webtab28.xls.
rates for developing countries during the 1980s and 18 Taken from the Forbes Global yearly ranking of the
1990s were lower than those of the United States. top 2000 publicly traded companies.

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