Economic transformation and poverty

Vidya Diwakar, Alberto Lemma, Andrew Shepherd and Dirk Willem te Velde, December 2019

Economic transformation (ET), the continuous movement of resources (such as labour and capital) from low- to higher-productivity activities, is crucial for sustained job creation and a more resilient economy, but little attention is paid to the detailed mechanisms by means of which ET relates to the poorest and most vulnerable people in society. This paper describes the main channels through which ET links to poverty, including through production patterns involving the poor directly or indirectly, consumption by the poor and other routes, including government services and context more generally. There are many direct and indirect ways through which ET supports the livelihoods of the poorest in society, but there may also be unintended effects that exclude benefits because of gender, ethnicity or other factors (unless complementary actions are implemented).

Vidya Diwakar, Alberto Lemma, Andrew Shepherd and Dirk Willem te Velde, December 2019

Economic transformation (ET), the continuous movement of resources (such as labour and capital) from low- to higher-productivity activities, is crucial for sustained job creation and a more resilient economy, but little attention is paid to the detailed mechanisms by means of which ET relates to the poorest and most vulnerable people in society. This paper describes the main channels through which ET links to poverty, including through production patterns involving the poor directly or indirectly, consumption by the poor and other routes, including government services and context more generally. There are many direct and indirect ways through which ET supports the livelihoods of the poorest in society, but there may also be unintended effects that exclude benefits because of gender, ethnicity or other factors (unless complementary actions are implemented).

The paper proposes the use of a range of indicators to better understand which transformation pathways are more poverty-reducing.

Photo: Farmers harvest their crops in the field near Kisumu in Kenya. Peter Kapuscinski / World Bank . Licence: (CC BY-NC-ND 2.0)

Dirk Willem te Velde(ODI) |Industrialisation in a digital era

The Industrial Development Report 2020 (IDR 2020) by UNIDO, ‘Industrialization in a Digital Age’, is spot on when it points to the centrality of building more industrial or productive capacities, as this will help in engaging better with the digital economy. This builds on our past findings in Africa and supports our preliminary findings in Cambodia, where we recently held a consultation. It is also a message to take to Africa Industrialisation week in November 2019.
The plight of industrialisation is often overlooked when countries move to a digital economy. Some countries are wrongly advised that manufacturing is yesterday’s strategy. This new UNIDO IDR corrects that narrative.

Dirk Willem te Velde (Principal Research Fellow, ODI)

11 November 2019

The Industrial Development Report 2020 (IDR 2020) by UNIDO, ‘Industrialization in a Digital Age’, is spot on when it points to the centrality of building more industrial or productive capacities, as this will help in engaging better with the digital economy. This builds on our past findings in Africa and supports our preliminary findings in Cambodia, where we recently held a consultation. It is also a message to take to Africa Industrialisation week in November 2019.

The plight of industrialisation is often overlooked when countries move to a digital economy. Some countries are wrongly advised that manufacturing is yesterday’s strategy. This new UNIDO IDR corrects that narrative.

The IDR 2020 points to several digital divides in production and use, between and within countries and across sectors. It sees ADP (advanced digital production) technologies operating as islands in a sea of firms without many capabilities. This will indeed be a key trend to watch for the future. Adair Turner posited in a lecture last year there would be very few high-productivity jobs by 2100, with lots of low-productivity jobs around them (‘hollowing-out’ of skills). This seems to be true within developed countries. Could the same concentration and specialisation happen between richer and poorer countries? Our findings on robots in Africa, such as that the share of world robots sales attributed to Africa is 10 times lower than its share in gross domestic product, point to digital divergence not convergence.

This represents a major risk to catch-up. Is catch-up a thing of the past without targeted corrective action? In his comments (at the back of the IDR2020), Rodrik argues that ADP technologies can enable faster catch-up, but without capabilities, skills and institutions they raise barriers to convergence by laggards.

Digitalisation is gathering pace differently across countries, with many differences across productive sectors too. The IDR 2020 points to the different levels of digital innovation across manufacturing, with the garments and food sectors lagging far behind electronics and automotives. The effects across major economic sectors are even larger. Our work in Cambodia and Kenya suggests that, while services apps like digital payment systems (such as Wing and Pi Pay in Cambodia) or transport apps (including tuk tuk apps) are taking hold rapidly, and agricultural apps are also gradually being implemented (BlocRice and Agribuddy), there are ongoing concerns around innovation in manufacturing.

Another digital divide is around impact. Not only do the digital laggards install and use less digital technology, but also the above ODI evidence suggests they get less out of it in terms of productivity (3% versus 11% manufacturing productivity impact for low- versus middle-income countries for the same 10% increase in internet penetration). Lack of complementary action and skills reduces the impact of digital technology. Again, such evidence points to the need for urgent corrective action. Our previous work has suggested a two-pronged approach of building industrial capabilities and preparing rapidly for the digital transformation. IDR 2020  presents three policies: framework conditions, creating demand and strengthening capabilities.

Digital transformation may not benefit all, or everyone to the same extent. Distributional effects matter. The IDR 2020 suggests ADP technologies are associated with net benefits. This is likely to be true. But it does not mean there are no losses/losers and we do need to think about the vulnerable groupings along the digitalisation path. We recently discussed (in a 4 November meeting in Phnom Penh) our draft report ‘Fostering an Inclusive Digitalisation in Cambodia’, which argues for five actions, taking into account the political economy of digital transformation: (i) transform manufacturing innovation; (ii) provide skills for the future; (iii) promote a digital start-up economy for an inclusive economy; (iv) protect the most vulnerable groups in the digital economy; and (v) promote a public sector that leads by example.  

All of this demands a lot from government and private sector actors. Unfortunately, this does not always appear to work out. During the launch of IDR 2020, I argued that for effective industrial policies, governments require leadership skills, coordinating capacities and iterative approaches. They also need to lead by example and embrace e-governance so that firms do not need to suffer uncertain conditions around taxes or licences. Not every country can become an Estonia in two decades’ time, but they can try to make advances. Cambodia has regrettably regressed on some UN digital governance indices.

Laggards (in terms of countries, sectors or firms) have a window of opportunity. Many countries missed the manufacturing boat when China industrialised, and they certainly do not now want to miss out on the benefits of digital transformation. It is better to have a less employment-rich manufacturing sector, but with spill over effects for jobs in other sectors, than to have no manufacturing sector at all. This is a crucial and urgent message for middle income countries such as Cambodia that already have a sizeable manufacturing workforce, as well as for those African countries that still need to build up manufacturing.

Photo: Cambodia’s garment industry.  Chhor Sokunthea / World Bank . CC BY-NC-ND 2.0