How do we reconcile unconditional convergence in manufacturing with its absence for economies as a whole? In Rodrik (2011a) I develop a decomposition to identify the factors that weaken the forces of convergence as we aggregate up from individual manufacturing industries. The exercise highlights the role of structural factors, in particular the slow (and sometimes perverse) movement of resources across economic activities with different convergence characteristics.
The trouble from a convergence standpoint is that economic activities that are good at absorbing advanced technologies are not necessarily also good at absorbing labour. As a result, too large a fraction of an economy’s resources can get stuck in the ‘wrong’ sectors – those that are not on the escalator up. When firms that are part of international production networks or that otherwise benefit from globalisation employ little labour, the gains remain limited. Even worse, intersectoral labour flows can be perverse with the consequence that convergence within the ‘advanced’ sectors is accompanied by divergence on the part of the economy as a whole. The analyses in Rodrik (2011a) and McMillan and Rodrik (2011) illustrate these outcomes using the experience of specific Latin American and African countries with such perverse patterns.
Though these findings are new, it is perhaps not surprising that manufacturing industries should exhibit unconditional convergence, at quite a rapid pace too. These industries produce tradable goods and can be rapidly integrated into global production networks, facilitating technology transfer and absorption. Even when they produce just for the home market, they operate under competitive threat from efficient suppliers from abroad, requiring that they upgrade their operations and remain efficient. Traditional agriculture, many nontradable services, and especially informal economic activities do not share these characteristics.
These results offer new insight on the determinants of economic growth and convergence across countries. They suggest that lack of convergence is due not so much to economy-wide misgovernance or endogenous technological change, but to specific circumstances that influence the speed of structural reallocation from nonconvergence to convergence activities. The policies that matter are those that bear directly on this reallocation. As discussed in Rodrik (2011b), what high-growth countries typically have in common is their ability to deploy policies that compensate for the market and government failures that block growth-enhancing structural transformation. Countries that manage to affect the requisite structural change grow rapidly while those that fail don’t.