1HlG51J

Technical notesDevelopmental stagesAt a relatively low-income stage, labour-intensive industriesprevail. The key input to make such industries competitiveis cheap, trainable labour, which is relatively abundant inlow-income countries. Success in labour-intensiveindustries drives up labour costs higher and makescountries less competitive in those industries. Thus, in amiddle-income stage, normally the growth of labourintensiveindustries slows down. At this income level,sustained manufacturing and economic growth requiresthe development of more capital-intensive industries,starting with relatively simple products and productionprocesses. These industries usually have higher labourproductivity than labour-intensive industries and paycommensurately higher wages, indicating that betterqualities of labour and infrastructure are the necessaryconditions to develop competitive capital-intensiveindustries. Transition from a middle income to a highincome status is associated with further changes inmanufacturing structure but also with the evolution ofservices. Labour intensive industries usually start declining,and differences in growth rates even among capitalintensive industries become increasingly noticeable.Industries largely driven by capital investment and theemployment of semi-skilled labour tend to experience aslowdown as less developed middle income countries moveinto such industries and start producing similar products atlower costs. Therefore, entry to a high income stage andsustained economic growth thereafter usually go alongwith the development and expansion of industries thatemploy highly-skilled labour whose success depends on acountry’s ability to continuously upgrade technologies andinnovate.Market failure rationalesMarket failure rationales for industrial policy build on theidea of information gaps, namely insufficient informationand lack of price signals, leading to underinvestment. 474Investment in new non-traditional industrial sectors mightbe limited by capital market failures, lack of effective equitymarkets or sufficient financing resources internal to thefirm. The price mechanism does “not provide clear enoughindication of the profitability of resources that do notactually exist (e.g. new skills and technology)”. 475Moreover, information externalities and problems of‘appropriability’ in the innovation process will alsodrastically affect investment in new activities. Specifically,in the so-called process of ‘self-discovery,’ 476 firms investheavily in the discovery of new combinations of factors andprocedures. If one firm cannot fully internalize the value ofits discovery (because of imitation by other firms and102informational externalities), there will be no incentive toundertake the initial investment. Some of these marketfailurearguments become particularly strong in the contextof green technologies. 477Structural coordination problemsStructural coordination problems tend to arise as dynamicmarket failures. 478 The first problem of coordination isrelated to the existence of demand complementarities andincreasing returns to scale in manufacturing industries.Many sectors and industries require a series ofcomplementary investments in interconnected activities inthe early phases of their development. This is because theirreturns, and sometimes even existence, depend on theexistence of a web of forward, backward and horizontallinkages. 479Systemic failures and challengesSystemic failures and challenges refer in particular to issuesaffecting the technological change and innovation processin regional, sectoral and national systems of innovation. 480These challenges include infrastructural and institutionalproblems, technological lock-in, path dependency, qualityof linkages, and issues related to learning dynamics at thefirm, local network, sectoral and system levels. Theseproblems apply not only to developing economies but alsoto countries at the technological and production frontiers,which might also require complementary investments insets of interrelated new key enabling technologies orproduction activities. 481Fundamental empirical regularities characterising thestructural transformation trajectories of developingcountries 482Growth: The first empirical regularity concerns growth indeveloping countries. The evidence suggests that it is notso much the quantum of GDP growth that sets developingcountries apart in terms of their per capita incomes. It isthe composition of their GDP growth, i.e., the degree anddirection of productive transformation of their economy.Employment: The second empirical regularity is related tojobs and the labour market in developing countries.Employment growth does not set developing countriesapart, in terms of their per capita incomes. What does setdifferent income categories of developing countries apartare changes in job quality. Further, these qualitativechanges seem to move together, with job quality beinggenerally better in manufacturing than in primaryproduction and in the informal services economy. This