Working document - Thinking development for today's Argentina

What is development and how to think about it

Natural Resources Area & Productive Development Area

The debate over development boils down to a matter of how to guarantee conditions of well being and a dignified life to the maximum number of people. Economic development is a more restricted concept. It refers to the aggregate performance of a national economy and includes two fundamental aspects: First, it implies a transformation of the productive structure of a country towards activities of greater productivity, and close to the global frontier. Second, it entails a deliberate effort by a country’s society to close the gap that separates it from the conditions present in more prosperous countries.

A country develops when it stops doing more of the same and changes what it used to do: it acquires new productive capacities and its comparative advantages evolve. Innovation is at the center of the process of development. Upgrading, in terms of national development, requires new ideas, methods, processes and productive technologies. That is, that the country as a whole improves its capacity to learn how to produce, and that this new knowledge spills over a great part of its productive structure. For countries trying to catch up in terms of development, it is fundamental to reduce the knowledge gap that separates them from the global frontier.

Economic development can contribute to ensuring a material base of subsistence for everybody, and better access to health and education—all outcomes consistent with the idea of a dignified life. Under the right social and political conditions, the prosperity of a country can favor other important results, like reducing income or gender inequality and, ultimately, more freedom.

Development does not occur automatically. It requires intentional and sustained coordination between public and private actors and a social coalition capable of giving it direction and support over time. Contrary to what is expected by standard economic growth theory, an economy will not move from low- to high-productivity activities solely as a result of individuals and firms reacting to pure market incentives.In fact, there are robust empirical and theoretical reasons to expect that, absent state action, structural change will not occur.

In comparative and historical perspectives, development is a difficult and infrequent result. Political economy offers hints for countries that, like Argentina, still need to move from middle to high income. It is especially valuable to analyze the experience of developmental states in South East Asia (South Korea, Taiwan, Singapore and Hong Kong), the only countries in the world that were able to pass the threshold to become high income without having discovered oil or entering the European Union. A particular form of coordination  between the public and the private sectors was a crucial driver of these countries’ transformation towards high value-added and technology-intensive sectors. These cases raise the question about how to replicate certain attributes of those experiences, in particular how to stabilize such types of strategies over time in radically different political contexts.

The challenge, in terms of development, is especially complicated for countries that find themselves in the middle-income trap, like Argentina, Thailand, Malaysia, South Africa, Turkey, Brazil, Mexico and Colombia. These cases experienced a deceleration of productivity growth as they exhausted gains obtained from their earlier jumps from low to middle income. They are “trapped” because they no longer have a real possibility to compete with those economies that export manufactured goods based on low salaries nor can they compete with advanced economies with high levels of innovation. If middle-income countries continue on their current path, they will likely to continue to fall behind. Changing trajectories necessarily requires a qualitative jump in their productive profile and a strategy of insertion into international markets which, in turn, implies generating an innovation leap. The global bar has been raised since these countries entered the trap more than half a century ago, which means that the institutional architectures required for that productive leap will need to be more sophisticated than those needed by countries that achieved development earlier. The agenda to escape the middle income trap must be coordinated by the state and designed alongside a coalition of socio-economic actors that make development a priority, so that it can be sustained over time. The exit to the trap therefore requires more politics than economics.