The most telling chart I have seen in a long time

The Inter-American Development Bank’s new study, The Age of Productivity is a trove of neat information on productivity performance in Latin America.  My favorite nugget is this one:

Ignore the intermediate period of debt crisis (1975-90) and focus on the differences between the periods of import-substitution (IS, 1950-1975) and Washington Consensus (WC, 1990-2005).  What do we see?

1. Labor productivity under IS grew at a rate that is double the rate under WC.
2. The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes.
3. The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change -- labor moving from low to high-productivity activities -- under WC than under IS.

We already knew 1, and I have long suspected points 2 and 3 to be true as well.  But I had never seen the facts laid out so clearly.

Here is what seems to have happened:

For all its faults, IS promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies!

Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change.

This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone.  After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing. 

Arthur Lewis lives.

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