Why would a country invest in lower-productivity industries? If a country is moving to low productivity service jobs it’s probably because high productivity jobs are not available.
It’s not that a country is investing in low productivity industries, this is just what is naturally happening. Poor people from the countryside are moving to cities for a marginally better life, but they’re selling trinkets on the street when in the past they may have been manufacturing the trinkets. The point is to figure out how to encourage high productivity jobs, not just observe that they’re unavailable.
My argument is that this is not really an accurate description. The difference between selling trinkets and manufacturing jobs is that the latter requires a large amount of upfront capital investment. If people are not doing this, we need to work out why and address it. Once it is viable, capital is naturally invested where its marginal product is highest, which in turn increases the marginal product of its compliments, like labour. As the wage rate is equal to the marginal productivity of labour, this ultimately increases the wage rate.
Once it is viable, capital is naturally invested where its marginal product is highest, which in turn increases the marginal product of its compliments, like labour.
I think the main challenge is finding out how to make investments viable, which is really hard for a number of reasons that are often grouped into the term “poor business environment”. It seems like the debate centers around whether anything can be done to improve the business environment, or if we’re better off treating the symptoms of poverty while economies sort themselves out.
What you describe above would happen in an efficient market, but stock markets barely exist in most sub-saharan countries so I think most SSA economies are operating far from efficiently. It seems like private equity deals, or doing due diligence for PE deals could have a big impact. Most private equity in SSA is growth equity rather than leveraged buyouts, and the counterfactual is probably some other risky investment that might not have as much development impact. This is an understudied area, but I’m excited to see the results of this research from IPA.
Why would a country invest in lower-productivity industries? If a country is moving to low productivity service jobs it’s probably because high productivity jobs are not available.
It’s not that a country is investing in low productivity industries, this is just what is naturally happening. Poor people from the countryside are moving to cities for a marginally better life, but they’re selling trinkets on the street when in the past they may have been manufacturing the trinkets. The point is to figure out how to encourage high productivity jobs, not just observe that they’re unavailable.
My argument is that this is not really an accurate description. The difference between selling trinkets and manufacturing jobs is that the latter requires a large amount of upfront capital investment. If people are not doing this, we need to work out why and address it. Once it is viable, capital is naturally invested where its marginal product is highest, which in turn increases the marginal product of its compliments, like labour. As the wage rate is equal to the marginal productivity of labour, this ultimately increases the wage rate.
I think the main challenge is finding out how to make investments viable, which is really hard for a number of reasons that are often grouped into the term “poor business environment”. It seems like the debate centers around whether anything can be done to improve the business environment, or if we’re better off treating the symptoms of poverty while economies sort themselves out.
What you describe above would happen in an efficient market, but stock markets barely exist in most sub-saharan countries so I think most SSA economies are operating far from efficiently. It seems like private equity deals, or doing due diligence for PE deals could have a big impact. Most private equity in SSA is growth equity rather than leveraged buyouts, and the counterfactual is probably some other risky investment that might not have as much development impact. This is an understudied area, but I’m excited to see the results of this research from IPA.