Public Policy and Industrial Transformation in the Process of Development
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World Bank, Washington, D.C.
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This paper studies the role of public
policy in promoting industrial transformation from an
imitationbased, low-skill economy to an innovation-based,
high-skill economy, where technological progress now occurs
through the domestic invention of ideas. Industrial
transformation is measured by changes in an index of
industrial structure, defined as the ratio of the variety of
imitation- to innovation-based intermediate goods. A key
mechanism through which productivity increases initially in
both the imitation and innovation sectors is through a
knowledge externality associated with learning by doing in
the imitation sector. The process of industrialization
increases the demand for high-skill labor, inducing
individuals to invest in education. The model also
emphasizes the distinction between basic or core
infrastructure, which promotes imitation, and advanced
infrastructure, which promotes innovation. A calibrated
version for a low-income country is used to perform several
policy experiments, including an increase in investment in
infrastructure, a reduction in the cost of training, and
improved enforcement of property rights.
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ACCESS TO BANK, ACCESS TO BANK LOANS, ACCOUNTING, ADJUSTMENT PROCESS, ADVERSE EFFECT, AGRICULTURE, ALLOCATION, ARBITRAGE, ASSET PRICE, BANK LOANS, BENCHMARK, BINDING CONSTRAINT, BONDS, BUDGET CONSTRAINT, BUSINESS CYCLE, CAPITAL FORMATION, CAPITAL GAIN, CAPITAL STOCKS, CENTRAL BANK, COLLATERAL, COMMODITY PRICES, COMPETITIVENESS, CONSTANT RETURNS TO SCALE, CONSUMER EXPENDITURE, CONSUMPTION EXPENDITURE, DEADWEIGHT, DEADWEIGHT LOSS, DEFICIT FINANCING, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DIMINISHING RETURNS, DISCOUNT RATE, DISCOUNTED VALUE, EARNING, ECONOMETRICS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIES OF SCALE, ELASTICITY OF SUBSTITUTION, EMPLOYMENT, ENTRY COST, EQUILIBRIUM, EQUIPMENT, EXOGENOUS RATE, EXPORT MARKET, EXPORTS, EXTERNAL FINANCE, EXTERNALITIES, EXTERNALITY, FINANCIAL SECTOR, FINANCIAL SUPPORT, FIRM GROWTH, FIRM LEVEL, FIRM PERFORMANCE, FIRM SIZE, FISCAL POLICY, FIXED CAPITAL, FORMAL ANALYSIS, GDP, GLOBALIZATION, GOVERNMENT INVESTMENT, GOVERNMENT REVENUES, GOVERNMENT SPENDING, GROWTH RATE, HOLDING, HUMAN CAPITAL, INCOME, INCOME DISTRIBUTION, INCOME GROWTH, INDUSTRIALIZATION, INEXPERIENCED WORKERS, INFORMAL ECONOMY, INFORMATION ASYMMETRIES, INNOVATION, INNOVATIONS, INTELLECTUAL PROPERTY, INTEREST RATE, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INTERNATIONAL MARKETS, INVESTING, INVESTMENT FLOWS, INVESTMENT RATE, JOBS, LABOR COST, LABOR COST ADVANTAGE, LABOR DEMAND, LABOR FORCE, LABOR MARKET, LABOR MARKETS, LABOR PRODUCTIVITY, LABOR SUPPLY, LACK OF CREDIT, LEGAL CONSTRAINTS, LEVIES, LIVING STANDARDS, LOCAL FIRMS, LONG-RUN EFFECTS, MACROECONOMICS, MANUFACTURING INDUSTRIES, MARGINAL BENEFITS, MARGINAL COST, MARGINAL PRODUCT, MARGINAL REVENUE, MARKET CONDITIONS, MARKET INTEREST RATE, MARKET SHARE, MAXIMUM LIKELIHOOD ESTIMATION, MONETARY FUND, NATURAL RESOURCES, OPEN ECONOMY, OPPORTUNITY COST, OPTIMIZATION, PATENTS, POLITICAL ECONOMY, POSITIVE EXTERNALITY, PREVIOUS SECTION, PRICE ELASTICITY, PRICE ELASTICITY OF DEMAND, PRIVATE CAPITAL, PRIVATE CAPITAL STOCK, PRIVATE INVESTMENT, PRODUCT INNOVATION, PRODUCTION COSTS, PRODUCTION FUNCTION, PRODUCTIVITY, PRODUCTIVITY GAINS, PRODUCTIVITY GROWTH, PRODUCTIVITY INCREASES, PROPERTY RIGHTS, PUBLIC INVESTMENT, PUBLIC SECTOR, PUBLIC SPENDING, RATE OF RETURN, RENTS, RURAL WORKERS, SCALE EFFECTS, SHARE OF INVESTMENT, SKILL PREMIUM, SKILL REQUIREMENTS, SKILLED WORKERS, STOCKS, TAX, TAX RATE, TAX REVENUES, TELECOMMUNICATIONS, TOTAL FACTOR PRODUCTIVITY, TRAINING COST, TRAINING COSTS, TRAINING PERIOD, UNSKILLED LABOR, UNSKILLED WORKER, UNSKILLED WORKERS, UTILITY FUNCTION, VALUE ADDED, VOCATIONAL TRAINING, VOCATIONAL TRAINING PROGRAMS, WAGE INCREASES, WAGE RATE, WAGES