Technology is Changing How Economists Understand Structural Transformation

At the recent launch of the UNDP’s Human Development Report 2016, I spoke on the role that technology is playing in the ‘changing world of work’. Aside from my remarks on the changes brought on in the technology-jobs paradigm specifically, I started with a conceptual issue that economists need to grapple with.

Technological advancements are changing our understanding of a fundamental tenet in development economics – ‘structural transformation’ of the economy.  The conventional wisdom explains structural transformation as the process that occurs when an economy moves from low productivity activities to higher productivity activities – particularly from agriculture to industry to services. The path is assumed to be more or less linear. But those discrete phases or steps may no longer make sense, and the lines are increasingly blurring. We are now seeing these three not only operate side by side, but interact with each other strongly.

Lets take a simple example of a farmer. A few years ago I was part of a study that explored access and usage of technology, and during that time we found young onion and sweet potato farmers in rural Matale using apps on mobile phones to check prices in urban vegetable collection centres. Based on that knowledge and updated information on prices, they would even time their harvest to maximize their gains. So the farmer maybe still in agriculture, but also participating in the knowledge economy (i.e., services sector).

Another example of the blurring lines is the “servicification” of industries – services increasingly getting embedded into manufacturing, or as UNESCAP describes it “the increased use of services in manufacturing processes”. For instance, in Sri Lanka’s top tier apparel firms, design, software, and knowledge services are deeply embedded into the manufacturing value chain. In the future these firms may only be doing the knowledge services component and not stitching any garments in Sri Lanka at all. So, under this new technology paradigm, a firm or individual may be part of the manufacturing sector, but in fact be doing a services sector activity like design.

This phenomenon is part of the broader trend seen around the world – the rise of global production networks (GPNs) – also referred to as global production sharing, networked trade, and international production fragmentation. (See this paper by Prof. Premachandra Athukorala on the subject of GPNs in East Asia)

This has important implications for policy. It calls for a re-thinking of policies that promote structural transformation. It also calls for a re-focussing on the efficiency of services markets; reforming them to ensure they have updated regulatory systems and are not standing in the way of driving greater competitiveness in non-services sectors, like industry and agriculture. Sri Lankan policymakers, and indeed businesses, need to have a sharper understanding of technology influences structural transformation of the economy and figure out more contemporary development strategies to guide the economy through it.

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