Dani Rodrik on Economic Development

Dani Rodrik's weblog: Another U-curve in economic development

What these results point to are two critical dynamics that take place during the course of development. First, you need some new, high-productivity activities to emerge in order for development to happen. These typically arise outside of agriculture. So as these new activities propel the economy forward, agriculture falls behind in terms of relative productivity. Second, labor tends to move from low- to high-productivity activities as an economy gets richer. This tends to reduce the gap between productivity in agriculture and non-agriculture (think of diminishing marginal returns). At some point, the second dynamic overwhelms the first, and the curve begins to slope outward.

Lesson: economic development requires both new activities (diversification) and ongoing transfer of resources from traditional to modern activities. Some countries are stuck with no new industries, so they never grow. Others get a few new industries (e.g. mining and other natural resource-based industries), but these do not expand sufficiently and absorb much labor, so development gets stuck at an intermediate level of income. The real successful countries are those that pull off both tricks.