Public policy and industrial transformation in the process of development

Pierre-Richard Agénor and Hinh Dinh

No 6405, Policy Research Working Paper Series from The World Bank

Abstract: 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.

Keywords: Labor Policies; Economic Theory&Research; Political Economy; Debt Markets; Labor Markets (search for similar items in EconPapers)
Date: 2013-04-01
New Economics Papers: this item is included in nep-dev and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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