When I was studying economics in my early twenties, the issue I was more interested in go deeper was the cause of development. Nowadays, I keep this interest in my readings, so this is a book every policy makers should read . In Brazil for more than one decade there is not any real GDP growth per capita. Policy makers and economists should make public policies that help Brazil to overcome this stagnant economic situation. Despite rumors that I wouldn't be a candidate, now I'm officially a candidate to city councilor and my number is 77650. Since 2020 I've had also a channel on YouTube, if you want to know my channel here is the link https://youtube.com/@lucianofietto4773?si=ZgrD-GvowGUhw8v8 This post is a summary of the book with the title above published in 2024 at https://openknowledge.worldbank.org/server/api/core/bitstreams/8f49fae8-ba60-45ba-b4d9-82bc22a964d9/content
Developing economies change in structure as they increase in size, which means that changes in the pace of growth stem from factors that are new to them. Although these imperatives can vary across countries, economic expansion, on average, begins to decelerate and often reaches a plateau in income per capita growth, typically at about US$8,000. A systematic slowdown in growth then occurs. Development strategies relying largely on capital accumulation that served these countries well in their low-income phase, begin to yield diminishing returns. To see why, consider this: if capital endowments were the only economically relevant difference between middle-income countries today, the gross national income per capita would have been nearly three-quarters of that of the U.S. in 2019. In fact, it is about one-fifth that of the U.S. Its growth prospects now depend increasingly on its ability to boost the sophistication of its production. To achieve high-income status, a middle-income country needs to ramp up the sophistication of its economic structure. Using economic complexity of a country's export basket, a measure of sophistication, there is a rising relationship between sophistication and income for all economies that transitioned from a GDP per capita of less than US$13,000 to more than US$31,000. To achieve more sophisticated economies, middle-income countries need two successive transitions. In the first, investment is complemented with infusion, so that countries focus on imitating and diffusing modern tech. In the second, innovation is added to the investment and infusion mix, so that countries focus on building domestic capabilities to add value to global tech, ultimately becoming innovation themselves. In general, middle-income countries need to recalibrate the mix of the three drivers of economic growth: investment, infusion, and innovation. What makes the move from middle-income status to high-income so difficult? One reason is that as they move through middle-income status, countries can't leap all at once from investment-driven growth to innovation-driven growth. Infusion of tech comes first and then innovation. Economic success in lower-income countries stems largely from accelerating investment. As these economies move to middle-income status, continued progress requires complementing good investment with measures designed to bring innovation from abroad and diffuse them across the economy, so called infusion. To intentionally import tech, knowledge of market potential, and business practices from abroad, as well as expedite their diffusion at home, middle-income economies have to change tack. Policy makers must support firms that are able to incorporate global tech into production. For firms to make the most of new tech, they need technically skilled workers in large numbers and a sufficient supply of engineers, scientists, managers, and other highly skilled professionals. Countries that are open to ideas from abroad and have strong education and vocational training programs tend to perform better than those that have not. The experiences of three economies that have grown quickly- Chile, Korea and Poland, illustrate these ideas. Developing countries should seriously consider the close correlation between the quality of institutions and the probability of falling into the trap. Economists have conjectured that poor institutional quality discourages investment and innovation, distorts allocation, and lowers returns to entrepreneurship. And policy and institutional deficiencies can put the brakes on and even derail development. Middle-income growth requires a shift from investment in physical capital to infusion of tech and innovation. At this stage, countries need to improve their capabilities to produce a range of sophisticated products. Efficient allocation of the factors of production accounts for about 25% of productivity growth. Efficiency in allocating resources boost jobs and output growth as well as creates positive spillovers for other business along the value chain. When countries focus on innovation, there is a rise in the number of their patents and the importance of these patents in the global production of knowledge. Countries need a more skilled workforce as their production processes become more complex with infusion and innovation, also need to invest in their researchers, who contribute to the expansion of knowledge in various fields. How have the most successful middle-income countries engineered progress? Modern economic history provides one valuable lesson. Countries that have made tech advances and achieved high-income status did so through two successive transitions. The first set of changes is importing technologies and business models from more advanced economies and diffusing this knowledge at scale in their domestic economy. The second phase of structural change, commonly called innovation, occurs mainly in successful upper-middle-income countries. This transition involves a deliberate shift from imitating and adapting tech used in advanced economies to building own capabilities to change leading global tech and products. Successful infusion efforts have marked reversals of fortune in several parts of the world. 1) Korea - An important component of industrial policy in Korea was incentives for tech investment. In particular, Korea subsidized the adoption of foreign. Firms received tax credits for royalty payment or R&D expenditures. Data on innovation grants were made publicly available. 2) Malaysia - Became a successful country through infusion-centered and export-oriented growth that replaced import substitution policies in the mid-1980s. Tech embodied in FDI was important for developing and structuring the country's industrial base. As policy makers shift their emphasis toward innovation, they should first combine a lot of investment with a lot of infusion. In many middle-income countries, policies need to be revisited and upgraded to reward merit activities. But this will require a change in mindset. Policy makers should think in terms of adding value: economic, social, and environmental. That requires changes in policies to enhance value added across the economy through the efficient resource utilization of talent, capital and energy. Although money is important, entrepreneurial success is not all about money. Most entrepreneurs need to be connected with networks of entrepreneurs to fully assess whether they and their ideas are fit for entrepreneurship. Accelerator programs are a relativity recent addition to the variety of programs that direct knowledge, social and financial capital to promising people and ideas. They provide training and technical assistance, along with mentorship, and networking support. Y Combinator, launched in 2005, is widely regarded as the first accelerator program. A highly competitive process allows founders to join a three-month program of capability assessment and upgrading in which their ideas are pitched to investors. After the program's inception, 5,000 US-based start-ups accelerated between 2005 and 2015 raised nearly US$20 billion in venture capital.
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