GLOBAL PRODUCTIVITY
CHAPTER 4
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Transitioning from foreign to domestically led innovation. Early success in diversifying sectoral employment and increasing economic complexity can be met with subsequent stagnation. Initially, low-wage and proximity advantages can provide a route to increasingly complex and higher-value-added production processes through engagement in global supply chains and the attraction of FDI in the “flying geese” model of development (Kojima 2000). As productivity and wages grow, the comparative advantage of economies in attracting these forms of production, often reliant on foreign technology transfer and investment flows, may fade (Mahon 1992). In the past, many economies have previously struggled to transition from the rapid-growth phase that has benefited from the adoption of technologies to the development of domestic innovation (Im and Rosenblatt 2015). Middle-income economies have been found to be vulnerable to growth slowdowns, particularly those economies with lower levels of tertiary education and where high-technology exports are low (Eichengreen, Park, and Shin 2013). Commodity reliance and the outlook for commodity prices. Several upper-middleincome economies such as Argentina, Brazil, and South Africa have remained Club 2 members over the entire sample (1970-2018) and not transitioned to Club 1. In many cases, commodity-exporting upper-middle-income economies have fallen further away from the productivity frontier since the 1980s. In addition to risks facing economies taking a manufacturing-led approach to development, economies with a high degree of commodity reliance, even those such as Chile where quality upgrading has been pursued, face a larger obstacle to growth as they contend with the challenge that the precrisis period of rapidly rising commodity prices has ended. The COVID-19-driven recession in 2020 may generate a prolonged reduction in demand for commodities. For example, changing consumer preferences for transportation, travel, and fuel may result; and demand for industrial metals may be persistently weaker if the recovery is drawn out. Slowing fundamental drivers of convergence. Furthermore, a range of additional headwinds to EMDE productivity growth could pose additional challenges to the development model of rapidly growing economies. As educational systems mature in many fast-growing EMDEs, there will be fewer high-return gains to education. EMDEs in EAP and ECA currently have workforces whose average years of education are within one year of those of advanced economies (World Bank 2020a). There is an additional danger of human capital development being set back in EMDEs because of COVID-19. The majority of schools and universities have been closed for some period during 2020 because of social distancing measures. EMDEs may be less able to conduct remote learning, and large negative income shocks have also been found to increase school dropout rates in EMDEs (World Bank 2020b). In addition, progress in improving institutional quality has stagnated in many EMDEs: measures of government effectiveness (Worldwide Governance Indicators) have not improved on average since the 1990s (chapter 2).
Conclusion and policy implications This chapter is the first comprehensive study of long-term labor productivity convergence trends to take account of the EMDE productivity growth increase that
