Failing Markets, Weak States
Productivity growth is a precondition for increasing living standards and maintaining competitiveness in the globalised economy. Low total factor productivity is the key reason for persistent poverty in developing countries. Therefore, poor countries need to increase productivity to eradicate poverty. The challenge is not only to develop more productive ways of doing business in activities already established but also to accelerate the structural transformation from low productivity activities in agriculture, petty trade and skill-extensive services to new activities that are knowledge-intensive and exploit the advantages of inter-firm specialisation. The role of industry and specifically manufacturing as the key driver of structural change, technological innovation and productivity increases has been at the centre of development economics from its inception: ‘Generally, industrialization was viewed as equivalent to development’ (Ranis 2004, p._4). This is mirrored by the fact that industrial policy has become a synonym for policies seeking to influence the direction, structure and pace of economic growth and development. Undoubtedly, the main driver of structural change is the private sector. Still, governments have an important role to play in setting policy frameworks that stimulate competition and encourage innovation and technological change, as well as in correcting market failure.