By Noah Smith, Bloomberg News
Editor's note: This article originally analyzed sub-Saharan Africa as well as Latin America but was edited to cover only the Latin American region.
NEW YORK — The great macroeconomist Robert Lucas once uttered a memorable quote about the mystery of economic development: “Is there some action a government of India could take that would lead the Indian economy to grow [more rapidly]. If so, what, exactly?... The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.”
In the last few decades, many poor countries have experienced bursts of rapid growth. Everyone knows about Asia, but many people believe that Latin America — as well as subSaharan Africa — have been left behind. This is false. Especially since the year 2000, countries in these two regions have been getting much richer.
Some countries, such as Argentina for example, are already at middle-income level. Others, like Ethiopia, remain poor. But almost all of these countries have seen substantial economic progress in the past 15 years or so.
However, not all growth is created equal. Harvard economist Dani Rodrik has been examining these countries closely, in order to evaluate the quality of their growth. In a new paper with Xinshen Diao and Margaret McMillan, he breaks poor-country growth down into two sources.
The first source is within-sector productivity growth. This happens when a country gets better at something, like farming or manufacturing electronics. More productive industries benefit the domestic economy too, and they also allow a country to retool in the face of shifting global demand. But if within-sector improvement is the only source of growth, it means the economy isn't doing a good job of moving resources to more sectors that create more value.