Page - (000025) - in Disrupted Development and the Future of Inequality in the Age of Automation

2 ECONOMIC DEVELOPMENT AND STRUCTURAL TRANSFORMATION 15 growth. This is because backward and forward input–output linkages are strongest in manufacturing and the scope for capital accumulation, technological progress, economies of scale and knowledge spillover are strong. Further, there is a strong causal relationship between manu- facturing output growth and labor productivity because of a deepening division of labor, specialization, and learning-by-doing and the scope for productivity gains is large due to economies of scale; (ii) industrialization requires a basis in agricultural modernization to ensure food supply and labor will transfer from other sectors to manufacturing. As manufacturing grows, productivity across the economy will rise even in agriculture and services through positive spillovers such as technological knowhow and complementary markets in services. Kaldor argued that the agriculture and industrial sectors are not only connected by the Lewis labor transi- tion (the elastic supply of labor is due to industry wages exceeding agri- culture wages) but also because agriculture creates autonomous demand for the manufacturing sector and thus land reform is required if agri- culture is not to hinder ST; (iii) aggregate demand should be managed to ensure growth (e.g. policies on public investment, taxation, directed credit); and (iv) as exports become increasingly important as a source of demand for the manufacturing sector as the economy grows, global com- petition requires temporary domestic industry protection accompanied by export-led growth policies.5 In sum, for Kaldor, the virtuous cycle or Myrdal’s cycle of cumulative causation is that demand and output growth fuel productivity growth due to increasing returns to scale which in turn fuels capital accumulation. It is Kaldor’s second law, also known as Kaldor-Verdoorn law, that contains a tension of particular importance to ST and inclusive growth. The Kaldor-Verdoorn (respectively, 1966 and 1949) coefficient is the employment elasticity of growth. The more manufacturing grows the more productivity grows across the whole economy because manu- facturing provides capital goods across the economy. This is because increases in manufacturing employment raise agriculture productiv- ity (as labor migrates) and because the manufacturing sector is the only sector with static and dynamic returns to scale due to new processes.6 Kaldor’s (1978 [1966]) interpretation of Verdoorn (1949) is that output growth induces improvements in labor productivity (assuming an elastic labor supply) and not vice versa. In contrast, the hypothesis of neoclas- sical models such as Solow is that productivity growth is due to techno- logical progress. Verdoorn’s argument was one of cumulative causation