Political choices shape the context in which structural transformation occurs. Investments in infrastructure, education, migration policies, trade policies, and industrial policies all reflect the underlying political realities of developing country governments. Moreover, policies like urban development, infrastructure, and education are reliant on public finance. The process of structural transformation thus reflects the underlying political forces and interest groups.
Theme 5 will focus on two channels through which political choices affect the scope and direction of structural transformation:
- Policies that have strong redistributive aspects. The political sensitivities of public investment, with contestation over geographic and sectoral allocation of public spending (and public policies more broadly), are clear. Many of the most common policies targeting structural transformation and growth, including infrastructure investment, industrial policy, and trade policy are especially prone to interest groups.
- Macroeconomic policy. Both fiscal and monetary policy can trigger powerful political responses, and the political economy of macro policy making in low-income countries has significant implications for the pace and direction of structural transformation. Monetary policy - particularly via the channel of exchange rate management - can affect the composition of output and trade. Fiscal policy may also have important impacts on structural transformation, especially in low-income countries where government employment and purchasing may represent some of the most powerful forces behind urbanisation. Countries’ ability to pursue optimal policies (e.g. trade liberalisations, infrastructure investments) may be constrained by the need to raise public funds using a limited set of viable tax instruments.
Theme 5 is led by Monica Martinez-Bravo (Associate Professor at CEMFI) and Leonard Wantchekon (Professor of Politics and Associate Professor of Economics at Princeton University).