The role of industrial and exchange rate policies in promoting structural change, productivity and employement

In mainstream economic theory the issue of employment is usually discussed in terms of a natural rate of unemployment and “distortions” in the labour market through institutions such as minimum wages, unemployment benefits and strong labour unions. However, developing economies whose labour market institutions are often weak or are ineffective outside the formal economy have experienced long periods of high unemployment. Furthermore, countries where labour unions greatly lost influence – as in Latin America in the 1970s and 1990s – nevertheless experienced rising unemployment (Stalling and Peres, 2000). Therefore, it is necessary to look at other variables when exploring the issue of employment. In addition, most developing economies have a large surplus of labour in the subsistence sector or in sectors with extremely low levels of productivity (underemployment).1 They are “dual” economies in Lewis’ sense, or at least they comprise labour market segments with productivity levels close to subsistence level. These models view economic development as a process of moving labour from lowto high-productivity segments. The engine that draws labour out of the subsistence sector is structural change (Cimoli, 1988; Cimoli and Porcile, 2011; ECLAC, 2007; McMillan and Rodrik, 2011). Countries need to transform the production structure, that is, create new sectors and technologies that generate more productive and better jobs.