Paper short abstract:

This paper investigates how macroeconomic policy, in particular redistributive policies and government spending, can act in support of domestic market formation and therefore ultimately in support of structural transformation in developing countries.

Paper long abstract:

This paper investigates how macroeconomic demand-side policies can act in support of structural transformation in low-income countries. With the noticeable exception of export-demand, demand-side conditions necessary to sustain profitable commodity production have not been the explicit focus of research on industrial development and policy. This paper argues that the question how domestic markets form and under which conditions demand for commodity production remains or becomes expansionary is of particular relevance for late-industrialisers given reconfigurations of global export markets. While aggregate export earnings of many developing economies increased as a result of the commodity price boom between 2000 and 2015, export markets served less and less as outlets for manufacturing products. Asset-driven wealth accumulation (financialisation) in developed economies crowds out long-term productive investment and tends to worsen the distribution of income and wealth thereby depressing consumer demand. What is more, intense price and wage competition between developing countries for the same export markets has resulted in declining terms of trade for low value-added manufacturing products. Against this global economic context tending towards systemic deficient demand, the mobilisation of domestic sources of demand for manufacturing outlets becomes a key challenge of late-industrialisation. This paper explores demand-side dynamics relevant for manufacturing sector growth, stressing that supporting the growth of domestic markets is among other things a function of income distribution and government spending.