Saturday, October 12, 2013

The Alleged "Perils" of "Premature De-Industrialisation"

Tyler Cowen on 11 October HERE reports (plus 32 comments HERE ) on an interesting paper by Dani Rodik, Professor of Social Science at the Institute for Advanced Study, Princeton, New Jersey) HERE 
The Perils of Premature De-Industrialisation”
“Most of today’s advanced economies became what they are by traveling the well-worn path of industrialization. A progression of manufacturing industries – textiles, steel, automobiles – emerged from the ashes of the traditional craft and guild systems, transforming agrarian societies into urban ones. Peasants became factory workers, a process that underpinned not only an unprecedented rise in economic productivity, but also a wholesale revolution in social and political organization. The labor movement led to mass politics, and ultimately to political democracy.
Over time, manufacturing ceded its place to services. In Britain, the birthplace of the Industrial Revolution, manufacturing’s share of employment peaked at around 45% before World War I and then fell to just above 30%, where it hovered until the early 1970’s, when it began a precipitous decline. Manufacturing now accounts for slightly less than 10% of the workforce.
All other rich economies have gone through a similar cycle of industrialization followed by deindustrialization. In the United States, manufacturing employed less than 3% of the labor force in the early nineteenth century. After reaching 25-27% in the middle third of the twentieth century, deindustrialization set in, with manufacturing absorbing less than 10% of the labor force in recent years.
In Sweden, employment in manufacturing peaked at 33% in the mid-1960’s, before falling to the low teens. Even in Germany, often regarded as the strongest manufacturing economy in the developed world, manufacturing employment peaked around 1970, at close to 40%, and has been steadily declining ever since. As Harvard University’s Robert Lawrence has argued, deindustrialization is common and predates the recent wave of economic globalization.
Only a few developing countries, typically in East Asia, have been able to emulate this pattern. Thanks to export markets, South Korea industrialized exceptionally rapidly. With manufacturing’s share of employment rising from the low single digits in the 1950’s to a high of 28% in 1989 (it has since fallen by ten percentage points), South Korea underwent in three decades a transformation that took a century or longer in the early industrializers.
But the developing world’s pattern of industrialization has been different. Not only has the process been slow, but deindustrialization has begun to set in much sooner.
Consider Brazil and India, two emerging economies that have done comparatively well in the last decade or so. In Brazil, manufacturing’s share of employment barely budged from 1950 to 1980, rising from 12% to 15%. Since the late 1980’s, Brazil has begun to deindustrialize, a process which recent growth has done little to stop or reverse. India presents an even more striking case: Manufacturing employment there peaked at a meager 13% in 2002, and has since trended down.
It is not clear why developing countries are deindustrializing so early in their growth trajectories. One obvious culprit may be globalization and economic openness, which have made it difficult for countries like Brazil and India to compete with East Asia’s manufacturing superstars. But global competition cannot be the main story. Indeed, what is striking is that even East Asian countries are subject to early-onset deindustrialization.
Consider China. In view of its status as the world’s manufacturing powerhouse, it is surprising to discover that manufacturing’s share of employment is not only low, but seems to have been declining for some time. While Chinese statistics are problematic, it appears that manufacturing employment peaked at around 15% in the mid-1990’s, generally remaining below that level since.
China is a very large country, of course, with much of its workforce still in rural areas. But most migrant workers now find jobs in services rather than in factories. Similarly, it is extremely unlikely that the new crop of manufacturing exporters, such as Vietnam and Cambodia, will ever reach the levels of industrialization attained by the early industrializers, such as Britain and Germany.
An immediate consequence is that developing countries are turning into service economies at substantially lower levels of income. When the US, Britain, Germany, and Sweden began to deindustrialize, their per capita incomes had reached $9,000-11,000 (at 1990 prices). In developing countries, by contrast, manufacturing has begun to shrink while per capita incomes have been a fraction of that level: Brazil’s deindustrialization began at $5,000, China’s at $3,000, and India’s at $2,000.
The economic, social, and political consequences of premature deindustrialization have yet to be analyzed in full. On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called “escalator industries”: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress in other sectors of the economy.
That is why rapid growth historically has always been associated with industrialization (except for a handful of small countries with large natural-resource endowments). Less room for industrialization will almost certainly mean fewer growth miracles in the future.
The social and political consequences are less fathomable, but could be equally momentous. Some of the building blocks of durable democracy have been by products of sustained industrialization: an organized labor movement, disciplined political parties, and political competition organized around a right-left axis.
The habits of compromise and moderation have grown out of a history of workplace struggles between labor and capital – struggles that played out largely on the manufacturing shop floor. Given premature deindustrialization, today’s developing countries will have to travel different, as yet unknown, and possibly bumpier paths to democracy and good governance.
[Read more HERE]
Thanks to Tyler Cowen’s extensive surveys of many Blog Sites (which alone makes his Blog worth bookmarking for picking up interesting materials otherwise missed), the post by Dani Rodick came to my attention.   I am so glad it did.
Having read Rodick’s post I am not sure for whom the “deindustrialization” trend is classed as a threat.  Is it the leading Western economies, including Japan, that are in peril, or are the Eastern and South American economies that should be shaking in their boots, or both sets together?
Whichever it is, or both, what on earth can anybody do about it?  I would suggest that against global phenomena on this scale, the scope for global remedies is extremely small, say, around the quantum leap scale, also usually expressed formally as epsilon, or in common parlance as next to nothing.
But there are some interesting observations from the history of economic thought that we can make.
Rodik refers to the “well-worn path of industrialization”, as if that “path” is the only possible path that all subsequent national economies must follow; surely an error of perception.  The path followed by Britain in the 18th century and beyond was rooted in the country’s history in the history of previous millennia. Many of the conditions that favoured a particular British route were shared or independently followed by many other countries but distinctly not followed by the majority of geographical regions of the Earth – some of which only recently formed into nation states - and definitely not followed in a few localised small regions of now existing countries (think of upper Amazonian and New Guinea highland areas).
The fact that the economic transformation happened first in England – and later Britain – without precedent elsewhere did not in itself set a universal standard that all others must follow. 
Moreover, Adam Smith got into a sort of muddle over such issues by being over-influenced by his own theoretical efforts to track a universal standard for economic development that was not even followed by Britain, nor any other economy since. In Wealth Of Nations he wrote:
According to the natural course of things…the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufacture, and last of all to foreign commerce” … “though this natural order of things must have taken place in some degree in every society, it has in all modern stated of Europe, it has been, in many respects, entirely inverted … [which] necessarily forced them in to this unnatural and retrograde order” (WN III.i.8-9: 380).
If the first modern market society evolved different forms of development, and all other countries have also followed their own routes to development within the new, innovative organizational forms, why on earth should it be remarkable or even worth remarks that countries, both those with considerable histories of contributions to innovations (China up to the 15th century) and those with experiences of industrializing using modern technologies (Japan, Taiwan, Singapore, India, and so on), which leapt over, as it were, the long slow slog through British-style 19th-century industrialisation to contemporary Hi-Tech manufacturing?
The many tens of thousands employed in individual plants, factories, coal mines, steel plants and shipyards, etc., of the world’s first industrial revolution in heavy industry, steam-driven transportation, and mass manufacturing of consumer goods (cars and electric generation) contributed to the large numbers of employees in the GDP statistics of the established ‘first movers’ in world economy compared to the newly industrialising economies in the rest of the world since the 1950s.
Not only is it evident that theirs is a distinctly improved experience, it should be unremarkable to an economist of the calibre of Dani Rodik.
Just as Adam Smith’s “natural order”, not even based on a sample of one, was a speculative thought too far and Dani Rodik’s “peril” of a too early “precipitous decline” is of the same order of error.
It is to no good end that Dani Rodik thinks that the new “industialising” economies are using a smaller proportion of their labour resources for GDP than Britain, the US and Europe did in the 19th-20th centuries compared to the newer manufacturing economies are using in the later-20th and 21st centuries.
The wholly ideological idea that they should stick to the same proportions as the first industrialising economies is woefully short-sighted. 
Old-style Stalinists of the 1930s-1960s imposed such an obsession for a similar model on their economies with less than awesome results.  As did many social democratic parties when it became evident that services were growing in proportion of GDP compared to declining proportions going to manufacturing. Nickolas Kaldor convinced a Labour Government that this was serious threat to the British economy and they adopted his “Selective Employment Tax” by imposing it on “service goods”.  It was quietly dropped eventually after it had damaged the economy and had no real effect on the declining proportion of manufacturing jobs in the UK. 
At the time, I regularly lectured on this subject to senior-officers in the Army about these trends, showing over several years the direction of sector shares in GDP and where they were inexorably going. Incidentally, as the UK manufacturing sector declined, imports of semi-manufactured products rose.  All through these transformations GDP was growing; per capita incomes were rising.  The mass grinding poverty of large proportions of the population gradually diminished.  Migration to the modern economies is all one-way.
I also recall more recently of a Vietnamese woman on being questioned by a Western journalist about her 14-hour working day that she worked six days a week in a new computer-board manufacturing plant near her home village. The Western Journalist considered this was a dreadful example of Western capitalist exploitation of the Vietnamese poor and he seemed to want her to receive US wage rates, so she boldly introduced him to the real world.  She told him of the real effect that the 14-hour days for light work in an air-conditioned computer factory: it was not exploitation in her circumstance because it was a significant improvement on her experience of grinding 18-hours, seven-day working in near-by farming fields, and it paid her a whole lot more, and more regularly, than in her previous working life. True, by US standards, her pay was still small and her hours were long, but in Vietnam in the 21st century, it was better paid than any financial rewards from the grinding uncertainties of heavy fieldwork to which she was condemned in before the arrival of the local factory.
I think some Western economists should get out more.


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