Ha-Joon Chang: why we need to pay more attention to production

Chang EconomicsUsersGuideMore from Ha-Joon Chang’s Economics: The User’s Guide, this time on production and its relative neglect by neoclassical economics. Despite the rise of the so-called knowledge economy, manufacturing and industry more generally remain vital to the development and evolution of our society, and a key driver of the economy.

Chang has written extensively on industrial policies, making the case for their role in promoting economic progress, both in the poorest and the richest countries. Here he is on p.273-275:

“Production has been seriously neglected in the mainstream of economics, which is dominated by the Neoclassical school. For most economists, economics ends at the factory gate (or increasingly the entrance of an office block), so to speak. The production process is treated as a predictable process, pre-determined by a ‘production function’, clearly specifying the amounts of capital and labour that need to be combined in order to produce a particular product.

Insofar as there is interest in production, it is at the most aggregate level – that of the growth of the size of the economy. The most famous refrain along this line, coming from the debate on US competitiveness in the 1980s, is that it does not matter whether a country produces potato chips or micro-chips. There is little recognition that different types of economic activity may bring different outcomes –  not just in terms of how much they produce but more importantly in how they effect the development of the country’s ability to produce, or productive capabilities. And in terms of the latter effect, the importance of the manufacturing sector cannot be over-emphasized, as it has been the main source of new technological and organizational capabilities over the last two centuries.

Unfortunately, with the rise of the discourse of post-industrial society in the realm of ideas and the increasing dominance of the financial sector in the real world, indifference to manufacturing has positively turned into contempt. Manufacturing, it is often argued, is, in the new ‘knowledge economy’, a low-grade activity that only low-wage developing countries do.

But factories are where the modern world has been made, so to speak, and will keep being remade. Moreover, even in our supposed post-industrial world, services, the supposed new economic engine, cannot thrive without a vibrant manufacturing sector. The fact that Switzerland and Singapore, which many people consider to be the ultimate examples of successful service-led prosperity, are actually two of the three most industrialized countries in the world (together with Japan) is a testimony to this.

Contrary to conventional wisdom, development of productive capabilities, especially in the manufacturing sector, is crucial if we are to deal with the greatest challenge of our time – climate change. In addition to changing their consumption patterns, the rich countries need to further develop their productive capabilities in the area of green technologies. Even just to cope with the adverse consequences of climate change, developing countries need to further develop technological and organizational capabilities, many of which can only be acquired through industrialization.”

How Nations Learn – industrial policy and political economy

HowNationsLearnLast week I finished some lockdown reading, following my perennial interest in industrial policy and how it impacts development. This time it was the edited 2019 volume How Nations Learn, subtitled Technological Learning, Industrial Policy and Catch-Up.

HNL explores industrial policy in the context of ‘learning’ by governments and firms in ways which can accelerate industrial growth and development. That is, learning by governments in the process of policy making for development and learning by firms in the form of using and adapting already existing technologies to drive productivity growth in the catch-up process.

It is fair to say that most of the chapter authors hold to the idea that industrialisation and the growth of the manufacturing sector in late (relative to today’s advanced countries) developers is a primary driver of learning and of development. In this vein development is seen as more than periods of growth, but as an economic transformation. It is this continuous transformation in economic structure which makes long term growth and broad increases in living standards possible. Continue reading

To imitate or innovate? Firm behaviour and economic performance

innovative-manufacturing-headerSuccessful developing countries that have made the transition to advanced country status are relatively few in number. Those that have ‘made it’ in the wake of already rich countries have tended to adopt polices which encourage firms and sectors to ‘catch up’ over a sustained period.

When economies are far from the technological frontier they can achieve more when firms learn to use and adapt already existing technology rather than innovating themselves. Historically this has taken place in countries from the US and Germany to South Korea and Taiwan. One would expect firms to imitate technology more at an earlier stage of development, assuming that there are economies, sectors and firms ahead of them and closer to or at the frontier, while as they approach the frontier, innovation should become more important.

A recent article in the journal Industrial and Corporate Change looks into this process at the firm level. Ching T. Liao explores the differences between those firms that imitate others and those that innovate, and the effect this has on productivity. Continue reading

Industrial policy and development – some neglected themes

Production_LineThere has been a resurgence of interest in the theory and practice of industrial policy in recent years. To many, the financial crisis of 2008 exposed a general failure of the ideology, if not the practice, of a minimal state. Although the interventions that resulted were necessarily imperfect, they reawakened among more mainstream economists and other social scientists ideas that had for some time been confined to the heterodox margins of academia, at least in economics.

Meanwhile, the experiences of economies in East Asia, such as Japan, South Korea, Taiwan and Singapore, which all experienced significant periods of rapid catch-up growth to advanced country status, revealed that, if one cared to look closely enough, industrial policy had never really gone away.

Moving to the present day, policy-makers all over the world have engaged in unprecedented intervention to try and protect parts of the economy during the Covid-19 pandemic and subsequent widespread lockdown. While these are more general than traditional industrial policies, those economists more sympathetic to state intervention are making the case that economies should learn some lessons from the current crisis, such as that there is very often a need for the state to work with the private sector to tackle public ‘missions’ at the national and international levels. Continue reading

The Promise – and Pitfalls – of State-led Development in Resource-rich Countries: Resource Nationalism in Latin America and Beyond — Developing Economics

The eclipse of neoliberalism in 2000s coincided with the so-called commodity ‘super cycle’ that lasted between 2002 and 2012. In search of a new model, resource-rich states began to articulate resource nationalism as a development strategy. While ownership and control of minerals and hydrocarbons are intricately tied to claims of state sovereignty and exercise of […]

via The Promise – and Pitfalls – of State-led Development in Resource-rich Countries: Resource Nationalism in Latin America and Beyond — Developing Economics

Development as transformation

DSC00236The quote below is about the nature of the development process, at least as it used to be understood. It is taken from an article in the March issue of the journal Development and Change, which provides a forum for the interdisciplinary discussion of current issues of development.

Here, development is seen as a process of transformation and the achievement of greater human well-being across a population, rather than simply poverty reduction by itself. Historically, the latter actually seems to have been achieved and sustained through socioeconomic change rather than narrow targets aiming just to reduce poverty.

This idea also has implications for applying notions of development to richer countries which, despite them having already made the transition to capitalism, are still undergoing a process of transformation, and are therefore in some ways still ‘developing’ socially and economically.

“Inherently multi-dimensional, before the 1980s and the ascendance of neoliberalism, development was understood as encompassing social and economic transformation. Inherent in the idea of development was a project of industrialization (and associated structural transformation of an economy), urbanization, transformations of social institutions and social relations, and improvements in human well-being…accumulation in the ‘modern sector’ allows for it to be taxed for the financing of education, health care and a range of public goods that enhance people’s well-being. Development goes beyond a quantitative increase in aggregate output, as important as that may be; its meaningfulness is to be found in the qualitative improvement in people’s well-being and how command over resources translates in to qualities of ‘doings’ and ‘beings’…[T]hese concerns about the ends of development are captured in the slogan of ‘a better life for all’. This was understood as applying to the full range of people within a territory: the expansion of opportunities and enhancement of quality of living. Development was not simply concerned with the relief of poverty. In the development process ‘structural and institutional factors were assigned a key role in the development process. In the initial phase of the field, the state was also assigned a large role in promoting development almost as a historical imperative’.

Jimi O. Adesina