A recent article by Trinh Nguyen of the Carnegie Endowment for International Peace (which can be accessed for free here) describes Vietnam’s recent development success story, its lessons for other late-developers and its prospects for the near future. According to the author, this success has been based on a rapid growth in manufacturing exports, much of it from foreign invested firms. This is in turn down to a liberal approach to international trade and investment, incentives for foreign firms to invest, including the provision of “industrial parks, infrastructure building, and tax breaks”, and more widespread “improvements in its electric system, national highways, and air and sea ports”. Continue reading
Many development economists in the heterodox or non-mainstream tradition argue that the particular kinds of goods and services produced by an economy and the way this structure of production evolves is a key determinant of developmental success. Leaving this evolution to the ‘free market’ is unlikely to lead to rapid and sustainable growth and transformation. It should therefore be a target of industrial policy, although the form this takes will necessarily vary between different country contexts.
The May issue of the Cambridge Journal of Economics carries an interesting article on the economic development of Brazil in recent decades (1990-2016) as a case of what the authors call ‘regressive specialisation’. That is, “both production and export structures are strongly oriented to goods of low technological sophistication and low income elasticity of demand”.
This has led to a “falling-behind trajectory” so that GDP growth is slow relative to the richest countries and the economy fails to catch-up over a sustained period in terms of GDP per capita. This carries negative implications for efforts to reduce poverty and inequality and raise living standards for the majority of the population. Continue reading
The insightful quote below distinguishes the structural approach to economic growth from the mainstream one. Although both allow for a transformation in the structure of the economy as part of the growth process, the former leads to a stronger argument for evolving patterns of state intervention to sustain this process.
This distinction in term of policy implications probably goes some way to explaining the biases on either side of the debate, as well as some of the hypocrisy of rich country policymakers, who have often used mainstream arguments to justify non-intervention in poor countries while continuing to employ a range of industrial and technology policies at home. For me the historical record of development, in particular the limited number of countries which have successfully “caught up” with the richest, favours the structuralist approach.
“There are two views regarding the role and implication of production structure for growth. The conventional narrative is that structural change in the patterns of production, expressed numerically in terms of variations in sectoral contributions to output, employment, investment, and patterns of specialization, is just a side effect of growth. As the economy expands and markets enlarge, new demands require new production processes that come into being by attracting inputs such as labor and capital. The structural configuration adjusts to incorporate novel activities or to enlarge existing ones. Growing economies almost always move from primary to secondary and further towards tertiary sectors.
The alternative view is that these patterns of structural change are not just a byproduct of growth but rather are among the prime movers. This has inherent policy implications. Because production structure must change if growth and development are to proceed, conscious choice of policies that will drive the transformation of the system toward certain sectors is essential for long-term economic expansion.
This insight is ignored by most contemporary economic theory. But it arises from observation and analysis of economic performance of developing countries around the world in the past and present. Economists who have been trained within the structuralist tradition share this perspective, holding that development requires transformation or the “ability of an economy to constantly generate new dynamic activities”, particularly those characterized by higher productivity and increasing returns to scale of production as reflected in decreasing costs per unit of output. This logic underlies Kaldor’s growth model…
One key aspect of growth in the poorest countries is that agriculture dominates the economy. Therefore, agricultural productivity growth is crucial, as in sub-Saharan Africa now. But productivity increases in the sector are significantly constrained by lack of access to modern technology, natural factors such as low fertility land, and mostly by its intrinsic inability to offer increasing returns. Hence, per capita output growth at 2 percent requires even higher growth rates of labor productivity in leading sectors (assuming that the ratio of employed labor to the population is fairly stable).
At higher income levels, the leading sector(s) must offer increasing returns and opportunities for robust output growth in response to demand. As demonstrated in…a raft of historical studies, a clear pattern of structural change emerges from the data for economies (today mostly in East and South Asia) which sustain rapid growth. Historically, manufacturing has almost always served as the engine for productivity growth but not for job creation (India with its information processing boom is an intriguing recent exception). For a sector or the entire economy to generate employment, its per capita growth rate of demand has to exceed its productivity growth. Net job creation usually takes place in services.
…[P]atterns of international trade also shift as economies grow richer. Their exports become more technically sophisticated and shift from raw materials toward manufactured products, especially in recent decades with the explosion of assembly manufacturing around the world. Import composition also shifts in response to overall changes in the basic structure of the economy. Indeed, those changes in the pattern of specialization in international trade are an essential part of the transformation of production structures, a fact that has been highlighted by the role that the terms “import substitution” and “export diversification” have played in development debates. Concerning these changes, one key question is whether an economy can pass through the raw material and assembly export stages to sell products abroad that have a high value-added content at home.”
José Antonio Ocampo, Codrina Rada, and Lance Taylor (2009), Growth and Policy in Developing Countries: A Structuralist Approach, New York: Columbia University Press, p.8-10.
What are the UK economy’s prospects for recovery following the coronavirus pandemic? A recent paper from the John Mills Institute for Prosperity (summary here) argues that in order to recover effectively the UK needs to sustain much faster growth in investment, output and productivity. It can only really do this by rebuilding its manufacturing base through a strategy of sustaining a weaker exchange rate and through increased government support for lending to industry.
Mills is an entrepreneur and long-time supporter of the Labour Party. He also campaigned for the UK to leave the EU. For some years now, he has led the call for UK government policy to pay much more attention to supporting reindustrialisation. Periods of exchange rate overvaluation over many years have played a major role in hampering the UK’s manufacturing exports and have left the country with a much reduced industrial base.
A much larger industrial base with an improved ability to export onto world markets would, he argues, help to eliminate the UK’s unsustainable current account deficit and thereby make possible a reduction in the country’s accumulation of private and public debt without further attempts at austerity, which have only weakened overall economic growth and reduced the level of provision of public goods and services.
It would also increase the capacity for more rapid growth in output and productivity, in a way that can rebalance the UK’s grossly unequal regions by restoring prosperity beyond London and the South East. As Mills puts it, a more competitive light manufacturing sector has greater potential for increasing productivity via increased investment in new capacity than much of the services sector. In short, the UK needs a much more ambitious industrial strategy.
Mills has made these arguments for some years, but this most recent paper adds the impact of the pandemic and the question of economic recovery from the crisis associated with coronavirus. If the UK is to sustain the necessary increased funding for public health, social care and an ageing population, decarbonisation and climate change mitigation, and education and training to support economic restructuring, the economy needs to have a much improved, and by implication a much more balanced, performance in terms of growth in output and productivity. He makes a strong case that this can only be done via concerted efforts to reindustrialise.
More 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.”
A video interview below with the always original Michael Hudson on the Real News Network (transcript here). He discusses the impact of Trump’s tariffs, the failure to bring back manufacturing production to the US, and how the President is managing to isolate America and unite much of the rest of the world.
An excerpt from a chapter by my old tutor at SOAS, Mushtaq Khan, who has written extensively on industrial policy in a range of late-industrialising countries, analysing case-studies with a range of outcomes in terms of development, successful or otherwise. Here he considers both the differences and the similarities with an industrial policy in the UK, which needs to innovate, rather than simply emulate already existing technologies and catch-up with the richest countries:
“For an advanced country like the UK, industrial policy clearly has to support both innovation and the development of competitive production capabilities that can convert ideas and knowledge into marketable products. There is no question therefore that industrial policy must have a focus on supporting innovation and the development of new knowledge. This involves investment in public bodies such as universities as well as in networks linking public and private players engaged in innovation. Countries such as the UK still have a lead over most emerging Asian countries in the organization of innovation, though there may be particular strategies of financing or organizing innovation that may be worth looking at. However, the second plank of any effective industrial policy has to be the development of competitive manufacturing capabilities so that good ideas and technologies can be converted into competitive products. Here the UK can learn a lot about the types of problems countries can face when they try to acquire (or, in the case of the UK, re-acquire) firm-level competitive capabilities. Britain’s gradual loss of manufacturing competitiveness after the Second World War was exacerbated after the 1980s in the context of rapid de-industrialization. The country lost much of the tacit knowledge embedded in the organizational routines of manufacturing firms, and as a result fell even further behind in terms of its capacity to regain a broad base of competitive firms. The experience of Asian industrial policy shows that the achievement of competitiveness in new sectors and technologies can be a difficult problem to crack. The two planks of industrial policy are closely connected because without a broad base of firms that can organize production competitively, a successful innovation strategy will simply result in the offshoring of manufacturing somewhere else.”
Mushtaq Khan (2015), The Role of Industrial Policy- Lessons from Asia, in David Bailey, Keith Cowling, and Philip R. Tomlinson, New Perspectives on Industrial Policy for a Modern Britain, Oxford University Press, p.80.
This post summarises some of the ideas in an interesting article from the May issue of the Cambridge Journal of Economics. The piece shows that an analysis of ‘complex networks’ using ‘big data’ lends support to structuralist arguments about growth and development. I briefly discuss the implications for industrial policies intended to promote the ‘catching up’ of poor countries with richer ones.
The Cambridge Journal of Economics (CJE) is an influential heterodox journal published six times a year. It includes as one of its patrons nobel prize-winner Amartya Sen and as associate editors Ha-Joon Chang, Mushtaq Khan and Anwar Shaikh, whose ideas I have sometimes discussed in previous posts.
As CJE articles are usually behind a paywall, I thought it would be helpful to summarise and comment on one or two when they are interesting and relevant to this blog. Continue reading
The BBC reported on Tuesday that government borrowing for the 2017-18 financial year fell to its lowest level in eleven years, at £42.6bn. This was lower than forecast and represents 2.1% of GDP. However much of this reduction is accounted for by reduced spending rather than increased tax revenue. This is because economic growth remains sluggish, at 0.1% in the first quarter of 2018 according to the latest figures, and is failing to generate buoyant tax receipts.
So austerity continues, while growth is faltering. The Chancellor, Philip Hammond, claimed today that “our economy is strong and we have made significant progress.” This is surely breathtaking arrogance. The deficit may be down, but the economy is struggling.
According to economist and entrepreneur John Mills, the UK economy could be doing much better and significant imbalances remain, which are constraining growth and improvements in productivity and wages. Continue reading
From Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism:
“We may be living in a post-industrial society in the sense that most of us work in shops and offices rather than in factories. But we have not entered a post-industrial stage of development in the sense that industry has become unimportant. Most (although not all) of the shrinkage in the share of manufacturing in total output is not due to the fall in the absolute quantity of manufactured goods produced but due to the fall in their prices relative to those for services, which is caused by their faster growth in productivity (output per unit of input). Now, even though de-industrialization is mainly due to this differential productivity growth across sectors, and thus may not be something negative in itself, it has negative consequences for economy-wide productivity growth and for the balance of payments, which cannot be ignored. As for the idea that developing countries can largely skip industrialization and enter the post-industrial phase directly, it is a fantasy. Their limited scope for productivity growth makes services a poor engine of growth. The low tradability of services means that a more service-based economy will have a lower ability to export. Lower export earnings means a weaker ability to buy advanced technologies from abroad, which in turn leads to slower growth. (p.88-9)
…[E]ven the rich countries have not become unequivocally post-industrial. While most people in those countries do not work in factories any more, the manufacturing sector’s importance in their production systems has not fallen very much, once we take in to account the relative price effects. But even if de-industrialization is not necessarily a symptom of industrial decline (although it often is), it has negative effects for long-term productivity growth and the balance of payments, both of which need reckoning. The myth that we now live in a post-industrial age has made many governments ignore the negative consequences of de-industrialization.
As for the developing countries, it is a fantasy to think that they can skip industrialization and build prosperity on the basis of service industries. Most services have slow productivity growth and most of those services that have high productivity growth are services that cannot be developed without a strong manufacturing sector. Low tradability of services means that a developing country specializing in services will face a bigger balance of payments problem, which for a developing country means a reduction in its ability to upgrade its economy. Post-industrial fantasies are bad enough for the rich countries, but they are positively dangerous for developing countries.” (p.101)