Quote of the week: five reasons why manufacturing matters for growth and development

“The manufacturing sector plays a key role in rapid growth and development for five reasons. First, manufacturing growth fosters diversification, backward and forward linkages, agglomeration economies and dynamic economies of scale through learning-by-doing. Thus, manufacturing tends to ‘pull’ the other economic sectors, even when they are initially larger. Second, manufacturing offers greater scope than agriculture or services for productivity growth through the development and adaptation of new technologies. These innovations are subsequently diffused across the economy through the spread of new skills and production methods and the sale of manufactured inputs. Third, manufacturing productivity tends to rise with the rate of growth of manufacturing output, potentially creating virtuous circles of growth across the economy. Fourth, manufacturing can more easily foster export diversification and the production of import substitutes, which can alleviate the balance of payments constraint. Fifth, manufacturing sector wages tend to be relatively high, which can support demand growth and improvements in living standards. Hence, intersectoral shifts of labour and other resources towards manufacturing can help to raise productivity and growth rates in developing economies; conversely, economic structures narrowly determined by static comparative advantages, as is envisaged by mainstream economics, are sub-optimal for long-term growth and for global convergence.”

Alfredo Saad-Filho (2021), The ‘Rise of the South’ and the Troubles of Global Convergence, Chapter 3 in Growth and Change in Neoliberal Capitalism, Chicago: Haymarket Books, p.79.

Chinese industrial policy: learning to succeed

Shanghai_-_Pudong_-_LujiazuiIndustrial policy has played a major role in enabling the Chinese ‘economic miracle’ in recent decades. This kind of catch-up development requires institutional and policy incentives for firms to learn to acquire and use existing technologies. China seems to have had success in this area, but its extent and future prospects, particularly in relation to its large state-owned enterprises, remain subject to debate. It is widely recognised that reforms are now needed, but at the interface between industrial and macro policy, the state is finding it hard to achieve what is necessary economically.

This week’s Economist magazine features a useful article on China in its Business section. It argues that foreign multinational companies (MNCs) with operations in China are finding it harder to compete with domestic firms that are becoming increasingly successful in supplying their home market. Many of the latter have been closing the technological gap with their foreign-owned rivals. While the article does not consider the implications of this for assessing the success of China’s industrial policy, the evidence is provocative. This post will attempt to outline the theory of industrial policy for ‘catch-up’ development and its application in China in recent decades since the period of ‘reform’ and ‘opening up’ began in the late 1970s. Continue reading

Too much industrial policy? The case of China

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China has reached a stage in its development where it needs to reform its growth model and rebalance its economy. But it is finding it hard to do so. Its policy framework remains too focused on expanding industrial capacity and insufficiently on rebalancing domestic demand away from excessive investment and towards consumption. In this sense China has ‘too much’ industrial policy. Sufficient incentives for progressive reform in China and other ‘imbalanced’ economies may ultimately require a new kind of global trade and financial system.

Many heterodox economists with an interest in development have made the case for industrial policy. Part of the reason for this is that all of today’s advanced economies have used it in various forms in order to accelerate growth and structural transformation. So-called late industrialisers, such as South Korea and Taiwan, have used it as part of their strategy to catch up with the richest countries. There have undoubtedly been industrial policy failures, with policies used to support fledgling industrial sectors becoming entrenched and firms failing to ‘grow up’ and become internationally competitive. However, these cases should not lead us to reject such policies wholesale. Rather we should learn from both the success stories and the failures in order to do the policies better and get state intervention right. Continue reading

Move fast and break things? What’s missing from the UK’s ‘growth plan’

The UK has a new Prime Minister and cabinet, from a party that has been in power for twelve years. The Conservatives have presided over austerity and Brexit, as well as a pandemic and now war in Europe. Many economists argue that the first two have sapped economic growth since the Great Recession of 2008-09, even before the disruption of the latter two factors. Productivity growth has been feeble during those years, breaking sharply with the previous long run trend. Other countries have experienced productivity slowdowns, but the UK’s has been particularly poor. The ‘new’ government and its leader Liz Truss have promised to ‘grow the economy’ faster via a mix of tax cuts and deregulation. Rather than acknowledging the Conservatives’ role in holding the country back, she has blamed some made-up enemies: the ‘anti-growth coalition’, which in practice seems to mean anyone who opposes her policies, and a focus of previous governments on redistribution rather than growth itself. As a self-styled controversialist, she has claimed that disruptive change is needed in order to restore the country’s economic fortunes.

All this seems to imply a future of regressive growth at all costs, whether socially, environmentally or even, paradoxically, economically. The government may not see it this way, and the full extent of its plan has yet to be laid out. But as an antidote to what is likely to prove to be a fantasy, more or less libertarian, set of economic policies, I thought I would lay out some areas of progressive concern over the ‘growth plan’, by taking a constructive approach rather than a purely critical one. The following sections are not meant to be in order of importance. In fact I think that all these areas are important to securing a more widely-shared prosperity, not least for the UK, as well as elsewhere. Continue reading

Marx, Keynes and the limits to wage increases

“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage  will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”

In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’. Continue reading

Mushtaq Khan: tackling corruption in developing countries

Mushtaq Khan is a professor of economics at SOAS, and has dedicated much of his career to researching ways of tackling corruption in developing countries as part of a successful long term development strategy. Corruption itself need not be a barrier to development. Historically, the effective checks and balances which counter it have tended to emerge with successful development rather than preceding the the process. Khan argues that, rather than corruption being necessarily ‘cultural’ or innate to individuals in a poor society, it is more often contextual, depending on economic structure and power relations. It can therefore be changed through policies which incentivise productivity growth and the expansion of the formal sector in developing countries, typically on a small scale which is more feasible to begin with, but ultimately on a larger scale by promoting broader socioeconomic development.

This video features Professor Khan talking about all of this. He covers some fascinating and important ideas. The first ten minutes cover the main points if that is what you’re after, but watching the whole video is more rewarding, particularly for those of you interested in this oft-neglected but vital area of development studies.

The productiveness of the welfare state

While the modern welfare state is generally supported by the political left, it is sometimes merely tolerated by the right. Simplistic critiques which decry “workshy” benefit recipients funded by the tax revenues drawn from “hard-working families” can be typical. A variety of schools of economic thought have historically deployed arguments that social spending is unproductive, a drain on the public purse, and a burden on the private, market-based sectors of the economy. But there are alternatives to this line of thinking, which argue that a well designed welfare state can not only reduce poverty, but also enhance the productivity of the economy and society as a whole. There is thus a potential win-win for progressive social policy and public spending more broadly. I consider these ideas below. Continue reading

Is it time to hike the minimum wage?

Contando_Dinheiro_(8228640)The Progressive Economy Forum (PEF) recently published a report recommending that the UK’s minimum wage, now called the National Living Wage, should be substantially raised in order to help tackle inequality and poverty. They argue that this should form part of a broad package of policies to encourage a more egalitarian and dynamic economy and society, with higher wages and productivity. The report, by James Meadway and Howard Reed, can be downloaded here. It focuses on the UK case, but has lessons for progressive policymaking in any capitalist economy.

The background

As elsewhere, the UK currently faces a serious cost of living crisis in which real wages are now falling, and in fact have on average barely risen for more than ten years, creating a ‘lost decade’ for millions. Calls for wages to keep up with inflation have been criticised by the government and the Bank of England as threatening a ‘wage-price spiral’, in which wages and prices follow each other upwards, embedding high rates of inflation and ultimately creating little real terms wage gains for workers. That has not happened yet. At the moment, average wage rises are falling well behind price rises. This is in stark contrast to the 1970s, when many firms faced a profit squeeze as wages at times rose faster than prices. Today many large firms are experiencing soaring profits. The PEF report therefore argues that there is a need for policy to shift the balance of power in the labour market away from capital and back towards labour, by increasing trade union membership and the coverage of collective bargaining. Continue reading

Robert Reich destroys minimum wage myths

In this video, Robert Reich, former labour secretary under Bill Clinton, and founder of Inequality Media, destroys a number of the myths surrounding the minimum wage, which in the US has not risen since 2009. In particular, he challenges the notions that raising it will kill jobs, damage business, raise inflation and even benefit the wrong people. In fact, it is likely to raise productivity, reduce worker turnover and training costs, boost demand by increasing consumer spending and have a negligible impact on the inflation rate. It will also reduce both racial inequality and the need for welfare spending to support those on the lowest incomes. As he says, if business owners rely on paying workers ‘starvation wages’ in order to survive, they should not be in business!

Misleading the public on tax: burdens, incentives, well-being and society

taxThis post was inspired by the platitudes on tax currently making the headlines in the UK during the current leadership contest for the Conservative party, the winner of which will become Prime Minister. But the issues apply far more widely, to any country with a functioning economy and tax system!

Following the resignation of the UK’s Conservative Prime Minister, Boris Johnson, around a dozen candidates are expected to declare themselves in the running for leadership of the party and the next premier. Many have already stated their intention to do so. They have started by setting out some policy pledges. They have all promised to cut taxes, within varied time frames, from day one to when circumstances allow, though the majority seem to want to go ahead swiftly.

In the midst of global economic, social, and geopolitical crises, perhaps circumstances will not allow for some time. But whatever happens, the competition to be the next UK Prime Minister looks to be stimulating an unhealthy mix among the candidates of fantasy and lies with regards to prospective policymaking.

Announcing the wish to cut taxes may make some headlines (and that is probably the point), but so far such statements are disappointingly devoid of economic, social or fiscal context. The pressure for politicians to overpromise, ultimately leading them to underdeliver, may be difficult to avoid, but it keeps pouring fuel on the fire of cynicism with regards to the political class. It is helpful in this kind of situation to soberly contend with some of the misleading rhetoric and analysis regarding taxation, and the public spending which it funds, lest we forget amidst all the excitement regarding future cuts to the former. Continue reading