25-31 October 2013 #678

Fast and furious fall

Dani Rodrik

Most of today’s advanced economies became what they are by travelling the well-worn path of industrialisation.

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 organisation.

The labour movement led to mass politics and ultimately to political democracy. Over time, manufacturing ceded its place to services, rich economies went through a cycle of industrialisation followed by deindustrialisation. Harvard University’s Robert Lawrence argues that deindustrialisation predates the recent wave of economic globalisation. Only a few developing countries, typically in East Asia, have been able to emulate this pattern. Thanks to export markets, South Korea industrialised exceptionally rapidly, undergoing in three decades a transformation that took a century or longer in the early industrialisers.

But the developing world’s pattern of industrialisation has been different. Not only has the process been slow, but deindustrialisation 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 15per cent. Since the late 1980’s, Brazil has begun to deindustrialise, 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 meagre 13 per cent in 2002 and has since trended down.

One obvious culprit may be globalisation and economic openness, which have made it diffi cult for countries like Brazil and India to compete with East Asia’s manufacturing superstars. But even East Asian countries are subject to early-onset deindustrialisation.

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 per cent 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 fi nd 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 industrialisation attained by the early industrialisers, such as Britain and Germany.

An immediate consequence is that developing countries are turning into service economies at substantially lower levels of income. Manufacturing has begun to shrink while per capita incomes have been a fraction of that level: Brazil’s deindustrialisation began at $5,000, China’s at $3,000, and India’s at $2,000.

On the economic front, it is clear that early deindustrialisation impedes growth and delays convergence with the advanced economies. Manufacturing is an ‘escalator industry’: labour 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 industrialisation. Less room for industrialisation 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 byproducts of sustained industrialisation: an organised labour movement, disciplined political parties, and political competition organised around a right-left axis.

Given premature deindustrialisation, today’s developing countries will have to travel different, as yet unknown, and possibly bumpier paths to democracy and good governance.

Dani Rodrik is Professor of SocialScience at the Institute for Advanced Study, Princeton.


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