Harvard: “rapidly growing countries are those with large manufacturing sectors”
Posted by Bert Maes on June 4, 2010
Gustavo Lopez (http://twitter.com/tuolden) asked me two weeks ago if I “have any stats (hard numbers) on what role manufacturing plays on successful economies”. I had to tell him that I haven’t… until today.
I just found a study with lots of references from Dani Rodrik, a Harvard professor with unconventional thoughts on economic development and globalization, showing convincingly that historically rapid growth is associated first and foremost with the expansion of industrial manufacturing activities of the exportable kind.
He is coming up with empirical evidence that places manufacturing development in the driving seat of economic growth and development. “Industrial upgrading is a leading indicator of economic performance,” Dani Rodrik says.
An example: compare East Asia with Latin America.
- In 1965, the manufacturing industries of the two regions were of roughly similar size, accounting for around 25% of GDP.
- By 1980, manufacturing’s share had risen to almost 35% of GDP in East Asia, while it remained still slightly above 25% in Latin America—a difference of 10% of GDP.
- And since the late 1980s, manufacturing has experienced a precipitous decline in Latin America, falling to a low of 15% by 2004. Probably the major reason for failure is that the continent got economically liberalized too soon. These countries often still remain poor because they are not producing the kind of goods that will carry them towards riches. Their manufacturing base didn’t have the chance or incentives to reach a sufficient momentum.
- At the other side of the world, the broader manufacturing base that East Asian countries were able to build—and maintain—is an important structural difference with all others.
Of course Asian countries reformed their economies using unconventional practices as protectionism, direct inducements, export subsidies, preferential loans, huge training programs, special economic zones, competitive real exchange rates, etc. But… there might be important costs to be paid of such activities in terms of foregone growth over the longer term (here I give you a hint). But we will see about that.
Anyhow, Dani actually states literally that “rapidly growing countries are those with large manufacturing sectors.” Manufacturing is the engine of economic growth. Growth take-offs and accelerations are linked to the performance of manufacturing. Up-breaks are associated with increased manufacturing employment, while down-breaks witnessed declines in manufacturing employment.
A country with a broad-based manufacturing sector is more likely to take advantage of new opportunities than one which has specialized in a few primary-based products. The manufacturing field is far denser and flexible than the natural resources, garments or primary agricultural product sectors. Manufacturers can easily shift from producing A to also producing B, a product that is close by, and vice versa.
As such, manufacturers help the economy tremendously not just by pulling resources into higher productivity activities, but also by making future structural changes and spillovers easier, as key to economic growth overall.
As always… under certain conditions:
Key is a quicker and more creative productive diversification over an increasing range of manufactured goods into more sophisticated, technically-demanding activities. China has been a master in this: absorbing technology from abroad, develop them further and diversify its exports, starting with low unit-value goods to learn and experiment, to eventually get a foothold in the goods that the richer countries produce.
- Learn how to do new things, new economic activities, not to focus on what one already does well. That is the issue with the current defensive policy if bailouts when it is not linked with durable results, fixing structural issues and real added value, focused on innovation and modernization.
- Manufacturing needs a kick off by entrepreneurs (and sometimes the state) who decide to undertake the investments needed to get an industry going.
- But they depend on the government to create the basic conditions of an attractive country: financial stability, a smart labor market, taxation policy, a modernized health- and pension policy, higher investment in R&D, a policy that improves private innovation and spillovers, agencies that serve as one-stop shops for all of the necessary permits and regulatory approvals, etc.
- These entrepreneurs also look for government coordination in facilitating the development of economic clusters in which various complementary companies, educational establishments, governments, entrepreneurs and financers work together practically and share know how and resources. That is the true source of innovation!
- But… how are we supposed to innovate when we are turning out lawyers and accountants while Japan, China and India are graduating engineers? Exactly that is the weakness of any manufacturing system in the world: supply of human resources and brain power. You might have got the right ideas, you have lots of money, but without the right people that work hard, that take initiatives and that have enjoyed top quality high-tech manufacturing education, you will not make it. A strong economy is routed in a strong educational system.
A important concluding remark, however, is that the ideal manufacturing policy doesn’t exist, there is no magic formula or simplistic stories, as truth has many aspects and facets. The Chinese view is not necessarily bad. I believe that every great ideal has its counterpart that is as great to achieve.
“Fording a river by feeling for the stones with the feet”, is the only solution philosopher Isaiah Berlin said; being modest and persistent, experimenting, “feeling in the dark what is comfortable, honest and just determines your next step.”