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Thursday, 6 September 2012

The Challenge of Manufacturing

Dani Rodrik on why it is more difficult now to emulate the East Asian tigers' rapid transformation from agrarian slow growing economies to rapid industrialized countries :
Successful long-term development therefore requires a two-pronged push. It requires an industrialization drive, accompanied by the steady accumulation of human capital and institutional capabilities to sustain services-driven growth once industrialization reaches its limits. Without the industrialization drive, economic takeoff becomes quite difficult. Without sustained investments in human capital and institution-building, growth is condemned to peter out.

But this time-tested recipe has become a lot less effective these days, owing to changes in manufacturing technologies and the global context. First, technological advances have rendered manufacturing much more skill- and capital-intensive than it was in the past, even at the low-quality end of the spectrum. As a result, the capacity of manufacturing to absorb labor has become much more limited. It will be impossible for the next generation of industrializing countries to move 25% or more of their workforce into manufacturing, as East Asian economies did.

Second, globalization in general, and the rise of China in particular, has greatly increased competition on world markets, making it difficult for newcomers to make space for themselves. Although Chinese labor is becoming more expensive, China remains a formidable competitor for any country contemplating entry into manufactures.

Moreover, rich countries are unlikely to be as permissive towards industrialization policies as they were in the past…. as rich countries struggle under the combined weight of high debt, low growth, unemployment, and inequality, they will apply greater pressure on developing nations to abide by World Trade Organization rules, which narrow the space for industrial subsidies.
Rodrik’s assessment is an excellent example of the value of proper dissection of international comparisons. Policies that have worked for one country in the past do not necessarily translate into instant policy success today. As for the remedy, he points to things we have always repeatedly suggested, “growth will need to rely to a much greater extent on sustained improvements in human capital, institutions, and governance”. I would add that under such an approach growth will be “slow and difficult” but it will be a welfare improving process. At present we have poor institutions, poor governance and poor growth.

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