The Economist runs a discussion forum
titled The
Economist By Invitation. In this, they recently
setup a
discussion
about an
opinion piece by Dani Rodrik about the future of
manufacturing-led growth in emerging
markets. I wrote
a response there which is reproduced here.
The role of manufactures
I agree with a small element of Dani Rodrik's argument, but mostly
for different reasons. Rodrik says:
Except for a handful of small countries that benefited from natural-resource bonanzas, all of the successful economies of the last six decades owe their growth to rapid industrialization.
I have seen this kind of thinking among some policy makers in India
also: that industrialisation is somehow special and good when compared
with services. I would question this proposition, that I term `the
widget illusion'. What matters to a country is having sophisticated
firms that have a high marginal product of labour. We should not care
whether this happens in services or in manufacturing. If anything, the
opportunity to do it is perhaps better in services.
India is a good example of a country which embarked on its catchup
by connecting into globalisation late: from 1991 onwards. It was
probably the last country in the world to shed autarkic policies. This
has given a remarkable growth acceleration. Sustained growth of 7 per
cent is pretty good by world standards. These achievements have been
significantly driven by services production in India within global
supply chains (whether within production facilities owned by global
MNCs who are operating in India, or contracted-out by global MNCs to
Indian firms). If your null hypothesis was that industrialisation is
essential to growth, then you would not have predicted what happened
in India, where manufacturing was hobbled by an array of policy
mistakes.
This illustrates the limitations of manufacturing-focused thinking,
which seems
bit out of date in today's world economy where most output is
services. Agriculture and manufacturing have wilted away in the
consumption of the global representative agent: to succeed in the
world economy today requires prime attention upon services.
Rodrik says:
Consider India, which demonstrates the limitations of relying on
services rather than industry in the early stages of development. The
country has developed remarkable strengths in IT services, such as
software and call centers. But the bulk of the Indian labor force
lacks the skills and education to be absorbed into such sectors. In
East Asia, unskilled workers were put to work in urban factories,
making several times what they earned in the countryside. In India,
they remain on the land or move to petty services where their
productivity is not much higher.
As Rodrik points out, there are important gaps between the
skills of the great unwashed masses in India versus China,
where elementary technical training reached a larger mass of
humans. In addition, China did better on core economic policy choices
about (a) Removing protectionism; (b) Removing barriers to FDI; (c)
Building hard infrastructure; (d) Labour law and (e) Rationalising taxation.
What policy advice would flow from this? India should not have have
made these six mistakes in economic policy (low training for the
masses, protectionism, barriers to FDI, weak investments into
infrastructure, labour law and mistakes in tax policy). At the same
time, this does not recommend a bias in favour of
manufacturing. It is hard to discern a meaningful choice about
emphasising services versus manufacturing in Indian economic
policy. Participation in all global production is good. Governments
should remove all barriers that inhibit global integration whether in
goods or in services - e.g. the six mistakes in Indian policy sketched
above.
A paragraph earlier, Rodrik says:
To be sure, some modern service activities are capable of productivity convergence as well. But most high-productivity services require a wide array of skills and institutional capabilities that developing economies accumulate only gradually. A poor country can easily compete with Sweden in a wide range of manufactures; but it takes many decades, if not centuries, to catch up with Sweden's institutions.
I would point out the contradiction: "A poor country can easily
compete with Sweden in .. manufactures" but earlier it was asserted
that the gaps in Indian skills inhibited India's ability to compete
with Sweden in manufactures.
Doing things that push skills and institutional capabilities
I would go further to say that it is good to go after fields which
require a wide array of skills and institutional capabilities.
I am reminded of Ricardo Hausmann's `Good Cholesterol' argument
about financial globalisation as opposed to mere FDI. When a poor
country operates in an institutional vacuum, foreign investors are
uncomfortable, and the only thing that can happen is FDI. To obtain
financial flows, the country has to build institutions: laws,
regulators, property rights, and so on. This is a good thing! A
country that gets to FDI and gets stuck there should ponder what is
going wrong. In similar fashion, no country aspires to have low-wage
production; every country wants to understand the secret sauce through
which a part of the labour force can earn high wages by world
standards.
As a country rises out of poverty, it is essential to build up
skills and institutional capabilities. If policy makers hinder
services and/or favour manufacturing, there is a greater chance of
being stuck in low skills and low institutional capabilities. I am not
proposing industrial policy in favour of services. I am only proposing
the absence of industrial policy; we should avoid a `widget illusion'
and foster more global integration without trying to push towards one
industry or another.
In India, with 7 per cent growth, GDP doubles every decade. As a
thumb-rule, I feel that a comprehensive transformation of skills and
institutions is required across each doubling of GDP, which is roughly
each decade for India. A country that is stuck in low-skill
manufacturing will find it difficult to achieve the reinvention of
this `soft infrastructure' of the mind. If policy makers tried to push
a country towards doing low end grunge work, it would be harder to
obtain these repeated transformations of institutions and the
furniture of the mind, which would lead to growth decelerations.
As an example, in the article
wave of deft robots is changing global industry, John Markoff
says:
Foxconn has not disclosed how many workers will be displaced or when. But its chairman, Terry Gou, has publicly endorsed a growing use of robots. Speaking of his more than one million employees worldwide, he said in January, according to the official Xinhua news agency: ``As human beings are also animals, to manage one million animals gives me a headache.''
The project of economic development requires sophisticated
interactions between firms and workers. The laws, human rights and
management practices that are required when dealing with humans are
different from those required when running a firm with `one million
animals'. I would hence argue that it is limiting for a country to
focus on the political, legal and institutional requirements to
produce a la Foxconn. It is better to confront the complexities of
high skill, high wage production, and to build the environment for
this to happen: in the political and legal system, in management
practices of firms, and in the power structure embedded in a
conversation between two citizens who are co-workers within a
firm. Services production is a valuable learning ground where the
complex management practices that involve high skill humans can be
learned.
The new world of manufacturing
Rodrik correctly points out that manufacturing has become
more sophisticated in recent years. This has some fascinating
dimensions:
- The rapid improvements in capabilities and declining costs of
- The rise of open source design coupled with 3-d printers. If a
3-d printer in the US fabricates a part close to its usage in an
assembly line, while the labour-intensive design work ("services")
that controls the 3-d printer is done in India, does this entail
manufacturing or services work in India?
- The world economy is likely to be in a low interest rate
environment for a long time, which will encourage capital intensity
worldwide (robots, 3-d printers), thus blunting the value of low
wages.
Momentous changes are afoot, which challenge our traditional
notions of manufacturing versus services. To some extent, we are even
seeing
manufacturing go back to the US.
Things that might `go wrong'
Finally, Rodrik talks about reduced willingness in the West to
tolerate unfair tactics like the Chinese exchange rate regime. I would
generally consider this to be a good thing, both for developing
countries and for the world. In any case,
Asian `Bretton Woods II' episode seems to be subsiding. As an
example of the disenchantment with exchange rate distortions: From
2004 to 2007, India debated exchange rate rigidity, and
away from it. The links between undistorted exchange rates and
growth have not been adequately emphasised in the discourse. A
developing country builds up inferior skills and institutional
capabilities by exporting under a subsidised exchange rate: it is
better to force firms to confront the market price and achieve the
productivity required to participate in globalisation when facing an
undistorted price vector.
He worries about a rise in protectionism in the West, but we have
to admit that the 2008-2012 experience has been pretty good in this
regard: by and large the West has not succumbed into protectionism. In
2008, all of us worried about Smoot-Hawley. Today, things seem to be
be going well.
Conclusion
In summary, I would argue that we should avoid a `widget
illusion'. There is nothing special about manufacturing or
industrialisation: as long as people in India get high wage jobs, this
is good. Getting there requries deep integration into the world
economy, which includes policy battlefronts such as:
- Openness to the Internet
- Use of English
- Inbound and outbound FDI
- The array of
cross-border financial services that are the enablers of complex
globalised production of both goods and services
- Globalisation-compatible tax policy on both trade and finance
- The
absence of either protectionism or mercantalism
- Fostering high quality
human skills, and
- Infrastructure.
To the extent that globalised production of goods and services
happens in areas which involve high skills and complex institutional
development, this is a bonus, since any high growth country needs a
rapid pace of reinvention of laws and institutions.
Most of this is the old orthodoxy. Policy makers worldwide are
generally focused on these issues, as they should be. From the 1960s
onwards, dirigisme has generally subsided, with the twilight of
policies like fixed exchange rates, industrial policy, capital
controls, protectionism, etc. These key lessons remain intact in the
21st century.
0 comments:
Post a Comment