The End to Economic Growth?

Asia and the End of Economic Growth

Not too long ago, the world witnessed the meteoric raise of Singapore, South Korea, and later China as they propelled their economics on the engine of export-based manufacturing. These countries witnessed a radical radical transformation and transition: from agriculture to manufacturing and transitioning in to service industries.

As I’ve written about in numerous articles, I believe automation is a major driver for putting this development model under threat. Economics Dani Rodrik, author of Economic Rules & The Globalization Paradox, has been studying this issue from a slightly different angle, seeing multiple factors leading to decline of rapid growth in emerging markets. It’s definitely worth diving into his view points here.

At a talk a the Chicago Council of Global Affairs, Dani Rodrik argues (see my transcript here) that the “phenomenal growth of East Asia, and Post-WW2 Europe before that, have been an aberration of history. Rodrik see the the ending of rapid growth – which changed cities like Kuala Lumpur and Singapore overnight – will create immense consequences for developing countries (where most of humanity lives) beyond simple economic growth:

It’s not just a problem of growth it’s a problem of exclusion, it’s a problem of inequality, it’s a problem of being able to generate employment for a lot of people who are leaving the country-side and coming to the urban areas

1990s vs. 2010s Kuala Lumpur Source: Via http://travelisfree.com/2015/03/08/city-skylines-change-then-now/
Malaysia’s Rapid Growth: 1990s vs. 2010s Kuala Lumpur
Source: Via http://travelisfree.com/2015/03/08/city-skylines-change-then-now/

 

Fantastic Growth, Unique Opportunity

From Great Britain to South Korea, the path to economic development has been largely the same story: uneducated people from rural areas moved to the cities, providing cheap, unskilled labour for factories. Traditional Manufacturing has a unique characteristics that were prefect for development:

1. Manufacturing Provided 3x-4x Productivity Leapfrog
As rural famers moved to urban centers, manufacturing allowed unskilled labour to quickly turn into productive labour, often at 3x-4x increase in productivity.

2. Manufacturing Readily Absorbed Rural People Moving to Urban Centres
Rodrik puts out that manufacturing could increase the productivity of each worker (as they transitioned from agriculture to manufacturing) while also “employing the resource that is in greatest abundance in poor countries which is relatively unskilled labor.”

3. Manufacturing Lets Countries Leap Ahead Technologically
A unique property of traditional manufacturing is that the latest techniques and technology could relatively quickly brought in and adopted, compared to the investment in education and skills required in the services industry:

“manufacturing enables you to access frontier technology in a much more quickly and much more directly than the other parts of the economy”

4. Manufacturing Scales, Unlike Services

Manufacturing market size may scale (via exports) upwards quickly, while services are (usually) limited by domestic demand:

“there is nothing that stops your manufacturing from expanding because as long as you are a small part of world market”

…But this Manufacturing Model of Growth is Gone

Rodrik argues that the world that created Britain, South Korean and even China today is shifting. Rodrik see this as “premature industrialization”:

I become very pessimistic about the prospects of industrialization as we go forward. And, in fact I think the right term to use which I’ve used in a number of writings is “premature de-industrialization”: That is that countries are beginning to de-industrialize today at levels of income which are a fraction of income levels than countries richer than them began to de-industrialize.

Developing countries are reaching peak manufacturing – in terms of number of people employed – before it declines at ever lower and lower rates, and earl:

For Korea, it was more like 25%-27% percent. China never approached this and India’s now hovering around 10%-11% percent and beginning to come down.

Ultimately, we’re at a time when manufacturing – as an engine for growth and employment – is coming into an end. Rodrik looks at two main drivers for the ending of export-led manufacturing development.

1. Labour Intensive v. Skil Intensive

Traditional manufacturing was extremely effective at absorbing unskilled labour – mostly people moving from the country side to the cities – and increasing their productively by 3x-4x. Traditional manufacturing was able to do so at scale, absorbing large amount of the work force.

Today, manufacturing requires complex skills and more trainnig. While Britain or Hong Kong were not selective about the education of its factory workers in its heyday, this has changed. Rodrik points out that Ethiopia’s current manufacturing boom has been mostly employing university graduates.

As manufacturing becomes more high-tech – either advanced software or robotics for automation – higher skills and higher education levels are required. This hampers manufecturing ability to absorb workers en masses.

2. Globalization Rules have Changed

Before the integration of the global economy, each country could have a wide range of manufecturing for domestic consumption Countries like South Korea, Taiwan, and even China have employed extensive industrial policies to support their. Today, as Rodrik points out, it doesn’t make sense to have a local industry for every time – like toys, furniture, bicycles – when they can made cheaper (even when including shipping) at some factory in China versus locally in Nigeria or Ethiopia.

Additionally, Industrialist policies that helped countries protect local industries at their infancy has been all but squeezed out by WTO and today’s free trade norms. As Rodrik mentions, South Korea, Taiwan and China used extensive industrial policies to protect, direct, and cultivate local manufacturers to export globally. Countries could create their own creative industrial policies, something that the WTO today increasingly disallows.

Developing Countries Need to Move Quickly

Where this leaves developing countries adopting manufacturing growth model for developing are having an ever smaller window to do so successfully. Developing countries must invest heavily invest to keep ahead of the de-industrialization curve to keep their manufacturing base:

So this transition is a race between how quickly you’re skilling up, you’re educating and increasing the skills of your labor force against how quickly is de-industrialization happening

Where Do We Go Now?

Rodrik’s talk ends relative pessimistically: he dos not see the high-growth of East Asia that we seen in the past 20-30 years. He sees Ethiopia as one possible model: it has been experiencing high growth without export-oriented industrialization. Instead, Ethiopia crafted their “Growth and Transformation Plan (GTP),” which focuses on building its domestic infrastructure from regulatory framework to rail and mobile telephone network.

Beyond that, Rodrik sees each developing country needed to develop its own path to development. Basically, we need to throw away the old “economic growth” rule books and look at everything anew:

I think what we’re going to see is that sort of the growth experience in the developing world is going to be much more diverse, much more heterogeneous. Now, because once it is domestic factors that is driving the growth everything that you happen to do domestically, that’s going to be the key thing so I think we’re going to be seeing much greater heterogeneity. Some countries doing relatively well, other countries doing actually quite poorly and the main thing is going to be this heterogeneity in performance rather than the common.

 

 

 

 

 

 

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