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Premature deindustrialisation (Rodrik (2015) (assumptions about premature…
Premature deindustrialisation
Definitions
Premature deindustrialisation
Denotes a secular trend of a shrinking proportion of manufacturing (or industry in general) whether in relation to GDP, employment or exports
Industrialisation
it includes manufacturing, but also mining, construction as well as gas, electricity and water provision
Rodrik (2015)
assumptions about premature deindustrialisation
An inverted U-pattern
First there is an increase in industrialisation
then levelling off of progress and finally decline
This inverted U-shape keeps moving leftward (meaning that deindustrialisation happens sooner, the later the economy develops)
Why does this happen?
Trade Liberalisation
Impact of Chinas 'gobbling' up of global manufacturing activities
The recent rapid technological change
Service sector vs manufacturing sector
He argues that services are not (generally) technologically dynamic and do not absorb much productive labour
In developed economies the manufacturing sector has experienced the fastest increases in productivity
thereby experiencing a decline in employment
NOT necessarily the case in developing economies
they have been deindustrialising because of globalisations adverse effects after opening their economies
namely many have become net importers of manufactured goods
Concludes
For many emerging economies and developing economies the major avenue open for their convergence to the per capita income levels of development economies has been closed off by 'premature deindustrialisaiton'
Where economic growth has occurred it has triggered mainly by capital inflows, transfers from developed economies or commodity export booms
as a result, their services sector has been expanding as agriculture notably declines in importance
Kaldor assumptions-> economic development requires industrialisation, still true though?
Service sector as a viable growth mechanism
some service sub-sectors are highly productive and well paying (IT and finance). But these sub-sectors are very skill intensive and cannot absorb the broad segments of the workforce being displaced from agriculture
UNCTAD (2003)
East Asia
promoted domestic investment, both public and private
Stresses the importance of strong and sustained domestic investment as a bedrock for economic development
Latin America
Mainly market based economic reform
Real economic challenge for emerging economies is to
combine strong productivity growth with increased employment
Ensure real wages do not outspace productivity
Adjust nominal exchange rates to maintain international competitiveness
While Washington Consensus policies in Latin America has indeed brought inflation under control, they had done little to stimulate economic growth and stability to promote longer term economic development
Stressed importance of progressive strategic polices
Higher rates of investment (both public and private)
Activist trade agenda to promote stronger investment export linkages
Sumner (2018)
Appears to accept the points made by the IMF- that we need to look beyond manufacturing sector and investigate the potential for rising labour productivity and higher quality of jobs int he service sector
Kaldor and other classical development economists had assumed, from historical experience, that economic development required industrialisation
But even when manufacturing activities are transferred to emerging and developing economies it appears that
They are often not technologically advanced
They often might not create much employment
Many positive characteristics have been attributed historically to the manufacturing sector
strong forwards and backwards linkages
More rapid capital accumulation
Greater technological progress
Economies of scale
Knowledge spill-over, even to other economic sectors
Higher labour productivity
IMF (2018)
Main two contentions
There has indeed been a shift of employment form manufacturing to services, but this shift need not hinder economy-wide productivity growth
While in advanced economies workers have been displaced from manufacturing to services, this has not been the main driver of riding inequality across labour incomes
KEY IMPLICATION- policy efforts should strive to raise productivity across all economic sectors (including services and ensure that any gains from rising productivity are shared equally)
The chief apparent problem for many developing economies in the current direct shift of labour from agriculture into services bypassing industry and manufacturing in particular
thus, one of the centrally important questions for the IMF is whether the rising importance of the service sector will dampen economy-wide productivity (and this growth incomes
In conclusion
The decline of manufacturing jobs in overall employment need not disturb economic growth, nor raise inequalities., Since 2000s the shift of employment from agriculture to services could have benefitted economy-wide productivity in many developing economies
The IMF still stresses that 'strong policy efforts' will be needed to facilitate the reallocation of workers toward the higher productivity service sub-sectors and thus boost economy-wide productivity
Policies should ensure that workforce skills are in fact aligned with the needs of the more productive and expanding sectors of the economy. Human capital and physical infrastructure should be bolstered, along with measures such as safety nets and 'redistribution policies' in order to ease the transition
China
Industrialisation to Deindustrialisation
'58 Great Leap Forward
capital intensive, heavy industries pursued
'60s- modernisation of agriculture
meaningful benefits for Chinese industrialisation
labour surplus to be redistributed into industry
food prices could be kept low, which allowed for lower wages
late '70s and onwards opening up of markets
FDI increased
potential to tap into massive market, faced a strong government 'played' investors against each other and demanded them to share technology with the chinese
continued to coordinate what investments were allowed in
'light' industries such as textiles
'80s and onwards growth of economy, worlds largest exporter of manufactured goods
SHIFT from attracting FDI to distributing it
investment in knowledge and skills
WHY and HOW china could keep ownership of mid-tech industries and to move into high.tech industries
this is in contrast to other 'developing' nations that increased their dependence on foreign know-how
Declining employment in manufacturing since 2013
however the decline has only been modest
2017 manufacturing still accounted for nearly 30% if total GDP (not as pronounced as in other cases)
State is still strong and very important
making investments to encourage high value added service exports to ensure a profitable and productive service sector and high-tech industry
Brazil
Industrialisation to Deindustrialisation
depended on the import of already available, often outdated, technology, the country has experienced 'industrialisation in leaps' followed by slumps as well as great vulnerability to international pressures
Strong development trajectory in the 70s
'82 debt crises, 'lost decade'
'pro-market' economics in '90s (trade and financial liberalisation)
followed by structural adjustments
manufacturing employment decreased, and developed a less prominent role in Brazil in '90s
other sectors grew to adapt to this change this is where the trend of deindustrialisation is applicable
increasing of retail, wholesale and restaurants
increased specialisation in natural resource sectors
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Comparison
Brazil's experience is characterised by the growing presence and power of finance
this has made the decrease in manufacturing even more pronounced
Context of deindustrialisation
illustrated Rodrik's main argument
Brazil had not gone through a 'proper' industrialisation when share of manufacturing began to decline
neither manufacturings share in the economy nor the GDP per capita had reached particularly high levels at the time Brazil started to industrialise
China the process of deindustrialisation has been less pronounced
Chinas inward direct investment in innovation and new technology has led to a rapid upgrading of domestic high-tech industries
the share of high tech and high skill intensive product in total manufactured exports has increased substantially
timing of increase in service sector
Brazil towards low productivity, China towards high skilled and high tech