Premature Deindustrialization

Course Outline

Development Economics

Course (256 videos)


Premature Deindustrialization

How do countries go from developing to developed?

Historically, export-oriented growth -- resulting from a period of industrialization -- has been a driving factor behind economic development.

However, some economists are now worried that developing countries are de-industrializing too soon or never saw much industrialization at all, limiting the potential for export-oriented growth. This is known as the theory of “premature deindustrialization.”

Most of today’s wealthy countries, such as South Korea, Japan, and Germany, industrialized and became strong in manufacturing – employing as much as 40% of the workforce. Those manufacturing jobs helped boost exports at a critical time in these countries’ development.

A large manufacturing sector also encourages the building of infrastructure in order to produce goods and get them to market. Additionally, manufacturing jobs tend to be held for a long time and employers have the incentive to invest in their workers’ skills. When overall human capital begins to improve, workers are more valuable, wages go up, and a middle-class begins to emerge.

Today, though, manufacturing is more automated. Noisy factories are now quiet places where machines and robots have replaced the human worker. Even in China, a relatively low-wage economy, we see the most robots of any nation. Premature deindustrialization is a very real concern.

What does the future have in store for these developing countries? It’s somewhat unclear, but there are a number of alternative paths to development -- including service-sector exporting, internal trade growth, and consumer-led growth.

Teacher Resources


Economic development is one of the central problems facing mankind, but how exactly is economic development supposed to come about?


Well, there's an older model called "export-oriented growth," but these days, many economists are worrying that export-oriented growth no longer can succeed. This is called the theory of premature deindustrialization --mainly that emerging economies may not have the right mix of jobs for a continued growth. What exactly is this concept, and what are economists thinking about it? First, let's review what economic development looked like in the past, before turning back to that concept.


When we look back to history, we find that most of today's wealthy countries had a significant portion of their overall employment in manufacturing jobs. The United States, for instance -- manufacturing jobs peaked in the 1970s, more than a quarter of the American workforce. In other developed countries today, manufacturing jobs have, at times in the past, been 30 or 40% of the workforce -- Sweden, Germany, Great Britain.


Now, why is a manufacturing job so special, anyway? First, there's some good evidence that manufacturing jobs are often more productive; they have higher rates of productivity growth; they're more likely to occur in larger firms; and they're also more likely to be connected to exporting to a global market. It's easier to send a manufactured good abroad than it is to try to sell a person-to-person service to buyers in another country. And, furthermore, a nice feature of manufacturing jobs is it tends to breed corporate-interest groups, which want the government to build a lot of infrastructure and invest in a lot of human capital, and that tends to boost economic development more generally.


A lot of manufacturing jobs -- like, say, being an autoworker in an automobile plant -- you work there for a long time, you need to build up some skills, so the employer invests a lot in training, makes sure those are good jobs, and wants quite a stable workforce. If you take a typical service-sector job -- say, like serving in a Starbucks -- well, the incentive for the boss to invest in the human capital of the workers, it's just not nearly as strong. So a large manufacturing sector allows a country to sell abroad which, in turn, expands its potential markets. That incentivizes investment in infrastructure and in human capital, and that leads to increased wages and the emergence of a country's middle class. And that, for many nations, has proven to be a successful model of economic growth. And we find this in the histories of South Korea and Japan -- building a lot of manufactured goods, and selling them abroad. It's sometimes called export-oriented growth.


The difference today is that there's much more automation. A factory has gone from being a noisy place to being a very quiet place. Machines, computers, software, robots do most of the work. Here's a fact I find truly striking. Right now, the greatest number of robots in the world is in China, and China is a relatively low-wage economy. When even China is investing in robots -- this is a sign that exported manufacturers are not going to put so many people to work at middle-class wages in the future, that the number of jobs that will be created by exporting manufacturers is relatively limited. Those jobs will have to come somewhere else.


So we find in countries such as Brazil, or India, or Mexico, or South Africa, the percentage of jobs in manufacturing -- that's been shrinking for some time. In those economies, the percentage of jobs in manufacturing is not exceeding 18%. They seem to have reached a peak manufacturing point. They are skipping this intermediate stage of having a lot of manufacturing jobs, never quite getting that middle class in place, not getting the same incentives to invest in human capital and infrastructure. How much is this a problem to worry about? Again, opinions differ somewhat. Economist Dani Rodrik is one thinker. He's quite worried about the loss of the manufacturing path toward growth. He stressed the point that not all jobs are created equally. I'm somewhat more optimistic.


It could be that economic development paths of the future -- they're going to look, perhaps, very, very different than what we're used to. What are some of those possible paths? Well, one path would be to try to export a lot more service-sector jobs. Sometimes, in the United States, if you call up a Help Desk to help you with your electronics device, well, you may end up speaking to someone in the Philippines, or to India. So there are some exports of service-sector jobs, but it's notable that, so far, exporting service-sector jobs has not occurred on a scale nearly as large as previous exports of manufacturing jobs. It could be that a lot of the economic growth of the future that will drive development -- it will be internal, within nations, and not always based on exporting to wealthier countries.


A good example of internal growth would be India. India, actually, has not had a lot of success exporting its manufactured goods. But what India has done well at is by taking ideas from other countries, and also doing its own innovations and generating more trade and more investment within India. That's why we call the growth internal. And the logic there of the gains from trade -- even though it's not always involving other nations, still, both parties are better off. Wealth is created, and, over time, those real wages will rise.


Well, we also may be entering an era of consumer-driven growth. That is, a lot of the growth comes first by getting the consumer products, and then, over time, you figure out ways to use those consumer products to help drive your service-sector businesses. A simple example here -- our cell phones. If you go to African cities, or even now the African countryside, most people have cell phones. Cell phones have knit together many parts of Africa in a network of commerce. They've made it easier to trade goods. They help people use bank accounts and access means of payment. Economic growth in Africa has been a lot more rapid because of the cell phone. Or, imagine consumer drones. Consumer drones are coming on the market now. They're quite cheap. They can help you transport goods. You will have emerging economies being among the first places to use drones in an effective way -- say, by sending medicines to a remote area when people need help. This is sometimes called a consumption-led model of growth -- the people get very, very cheap consumer goods, but they use those consumer goods to help them run businesses in a more productive way.

So this means that the economic development of the future may look quite different from the economic development of the past. The physical buildings may not impress you as much, but the smarts, the networking, and the mobilization of information might be a new kind of invisible, yet very powerful form of economic development.


But the takeaways here are -- New patterns of growth are not like the old ones. Something fundamentally has shifted in manufacturing. That's mostly because of automation. Export-oriented growth of the kind that South Korea and Japan did -- that may well be a thing of the past. But there are also new and dynamic opportunities for service-sector growth, internal growth, pulling new ideas off the shelf more quickly, and consumer-led growth with products such as cell phones and drones. Just pull out your cell phone and think about the power of that device. Premature deindustrialization -- it is a problem. It remains to be seen how much entrepreneurs around the world will manage to solve this problem.



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