End of export led growth would not be good for post crisis Asia Asia Pathways

OK. Popping the distraction stack again. The very sharp Matthew Yglesias writes about:

Matthew Yglesias: Premature Deindustrialization: The New Threat to Global Economic Development:

In the popular imagination, the old industrial landscape has moved abroad to Mexico or to China, perhaps due to bad trade policies or simply the vicissitudes of changing circumstance… [and] the migration of factory work to much poorer countries has been a boon to those countries’ economic development…. [But] ‘premature deindustrialization,’ in which countries start to lose their manufacturing jobs without getting rich first…. [Dani Rodrik:] “Developing countries… have experienced falling manufacturing shares in both employment and real value added, especially since the 1980s.’…

Jana Remes… economy-wide productivity growth in Mexico has been dismal… [because] Mexican manufacturing sector has… remained quite small…. The dynamic manufacturing sector, in other words, simply isn’t big enough to employ many people. And it’s not really growing much…. [Future] manufacturing enterprises will increasingly look more like software companies–where designing, programming, maintaining, and debugging the machines will be more important than staffing them. A country like the United States with a very robust high-tech sector will be a strong contender for those technologically intensive manufacturing jobs, even if there aren’t very many of them. Countries that haven’t yet industrialized, meanwhile, may be left out in the cold…

And:

Let me back up and quickly sketch the argument that manufacturing matters, and manufacturing exports matter a lot for industrialization and economic development in the Global South. And let me make the argument in what I regard as the proper way–that is, dropping far back in time and running through the economic history…

I do not, all thing considered, think that, absent the luck and randomness that gave us the British Industrial Revolution, a permanent or semi-permanent “Gunpowder Empires” scenario was the third-millennium likely historical destiny of the Sociable Language-Using Tool-Making Big-Brained East African Plains Ape.

However, this does not mean that the historical destiny looking forward from 1750 or so in the Global South was bright. World population had quintupled in the 2000 years to 1750, carrying with it a notional five-fold shrinkage in average farm sizes, or at least in the amount of land supporting the typical family. The slow pace of technological progress from -250 to 1750 had made up for–indeed, had caused–this rise in population. And the biotechnologies of agriculture were indeed mighty: to 1750 we have the creation and diffusion of maize, of double-crop wet rice, of the combination of the iron axe and the moldboard plow that could turn northern temperate forests into farms, of domesticated cotton, of the merino sheep, and of the potato.

But a human population growing at 10% per generation required more such innovations, lest living standards fall in order to curb population growth via children so malnourished to have compromised immune systems, women who were too thin to ovulate, or increased female infanticide. People in 1750 were as well fed and clothed as they had been in -250. But what would have been the next agricultural miracles? You would have needed a number of them to attain continued total factor productivity growth at 0.02%/year to compensate for the further quartering of farm sizes that would have been inevitable for population growth to continue and human numbers topped 3 billion by 2050. And draft animals are not that much help in a densely populated near-subsistence society: they have large appetites, and the land their foodstuffs grow on is subtracted from that available for people. Only a relatively rich society can afford to replace human backs and thighs with those of horses and oxen.

However, these problems in the economic growth of the Global South ought to have been solved by Britain’s Augustan Age industrial breakthrough. Let’s rehearse the story briefly:

(1) The Protestant Wind that blew in 1688 and a century before in 1588 created in Great Britain an ideologically mobilized ruling class willing to commit previously unheard-of resources to first defensive and then imperialist war. (2) The resulting fiscal-military state coupled with the fact that Great Britain is an island created the first British Empire and funneled the maritime trade profits of the world into the island. (3) The resulting high wages coupled with the extremely low price of coal made the R&D to invent and deploy the first generation of technologies of the coal-steam-iron-cotton-machinery complex profitable. (4) The first generation of this complex of technologies are barely profitable even in the most favorable regions of Britain. (5) But the third-generation technologies are wildly profitable in Britain and profitable in selected other regions like New England and the lower Rhine valley. (6) And by the fifth generation–1850 or so–British-style industrial technologies would have been profitable anywhere in the world the resources could have been brought together, as long as there was large enough market demand to serve.

Thus as of 1850 the problem of finding the agricultural and industrial technologies needed to move the Global South to wealth and prosperity appeared solved. The technologies existed–in Britain. They could be easily transported–they were embodied in the capital goods made in the machine shops of Lancashire. Writing around 1850, Karl Marx saw 50 years as the time span for his bourgeois economic and political revolutions to spread as far as India–and thus set the stage for global socialist utopia.

Writing around 1850 and still writing so in the 1870s, John Stuart Mill saw the big economic problems as not ones of innovation and technological diffusion but rather of the demographic transition: The conscious human management of fertility was essential if technology was going to win its Malthusian race against population even in the Global North, and that required widespread cheap artificial birth control coupled with the dropping of the Victorian modesty that prevented public discussion of such “things”.

But Marx and Mill were wrong. The problems of the demographic transition turned out, in the long sweep of things, to be easy presuming successful development and income growth: They solved themselves within two generations after girls attained the leisure to learn how to read.

It was, rather, the problems of technological and institutional development and transfer that turned out to be the nastiest and most stubborn ones for the Global South. The U.S. was about twice as rich as China and India in 1800. It was 30 times as rich as they were at purchasing power parities come 1975. And, at least according to Hans Rosling and company, China and India were no richer in 1975 than they had been in 1800.

Why should this be the case in a world in which the technology was embodied in large hunks of metal shaped in the machine shops of Lancashire–hunks of metal that could be cheaply transported all over the world? Why did the 20th century see a world sharply divided between a Global North and a Global South, with productivity in the Global North growing at 2% per year while the Global South fell further and further behind?

What I believe to be the correct answer was given by W. Arthur Lewis (1977): The Evolution of the International Economic Order:

Lewis’s first step first step is to note nineteenth-century labor mobility. Between 1850 and 1914 more than 50 million people left Europe to settle elsewhere, and more than 50 million people left China and India to settle elsewhere. Racism and imperialism exclude Chinese and Indian migrants from settling in the temperate zone colonies and ex-colonies with agricultural profiles familiar to the relatively rich Europeans. Thus the need to pay wages high enough to attract migrants from Europe kept living standards in what Lewis calls the temperate zones of European settlement high, and kept the prices of the temperate-zone commodities that they alone could produce high as well.

Migrants from China and India went to the tropics. China and India were both then in the down-phase of the Malthusian cycle, with emigrants thus being willing to accept barely more than raw biological subsistence wages to move to the world’s Malaysias and East Africas. Their pressure pushed wages in tropical migrant-recipient economies down, and pushed the world market prices of the tropical-zone commodities that they made and sold down. That meant that even tropical economies that did not receive immigrants from China and India found their relative wage levels collapsing as well. Manaus, the capital of Amazonas in Brazil, looked to be getting rich providing services for the prosperous rubber tappers of the Amazon basin–until the British Empire brought Brazilian biologics and Chinese workers to the Malay Peninsula, and the world price of rubber collapsed.

Thus when Modern Economic Growth began in the last third of the nineteenth century, the world was then being rapidly divided by migration and the world labor market into a Global North producing high-price temperate and a Global South producing low-price tropical agricultural products. And it was in this world that first the fifth-generation technologies of the coal-steam-iron-cotton-machinery complex and then the knock-on Second Industrial Revolution technologies of modern metallurgy, internal combustion, electricity, and organic chemistry diffused.

And here something peculiar happened.

The overwhelming bulk of the labor required for Industrial Age factory-floor work is not high: “semi skilled” is the buzzword–which means a degree of familiarity with machine technology and the operations of the particular system, plus a willingness to accommodate your motions to those enforced by the system as a whole. It is the kind of thing but almost anyone can pick up any few months at most. No deep knowledge or understanding of the underlying processes and engineering mechanisms is required to be a productive assembly line worker. The high technology is embodied in the machines. And the machines can be cheaply shipped anywhere on earth. Yes, you do need a few engineers who understand the machines at a profound and comprehensive level. But, ever since the day in 1789 that the 21-year old [Samuel Slater][] sailed for America, finding qualified engineers willing to work as expatriates has not been an insurmountable problem.

You would imagine, therefore, that once the iron-hulled ocean-going screw-propellered steamship and the submarine telegraph cable had made their appearance, factory work worldwide would have rapidly gone to where labor was cheap. Yet from 1850-1980 that was not the case. Factory work by and large stayed where labor was expensive. And those economies that did manage to figure out how to utilize British Industrial Revolution and Second Industrial Revolution technologies at near-frontier levels of efficiency rapidly joined the club of rich economies that was the Global North.

In fact, up until the 1980s, with the important exception of the move of the textile industry from New England and Old England to the U.S. South and the European Mediterranean, outsourcing and offshoring were simply not things putting downward pressure in aggregate on the wages and prosperity levels of old industrial districts. For every job that left for, say, low-wage Korea or Taiwan putting downward pressure on wages, there was another job where rapidly rising wage levels in Japan or Italy putting upward pressure on Global Manufacturing wages. Before the 1980s it was rapidly increasing productivity in manufacturing coupled with a less than unit price elasticity of demand for staple manufactures that hollowed out the Global North’s old industrial disticts–not globalization.

So why was it that manufacturing stayed in the Global North for so long, given that the machines could be shipped anywhere, the skill required of the workers was not so high, and expatriate engineers (and managers) were cheap relative to the scale of operations?

Lewis (1977) provides his explanation:

In a closed economy, the size of the industrial sector is a function of agricultural productivity. Agriculture has to be capable of producing the surplus food and raw materials consumed in the industrial sector, and it is the affluent state of the farmers that enables them to be a market for industrial products…. If the smallness of the market was one constraint on industrialization, because of low agricultural productivity, the absence of an investment climate was another. Western Europe had been creating a capitalist environment for at least a century; thus a whole new set of people, ideas and institutions was established that did not exist in Asia or Africa, or even for the most part in Latin America, despite the closer cultural heritage. Power in these countries—as also in Central and Southern Europe—was still concentrated in the hands of landed classes, who benefited from cheap imports and saw no reason to support the emergence of a new industrial class. There was no industrial entrepreneurship.

Of course the agricultural countries were just as capable of sprouting an industrial complex of skills, institutions, and ideas, but this would take time. In the meantime it was relatively easy for them to respond to the other opportunity the industrial revolution now opened up, namely to export agricultural products, especially as transport costs came down…. And so the world divided…. It came to be an article of faith in Western Europe that the tropical countries had a comparative advantage in agriculture. In fact, as Indian textile production soon began to show, between the tropical and temperate countries, the differences in food production per head were much greater than in modern industrial production per head….

Trade offered the temperate settlements high income per head, from which would immediately ensue a large demand for manufactures, opportunities for import substitution, and rapid urbanization…. The factorial terms [of trade] available to them offered them the opportunity for full development in every sense of the word.

The factorial terms available to the tropics, on the other hand, offered the opportunity to stay poor-at any rate until such time as the labor reservoirs of India and China might be exhausted…

The key is that the technologies of the first British and the Second Industrial Revolution, as they developed, rapidly grew in productivity, scale, and capital intensity. You needed a large market in order to support an industrial complex at a scale capable of near-efficient production. And a poor economy with a poor middle class could not do the job from demand at home.

To recapitulate: If you were a rich, temperate zone economy with a high wage level, the market for your nascent manufacturing sector was all around you. As long as you could keep Britain (or later the United States) from sucking up all of the oxygen, your manufacturing sector could grow organically. And so you can gain the learning-by-doing expertise needed for successful industrialization, growth, and development to carry you to the world’s productivity and living standard frontier.

But if you were a poor, low-wage, tropical country, you could not. Your own citizens were too poor for your middle-class to be a source of mass demand for manufacturers. Thus successful economic development would require much more than import substitution.

It would require export promotion, and successful export promotion at that. You could not industrialize and develop by relying on your own home market. You had to borrow someone else’s. And as the twentieth century proceeded that turned out to be a tricky and a delicate task indeed.

TO BE CONTINUED

[Samuel Slater]: https://en.wikipedia.org/wiki/Samuel_Slater (Wikipedia: Samuel Slater