Must-Read: Kevin O’Rourke and Jeffrey Williamson: The spread of modern manufacturing to the poor periphery

Must-Read: Kevin O’Rourke and Jeffrey Williamson: The spread of modern manufacturing to the poor periphery http://voxeu.org/article/spread-modern-manufacturing-poor-periphery: “Factor endowments: had a profound impact…

…Labour-abundant and resource-scarce countries could enter at the bottom of the ladder, producing and exporting labour-intensive products (e.g. East Asia). Labour-scarce and high-wage periphery countries could not exploit that strategy, and thus relied on a tariff-protected domestic market (e.g. Latin America). Where the labour-scarce economy had only a small domestic market (e.g. Southeast Asia), industrial growth was difficult…. Sub-Saharan Africa, Latin America, and Southeast Asia… resource-abundant and labour-scarce… commodity export processing, and later import substituting industrialisation, were the typical routes….

The supply of educated labour seems to have been just as important as the supply of overall labour in improving the ability of poor countries to develop modern manufacturing. When modern manufacturing began its spread to the periphery, a lack of skills was often an important constraint…. European colonisers damaged their colonies: it was not until their colonies achieved independence that major progress was made towards providing universal primary (and later secondary) education. After independence, a literacy revolution took place almost everywhere around the periphery.

It was easier to overcome a shortage of financial and physical capital than human capital…. Financial capital was borrowed from abroad… in the first global century up to WWI for Imperial Russia, colonial India, and Latin America. But borrowing from abroad was only possible when international capital markets were functioning properly, and this was not the case during the de-globalising years from the 1920s to the 1970s. Even more important than financial capital inflows were imports of equipment and machinery, which embodied up-to-date technology. These imports were crucial…. They had to be paid for with export earnings when international borrowing was difficult. Otherwise, balance-of-payments constraints suppressed investment…. Governments attempted to relax these constraints in various ways….

International context and luck:… World commodity price trends and their volatility were central to local manufacturing profitability and performance…. Since world markets for manufactured exports mattered, so did geography…. Regional agglomerations… linked to trade connections with the rest of the world: port cities offered access to foreign capital, cheap raw material imports, entrepreneurship, and modern technology, or access to foreign markets…. Finally, luck mattered…. Latin America dropped its trade barriers in the late 1970s only to have China flood world markets with manufactures…. Southeast Asia started its miracle in the 1970s when Japan shifted from labour-intensive to capital-intensive technologies and used FDI to move their older technologies to Malaysia, Thailand, and other Southeast Asian countries. The region was again favoured by a booming Chinese market starting in the 1980s….

Policy:… Tariffs spurred the growth of import-competing manufacturing, but they hampered the growth of export-oriented commodity processing, and early on this was the most important modern industrial activity in resource-abundant and labour-scarce regions…. In labour-abundant countries, labour-intensive manufacturing had at least a chance of getting off the ground without the artificial stimulus of tariffs…. In labour-scarce countries, however, protection was probably going to be required if labour-intensive manufacturing was to get off the ground: industrialisation in peripheral Europe and Latin America typically originated behind tariff barriers… [but] when these countries liberalised in the 1980s and 1990s, many lost a good deal of the industry that had been built up under protection….

The impact of policy was particularly dramatic in those economies which turned to Communism…. All promoted capital-intensive heavy industry for ideological reasons…. The experience following liberalisation in the 1980s or 1990s has differed greatly…. Chinese central planners helped lay the foundation for the subsequent growth miracle, by changing factor endowments, importing technology, and providing a manufacturing base that would become much more efficient. East European countries have deindustrialised since 1989, while even Russia has reverted to more resource-exporting. India, which also pursued capital-intensive industrialisation strategies, saw its service sector expand dramatically after liberalisation…