Roads to Prosperity
The Manufacturing Imperative
Dani Rodrik
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CAMBRIDGE – We may live in a post-industrial age, in which information technologies, biotech, and high-value services have become drivers of economic growth. But countries ignore the health of their manufacturing industries at their peril.
High-tech services demand specialized skills and create few jobs, so their contribution to aggregate employment is bound to remain limited. Manufacturing, on the other hand, can absorb large numbers of workers with moderate skills, providing them with stable jobs and good benefits. For most countries, therefore, it remains a potent source of high-wage employment.
Indeed, the manufacturing sector is also where the world’s middle classes take shape and grow. Without a vibrant manufacturing base, societies tend to divide between rich and poor – those who have access to steady, well-paying jobs, and those whose jobs are less secure and lives more precarious. Manufacturing may ultimately be central to the vigor of a nation’s democracy.
The United States has experienced steady de-industrialization in recent decades, partly due to global competition and partly due to technological changes. Since 1990, manufacturing’s share of employment has fallen by nearly five percentage points. This would not necessarily have been a bad thing if labor productivity (and earnings) were not substantially higher in manufacturing than in the rest of the economy – 75% higher, in fact.
The service industries that have absorbed the labor released from manufacturing are a mixed bag. At the high end, finance, insurance, and business services, taken together, have productivity levels that are similar to manufacturing. These industries have created some new jobs, but not many – and that was before the financial crisis erupted in 2008.
The bulk of new employment has come in “personal and social services,” which is where the economy’s least productive jobs are found. This migration of jobs down the productivity ladder has shaved 0.3 percentage points off US productivity growth every year since 1990 – roughly one-sixth of the actual gain over this period. The growing proportion of low-productivity labor has also contributed to rising inequality in American society.
The loss of US manufacturing jobs accelerated after 2000, with global competition the likely culprit. As Maggie McMillan of the International Food Policy Research Institute has shown, there is an uncanny negative correlation across individual manufacturing industries between employment changes in China and the US. Where China has expanded the most, the US has lost the greatest number of jobs. In the few industries that contracted in China, the US has gained employment.
In Britain, where the decline of manufacturing seems to have been pursued almost gleefully by Conservatives from Margaret Thatcher until David Cameron came to power, the numbers are even more sobering. Between 1990 and 2005, the sector’s share in total employment fell by more than seven percentage points. The reallocation of workers to less productive service jobs has cost the British economy 0.5 points of productivity growth every year, a quarter of the total productivity gain over the period.
For developing countries, the manufacturing imperative is nothing less than vital. Typically, the productivity gap with the rest of the economy is much wider. When manufacturing takes off, it can generate millions of jobs for unskilled workers, often women, who previously were employed in traditional agriculture or petty services. Industrialization was the driving force of rapid growth in southern Europe during the 1950’s and 1960’s, and in East and Southeast Asia since the 1960’s.
India, which has recently experienced Chinese rates of growth, has bucked the trend by relying on software, call centers, and other business services. This has led some to think that India (and perhaps others) can take a different, service-led path to growth.
But the weakness of manufacturing is a drag on India’s overall economic performance and threatens the sustainability of its growth. India’s high-productivity service industries employ workers who are at the very top end of the education distribution. Ultimately, the Indian economy will have to generate productive jobs for the low-skilled workers with which it is abundantly endowed. Much of that employment will need to come from manufacturing.
For developing countries, expanding manufacturing industries enables not only improved resource allocation, but also dynamic gains over time. This is because most manufacturing industries are what might be called “escalator activities”: once an economy gets a toehold in an industry, productivity tends to rise rapidly towards that industry’s technology frontier.
I have found in my research that individual manufacturing industries, such as auto parts or machinery, exhibit what economists call “unconditional convergence” – an automatic tendency to close the gap with productivity levels in advanced countries. This is very different from the “conditional convergence” that characterizes the rest of the economy, in which productivity growth is not assured and depends on policies and external circumstances.
A typical mistake in evaluating manufacturing performance is to look solely at output or productivity without examining job creation. In Latin America, for example, manufacturing productivity has grown by leaps and bounds since the region liberalized and opened itself to international trade. But these gains have come at the expense of – and to some extent because of – industry rationalization and employment reductions. Redundant workers have ended up in worse-performing activities, such as informal services, causing economy-wide productivity to stagnate, despite impressive manufacturing performance.
Asian economies have opened up too, but policymakers there have taken greater care to support manufacturing industries. Most importantly, they have maintained competitive currencies, which is the best way to ensure high profits for manufacturers. Employment in the manufacturing sector has tended to increase (as a share of total employment), even in India, with its services-driven growth.
As economies develop and become richer, manufacturing – “making things” – inevitably becomes less important. But if this happens more rapidly than workers can acquire advanced skills, the result can be a dangerous imbalance between an economy’s productive structure and its workforce. We can see the consequences all over the world, in the form of economic underperformance, widening inequality, and divisive politics.
Dani Rodrik, Professor of International Political Economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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jpf44736 10:30 10 Aug 11
Don't allow China and other counties that run a trade surplus with the U.S. to collect interest on U.S. treasuries. Let them hold 0% interest federal Reserve Notes so they'll spend them.
mksss 10:35 10 Aug 11
what is missed is the huge role of government in the decline of manufacturing job. It not just at the federal level but at state and local levels as well. Available Industrial land has been in decline as politicians have moved to ‘urban redevelopment’ which basically means a loss of good industrial land for politically favored housing or retail development. Not to mention regulations that are meant to thwart industrial development, and good old ‘not in my back yard’ movements that make it hard if not impossible for many industrial developments to move past eh planning stage. It is little wonder with government actively killing industry that companies move overseas. Look at intel, a large manufacture but they has clearly stated many time that it cost a billion dollars more to build a factory in the USA than overseas and its not due to labor costs --- it regulatory costs!
tcolgan001 12:18 11 Aug 11
Speaking of Intel, Andy Grove (founder of Intel) has suggestions:
http://www.businessweek.com/magazine/content/10_28/b4186048358596.htm
“The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. ”
dennisargall 12:57 11 Aug 11
It is useful to recall the fate of the Kingdom of Naples with the unification of Italy in 1860. So many bright liberal minds advocated unification, proportionately as many as hail globalisation now. Naples was an enthusiastic adopter of new technnologies, a 90% service economy that ignored its manufacturing potential. When suddenly it could not raise taxes (in that case, when the tax power went to the new Italian government) the socio-economic fabric of Naples crumbled. Unification of Italy had to happen; globalisation in some measures has to happen. The biggest cleverness question is in how do the devilish details, including in relation to manufacturing.
Mechanisms for saving whatever industry wherever need to be multilateral in application and value, not just protectionist. How cute the suggested threat to China and others, from another commentator here, that bonds should be offered to such countries without interest... A fantasy of leverage in declining American power. Yes, absolutely maintain and grow new industrial skills, but do so acknowledging a need to adapt minds to the world as it now is and to consider what the world will be, sooner than imagined. The more coherently and constructively the US adapts to a new world which it cannot dominate, and in which military force does not work as hoped, the better: the more Americans self-reassuringly talk and try to act in terms of continuing commanding global power the more disastrous the eventual adjustment. Turn around the military industrial engines to renewable energy and other 'future' industries sooner.
houhuabob 01:01 11 Aug 11
What the author fails to understand is that manufacturing is becoming more and more automated with each iteration. This leaves room for fewer and fewer less skilled workers and they literally become serfs to the automated machinery. People find it increasingly difficult to make consistent quality products over and over again. A feat easily accomplished by machines. Buy a latte 10 times from the same barista and I guarantee the quality will not be the same. They will be too busy talking or thinking about their life to perform consistently which modern manufacturing demands. Wages will and must fall as the machines take over more and more of the manufacturing process.
Factified 02:27 11 Aug 11
We should level the playing field with a global tariff that offsets the cost advantages of developing countries.
Otherwise, the U.S. economy is very likely to stagnate indefinitely, as our corporations are acting rationally (due to the incentive structure presently in place) to give jobs to overseas workers instead of our own.
An economy is built one job at a time. We only created a net 2 million jobs from 2010-2020, vs. 15-20 million in each of the three prior decades. That should give us a clue (and even from 2000-2007 pre-bubble we only created 7 million).
For awhile, mortgage brokers acted rationally in giving loans to just about anyone, as they could sell them into the pipeline. We know how that turned out. We cannot continue to leave the present incentive system in place; that was the lesson we were supposed to learn in the crisis.
dennisargall 03:17 11 Aug 11
"We should level the playing field with a global tariff that offsets the cost advantages of developing countries."
"Cost advantages of developing countries" reflects levels of poverty, levels of disease, short life expectancy. The hostility directed at such countries as they lift from the mire and become competitive does not solve the problem created for us rich countries. The US had its turn at thumping other economies out of the ball park when it achieved its great efficiencies in the last century. History is history.
Why not level the playing field with adjustments relative to capacity to pay, or national consumption of energy per capita, or indeed individual capacity to pay, evidenced by income of the individual purchaser as per last tax return? Surely all-seeing all-knowing Google could set up such a mechanism in a flash.
http://www.nybooks.com/articles/archives/2011/aug/18/how-google-dominates-us/
houhuabob 06:22 11 Aug 11
In the 1960's a steel zinc coating line would require perhaps 1000's of electromechanical relays and a thousand miles of electrical wiring. When you wanted to make a change to the machine it would take days of running new wires and installing relays. The machine would require 12-15 operators per 8 hour shift, a maintenance department of 15-20 electricians and an equal number of mechanics/millwrights.
In the 2000's a steel zinc coating line requires a few Programmable Logic Controllers(PLCs) with maybe a 100-200 relays and a hundred miles of electrical wiring and most changes can be made entirely with a computer and takes one person maybe an hour! The machine requires 5-6 operators per shift and due to much more reliable equipment a maintenance department of 3-4 electricians and 3-4 millwrights at most. Some factories even farm out their Maintenance!
Tariffs won't make a difference! Labor costs won't make a difference as there are almost NO LABOR COSTS! Today's technology does not provide the number of jobs that UNIONS wish to have like they did in the 60's. Those days are over! It is only going to get worse and the reason more and more companies farm out the maintenance is because the skills are too specialized to waste money attempting to train a labor force. I really hope that this CLEARS THINGS UP. WE AIN"T GOING BACK TO THE GOOD OLD DAYS!
Factified 07:34 11 Aug 11
Why its high time to protect the U.S. jobs market:
1) U.S. economy has grown 1% 2001-2008 ex bubbles, per Niall Ferguson.
2) U.S. needs 3% GDP growth or unemployment goes up (Okun's Law)
3) U.S. created 2 million jobs net 2000-2010, vs. 15-20 million in each of the three decades prior.
4) McKinsey reported that U.S. must create 20 million jobs by 2020 to return to 5% unemployment, one measure of full employment.
5) Goods trade deficit is $650 billion, $200+ billion with just China. At 50k per job (a conservative number, as a typical job is about 35k in U.S.) this is about 10-15 million jobs...nearly our entire unemployment problem. Trade deficit requires capital surplus or borrowing by U.S.; since we had no place productive to put the capital, some of it went into housing. A nifty piece of vendor financing by China.
6) Apple employs 250,000 overseas vs. 25,000 in U.S. Dell and other high tech companies have similar 10-1 ratio, per Andy Grove article cited above.
7) China's share of global manufacturing has grown from 5% in 1996 to 12% by 2008, per Mark Zandi.
8) U.S. manufacturing employment has declined from 17 million in 2000 to 12 million in 2011 per The Economist.
I see a pattern here. If lack of jobs is one-third of our budget deficit, let's get on the case already.
ravikunjurs 08:24 11 Aug 11
Prof Rodrik, good post. Thanks. You are spot on with the analysis that manufacturing sector provides the first step to progress for the un-skilled, as opposed to the hi-tech and services sector. It’s an anomaly to see the US hi-tech companies import hi-tech skills and resources, while the general un-employment level is so high domestically. No amount of re-skilling is gonna plug this human resource gap. Even in India, wherein the agricultural sector is over-employed, with a large percentage of employable resources living in rural India, it’s the manufacturing, and not software sector, which is the ideal employer given the limited re-skilling required. Big question for the USA is how can it get its manufacturing sector to bounce back?
TheAmazingReset 08:26 11 Aug 11
All this debt worked so well to kick start globalization. US sends production oversees buys products back. We borrow from the other countries to pay for the difference. No problem as long as debt to GDP never reaches 95% or that houshlod debt does not go to 260% of GDP. This worked so well until we now realize that we can't grow fast enough to outpace debt and inflation. This geometric spending and credit expansion that created huge economic growth is slowing thus all asset prices are at risk. At www.theamazingreset.blogspot.com much attention is given to this issue. It seems that the only way to move forward is to take a step back and reset. This will cause a shock to the system but at least it will put us on firm ground.
Satyendra 11:58 11 Aug 11
in above commentary Dani Rodrik writes ''it can generate millions of jobs for unskilled workers, often women, who previously were employed in traditional agriculture or petty services.''
In India 52percent of labour force is employed in Agriculture sector and contributing to GDP only 16.1pe only.if in mfg sector labour force is raised to 50pc(it will be 239.1million),then what will they do there?author suggests "I have found in my research that individual manufacturing industries, such as auto parts or machinery, exhibit what economists call “unconditional convergence” . for auto & machinary these 239.1million will dig up whole iron ore of nation within a week and very next day vedanta Tata Mittals will sell it abroad-unconditional outward flow of precious ore.the developing nations with huge below poverty line families needs basic things food,shelter and cloth.manufacturing growth will not sustain without enhancement in agricultural productivity.if all developing nations will engage in manufacturing,who will give them food?global food market is in ‘critical’ status.
Shifting intention of labour force in developed nations:Agriculture->Industry->Service sector .everyone want to do white collar job. so service sector has swelled there.In UK 80.4pc of labour force are in sevice sector.
euroquisling 11:27 12 Aug 11
There's just one problem: even China's numbers of people employed in manufacturing is actually slowly falling.
Automation, increased productivity, service economy, et al.
Altogether, it's not bad: industrial products get cheaper and cheaper relative to incomes. That's what we wanted in the first place, and a major chunk of prosperity.
The point of economy is not "employing people", it's providing us with production. Employing people is a necessary cost, and not a goal.
krotok 04:27 13 Aug 11
In a developped economy, the tertiary sector (the service industry) is the largest. Growth must come from the improvement of the human capital producing these services. Scientific research can only improve material capital: primary or secondary sector of the economy. Research in human science can improve productivity and maintain growth in developped economy but we keep sending crap to Mars. Growth will come back when we'll know how to make better teachers, lawyers, politicians, nurses, managers, etc.
Pelle 01:53 17 Aug 11
I sometimes believe rules should be implemented such that countries with total current account deficits automatically should implement import taxes the size of the deficit and distribute the tax on those countries where the deficit accrue in proportion to their share of imports. The income of the taxes should be used to lessen the tax burden of export. The purpose: balance in foreign affairs and internal devaluation. Taxes on capital import is probably needed as well.
One effect of moving industry out of a country will be a higher deficit for that country, but the calculation done by a single firm differs from the total effect. A single firm doesn’t need to calculate with higher duties and differences in purchase power weighted salary will make the calculus of moving out positive. An import tax per country compensating for differences in purchase power parity is probably needed if fair trade is to be upheld.
gamesmith94134 08:29 31 Aug 11
gamesmith94134: How China and India will pay your bills
“Changes today produce new opportunities tomorrow. That transition can often be destabilizing. Some people will suffer as others gain. But such transformations are the inevitable result of free-market economics, and they provide hope as well as challenges.”Mr. Shuman is perfectly correct on the attitude that how the world evolves; so does Mr. Pneogy’s “a new world order in the Making?”
However, I hope just between US and China can take away their protectionism in cutting the tariffs and respect the law of copy right as well. Just last month, I was at Guangzhou for vacation and shopping; I found many Chinese products are quality goods but quite expensive and those foreigner’s goods are still out of reach to many even for me. A pair of ECCO shoes I purchased at Ross (the outlet store) at $60, and it was price $179 at retail store; and I found it too in International Trade Centre of Guangzhou at 4325 renmimbi at 80%(Chinese seller always gives discounts) bargain, or USD$600. Is it after plus 200% tax on import leather goods or the seller is making too much? However, the $179 plus transportation is pretty out of reach and beyond the understanding of the general public.
I am not criticizing the methodology in free trade; and I just think both countries should ease on tax and tariffs that we the consumers can make a better choice for what it is worth. Besides, there is a long way in the balance of trade, but we should take a better look on the consumer’s choice that defines everything. Can China and India pay the bills like jobs for American? It is the gateway to commerce only if they are rich enough to hire us or purchase our American products. My brother-in-law bought an I-phone (HK Model) at RMB6000 , sold at SF (USD$599), and he was rich but not many Chinese or American can either. So, free trade is still far beyond, but only a few from China can enjoy our popular product to-day that a Chinese professor of a named university can’t afford twenty years ago. We got a start and there is hope.
Now, China and India are upscale their infrastructure and financial establishments accompany with the increase of cost of labor that their citizens are benefited during the process. Their loss of competition to Vietnam and others with lower labor cost makes them consumers as well on the cheaper goods from the land afar; and they becomes the secondary consumer nations and partners to many Multinational Corporations. It creates the new world order in the freer market economics; and its ripple effect expands the population of consumers that their economy must complete on technologies and skill; so they can emerge into a new round of Multinational Corporations; then they can out sourced its jobs to many Americans who know how; and some up-scaled workers can afford to buy American products. Perhaps, we are talking of the new round of the emerging markets nations like Vietnam, OAS, African nations, or even Spain or Italy after they step away off the austerity programs that would follow the steps to innovate themselves to another new emerging market nations. In addition, there must be a better GATT arrangement on the consumers not the traders, we must understand the way we are and protectionism is not a guard to commerce but hurdle.
The frequency and liquidity of the consumable goods make the world goes around and protectionism only make the trader richer and it is not desirable to consumers through the strengthening of the mercantile law. Why should one pay three or double times more from one region than the other? I am not object to the copy right protection. But If only we allow the advantage of being the producer or manufacturer in the fair exchange from its motherland, we must see the consumers can enjoy the equal quality and pricing after emerging to another foreigner markets.
Either the ECCO shoe or the I-phone is the ones paid the bills, but we and both our government must take another look of what benefits most to the consumer if we think consumerism may save us from the turmoil of recessions.
I am not complaining on the RMB35 cup of Starbuck coffee in Shanghai ten years ago, but I do enjoy the varieties with Chinese style that serves in KFC, of Guangzhou to-day. Perhaps, I should drink tea instead of coffee in China, but it is not the point, or chew on the deep fried chicken instead of the Chinese donut; however, the quality trade may not be price and cost equilibrated, it is the affordability and the flexibilities in making the service to consumers that gives the competition for excellence and convenience in serving the consumers even in the different soils. If we the consumer can move the markets; certainly, we can change the mercantile law and attitude in protectionism. Growth on the global economies makes the nations healthy and we all get paid and we all pay the bills. Eventually, it is not which nation is purchasing our goods, it is the consumers who buy and pay; it is all equality and balances in the one of consumerism if we can have justifiable free trade among all nations.
May the Buddha bless you?
gamesmith94134 08:36 31 Aug 11
Gamesmith94134: How important is it to make things?
“That corresponds to high skill levels or capital intensities, both of which limit the extent to which high-wage manufacturing jobs will be responsible for mass employment. Low-skill jobs in tradable sectors will tend to flow to places with very low labor costs.”
This statement remains true on how profitable it is; and such concept did us in over the time of recession and unemployment. Our performance by efficiency even with better innovation or manufacture more with value added production, made mass employment selective. Eventually, we may lose our manufacturing by neglect, and redistribution of wealth is in jeopardy; perhaps, it is how the rich and the poor are polarized with the missing middle class worker who manufactures; in time, we lost our power to consume and edged our economy to anemic.
In the following, I would tell a story we should learn from the Chinese on how they did it. You may cry out socialism but redistribution of wealth and divisions of labor can be efficiently executed with its impetus in lesser essence of profitability through the circuitry of its economy that its discipline made China booms.
Perhaps, I would to tell a story happened to me in China recently. I went foot massage at a local parlor; and I met a retired movie star in the parlor. I asked her if she ever worked in the entertainment industry.
She smiled and replied me,” Yes. It was long ago. Now, I feel like useless.”
I answered her,” you are not. You are the consumer and not useless. If you are not here this evening; the store may closed earlier, and your massager is not making money and she do not have to buy her diner; then the café is not making money, the waiter and the cook is out of job.”We both laughed. I remember this conversation because no one ever gave me a compliment as being a good businessman.
Another time years ago, when I rode on the bus on the road in China, I saw
there were eight people watering the potted flowers at the center of the road.
I sighed and murmured with amaze that how wasteful is it to water the potted
flowers at the center of the road. Just a month ago, I saw there were eight
people water the potted flowers at the same road again. And, my wife compliment
me that female retires at 50 and male at 60; so the youth would have jobs.
Now, I am convinced productivity and efficiency worked differently on its
scales like macroeconomics and microeconomics. American was so efficient and
productive that we bankrupt the social security system and call on the senior
to work after 65.
So, take a speculation on the words like “useless” and wasteful again in job
creation and apply your model in both micro-economically and
macro-economically. It may inspire you the circuitry and frequency would
improve your thinking on the future.
Gamesmith94134: How important is it to make things?
“That corresponds to high skill levels or capital intensities, both of which limit the extent to which high-wage manufacturing jobs will be responsible for mass employment. Low-skill jobs in tradable sectors will tend to flow to places with very low labor costs.”
This statement remains true on how profitable it is; and such concept did us in over the time of recession and unemployment. Our performance by efficiency even with better innovation or manufacture more with value added production, made mass employment selective. Eventually, we may lose our manufacturing by neglect, and redistribution of wealth is in jeopardy; perhaps, it is how the rich and the poor are polarized with the missing middle class worker who manufactures; in time, we lost our power to consume and edged our economy to anemic.
In the following, I would tell a story we should learn from the Chinese on how they did it. You may cry out socialism but redistribution of wealth and divisions of labor can be efficiently executed with its impetus in lesser essence of profitability through the circuitry of its economy that its discipline made China booms.
Perhaps, I would to tell a story happened to me in China recently. I went foot massage at a local parlor; and I met a retired movie star in the parlor. I asked her if she ever worked in the entertainment industry.
She smiled and replied me,” Yes. It was long ago. Now, I feel like useless.”
I answered her,” you are not. You are the consumer and not useless. If you are not here this evening; the store may closed earlier, and your massager is not making money and she do not have to buy her diner; then the café is not making money, the waiter and the cook is out of job.”We both laughed. I remember this conversation because no one ever gave me a compliment as being a good businessman.
Another time years ago, when I rode on the bus on the road in China, I saw
there were eight people watering the potted flowers at the center of the road.
I sighed and murmured with amaze that how wasteful is it to water the potted
flowers at the center of the road. Just a month ago, I saw there were eight
people water the potted flowers at the same road again. And, my wife compliment
me that female retires at 50 and male at 60; so the youth would have jobs.
Now, I am convinced productivity and efficiency worked differently on its
scales like macroeconomics and microeconomics. American was so efficient and
productive that we bankrupt the social security system and call on the senior
to work after 65.
So, take a speculation on the words like “useless” and wasteful again in job
creation and apply your model in both micro-economically and
macro-economically. It may inspire you the circuitry and frequency would
improve your thinking on the future.
May the Buddha bless you?
May the Buddha bless you?
gamesmith94134 08:38 31 Aug 11
Gamesmith94134: How important is it to make things?
Dissent wrote,
” The bottom line is that unless we think someone is going to hand us trillions of dollars worth of manufactured goods for nothing indefinitely, then there is zero doubt that America needs manufacturing. It also needs people writing on economic issues who know arithmetic."
You sound too dark. There is always miracle like we are making chopsticks for Chinese, since they ran out of wood and bamboo. I saw it on TV. A timber company, in Georgia of America, turned into manufacturer with low tech machine operators and packers are making chopsticks for China and Asia. Just think of the Asians do use consumer products like chopsticks that is “Made in USA”. Low-value added, but it works with not so educated workers in America. Does it sound encouraging? It is not a hand-out for American hard working man. They earn it.
Perhaps, it is time for us to understand what they need, and we do have the technology to land on moon; why can we investigate on what can be manufactured? Who need High tech computer and large screen TV? They are making them now.
May the Buddha bless you?
RameshKumarNanjundaiya 04:41 07 Nov 11
YET ANOTHER VIEW - The current state of the Indian Economy 2011
Oct 8th 2011 4:45 GMT
What is the current state of the Indian Economy - The Indian Paradox 2011
QUOTE
India’s economic growth rate in the past decade has been nothing short of spectacular. With its GDP growth around 7 to 9 percent per year, India is the second-fastest-growing large economy in the world. However, the country’s manufacturing sector accounts for a dismal 17 percent of its employment opportunities, as compared to 60 percent in agriculture and 23 percent in services.[1]This summer, the World Bank’s Indian Visiting Scholars Program* invited two leading academics from Harvard University to visit India and to articulate potential pathways to sustain the country’s growth trajectory. These 2 scholars are Ricardo Hausmann, Professor of Economic Development at the John F. Kennedy School of Government and Director of Harvard’s Center of International Development and Dani Rodrik, Professor of International Political Economy at the Kennedy School. While there, they interacted with the private sector and key policymakers, including senior officials of the Department of Industrial Policy and Promotion, the Planning Commission, and the Ministry of Finance. Hausmann argues that diversification in the economic structure, and not necessarily specialization, may be a crucial factor for accelerating growth in India.
UNQUOTE
My response
What is the current state of the Indian Economy and where is it headed – While I fully understand and appreciate Hausmann’s views that diversification in the economic structure, and not necessarily specialization, may be a crucial factor for accelerating growth in India, his observation that rich economies produce many products whereas developing economies produce few products that are also made in rich economies calls for a discussion. It is true, that this relationship exists not only between countries, but also between cities within a country. What is therefore the secret of India’s economic growth rate in the past decade which has been nothing short of spectacular? With its GDP growth around 7 to 9 percent per year, India is the second-fastest-growing large economy in the world. Who is the driver for this. Before we answer this, one needs to revisit the American Economic Historian W.W. Rostow who in the sixties had suggested that countries passed through 5 stages of economic development as Traditional Society, Transitional Stage, Take-off, Drive to Maturity and High Mass Consumption., Would this today apply to India. Many development economists argue that Rostows's model was developed with Western cultures in mind and not applicable to developing countries as India as it is generalised and policy makers are unable to identify the various stages as they seem to overlap each other. It depends how you look at it. It is a growth model and we should examine if there is actual all round development to witness the 9% GDP growth. One of the contributors for this is the growing “Indian Middle Class”. While the reasons are varied, but one which has really propelled up the Indian economy ( I would say, in the last 6 years) is the growing buying power of people in the so called "Middle Income Group" which in the case of India, per my estimation, represents almost 300 million people. This is a huge market to cater to and is growing. This group is the one which is pushing demand locally and thus giving a boast to the economy. It is a life cycle change in the population group. This is the group which is spending on all goods and related services. Because of such a growth demand for goods/services, banks will certainly witness increase in their lending in the next couple of years. This fuels continuous economic growth (notwithstanding inflation) The rosy side is that when the economy grows, the equity markets become much more active and again adds for the economy growth with more people coming into the "Middle Income Group of People" or the people with buying power or cash to spend. Thus going back to W.W. Rostow, we are somewhere in between stage 3 and 4. But at this stage, one needs to be very careful. While India seems to be embarking on a high-growth strategy today, it must guard and overcome some global trends which include global warming, the falling relative price of manufactured goods and rising relative price of commodities, including energy; swelling discontent with globalization in advanced and some developing economies, the various ongoing “scams” which could eat upto 2% of the GDP, the growing “young population” which should not become a struggle (almost 400 million in the age group of 15 to 30 years) to cope with and the ongoing mismatch between global problems—in economics, health, climate change, and other areas—and weakly coordinated international responses. Notwithstanding the challenges, the support of the global economy remains central for the current Indian growth story or as they call it the - The India Paradox: Promoting Competitive Industries in a High-Growth Country.
RAMESH KUMAR NANJUNDAIYA
Anumakonda 12:55 16 Nov 11
Dani Rodrik,your plea for MANUFACTURING Economy as Prime Mover is indeed timely.
Dr.A.Jagadeesh Nellore(AP),India
gamesmith94134 08:43 16 Nov 11
Gamesmith94134@ The manufacturing imperative
Mr. RAMESH KUMAR NANJUNDAIYA
“Redistribution of wealth and divisions of labor can be efficiently executed with its impetus in lesser essence of profitability through the circuitry of its economy that its discipline made China booms”, it works for India too. If you can focus on the frequency and circuitry can improve the domestic economy and stop polarization of the rich and poor by creating more of the “middle income group of people”; in addition, why should India be the competitive and high growth industries nations in catching up with the 99% nothing and 1% of the rich ones. Strength comes from inside, not competitions. What is paradox would be if you know why American made chopsticks and you must make rooms for the youth?
Gamesmith94134: The economics of strategic containment
When I read of the APAC, Hawaii meeting, I was amazed that the result was good as the G20 in solving the European Crisis----let China pays. Now, I am listening to the containment plan in single out China in America’s new “Pacific offensive,” aimed at offering nations in the region an alternative to excessive and rapidly growing dependence on a rising China; and balckmailing Jpan to join the offensive to shut out China; if China would not allow reminbi to rise by 25%, or catch copy right offenders.
“In short, the TPP’s core agenda will offer the region a “Doha Round-type” agreement that includes the social and environmental agenda that developing economies have been resisting within the WTO.” Is it the coming future of the Obama-Clinton agreement on their CIA, as “commerce in awe”? Currently, China is in denial of the South Sea dispute, and the EU crisis; it worked, so America can donimate Doha Round-type agreement and everyone follows into the cold war with China and Japan.
However, as American Chinese, I fear of the ‘containment’; it sounds like a beast entrapped; and I must not criticize how the CIA, as ‘Commerce In Awe’, can influence more on the recovery of the global economy. However, I do agree with Zolt’s saying that we are all part of the system we must work together to have a mutual understanding of our survival. It is for us switching our inherent nature and attitude from self calculation to calculation for the whole in order to make this mutual system work.
Perhaps, Mr. Obama and Ms. Clinton must learn to walk a mile with Mr. Hu’s shoe, in raising reminbi by 25% promptly; then, American can ease the price of its real estate by 25% and let the richer Chinese buy them. Perhaps, they can repay Chinese for the loss in MF global financial just like the Lehman Brothers promptly too; since we do not accept counterfeiters or scammer in our Commerce In Awe. In the end, everybody is going back to Doha Round and everyone is smiling.
May the Buddha bless you?
tcolgan001 04:36 10 Aug 11
Simple solution to the decline in manufacturing - balance trade.
See Warren Buffett’s “Squanderville versus Thriftville”
http://www.freerepublic.com/focus/news/1053684/posts
Give “Import Credits” to those who export. Tax those who merely import and saddle the nation with debt. This will encourage manufacturing and establish the true utility of fair trade (with all benefits of “comparative advantage”).