Counterparties: Can poor nations manufacture wealth?

By Peter Rudegeair
August 9, 2012

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Dani Rodrik has a provocative piece for Project Syndicate arguing that the quest for growth has gotten more elusive over the past few years. During the second half of the 20th Century, he says, if poor countries wanted to grow up to be rich (and didn’t have the patrimony of natural resource wealth), they would have to first “move their labor from the countryside (or informal activities) to organized manufacturing”. Manufacturing industries are relatively easy to replicate; they create rapid growth in productivity and incomes “regardless of the quality of domestic policies, institutions, or geography“.

That world is gone now. Achieving an Asian Tiger-style growth miracle is trickier for a couple of reasons:

Technological advances have rendered manufacturing much more skill- and capital-intensive than it was in the past, even at the low-quality end of the spectrum … It will be impossible for the next generation of industrializing countries to move 25% or more of their workforce into manufacturing, as East Asian economies did.

Second, globalization in general, and the rise of China in particular, has greatly increased competition on world markets, making it difficult for newcomers to make space for themselves. Although Chinese labor is becoming more expensive, China remains a formidable competitor for any country contemplating entry into manufactures.

Ryan Avent points us to a recent column in the Economist that reaches the opposite conclusion: “[m]odern supply chains are making it easier for economies to industrialise”. In a blog post, he finds Rodrik’s concerns wanting:

For the moment, Mr Rodrik’s concerns appear somewhat unfounded. Chinese manufacturing is very capital intensive, and yet employment in industry there has been remarkably consistent over the past two decades. Admittedly, this is partly due to declining employment in old state enterprises offsetting rising employment in new, export-oriented firms. But across the rich and emerging world, falling labour intensity in manufacturing does not appear to limit the contribution of industry to prosperity.

Rodrik and Avent disagree over the extent to which manufacturing can spark catchup growth, but both seem to take it as a given that it’s still the best path to follow for countries that want to get rich. It’s at least a much more empirical view than Deirdre McCloskey’s thesis that countries get rich once their citizens “stopped sneering at market innovativeness and other bourgeois virtues”. – Peter Rudegeair

On to today’s links:

Regulators
SEC drops mortgage charges against Goldman – DealBook

Asset Classes
Lessons in lobster pricing – NYT

Compelling
“Turning bad jobs into good jobs is arguably as important as creating more jobs” – Demos

Price Points
Calm down, the drought will not have much effect on America’s already low food prices – WSJ

MF Doom
Jon Corzine is just waiting for anyone with a Bloomberg terminal to get in touch – Zero Hedge

Quote of the Day
“[Federal] agencies will be asked to test complex or lengthy forms … by seeing if people can actually understand them.” – White House

Housing
Record low mortgage rates could be even lower “if banks were satisfied with the profit margins of just a few years ago” – DealBook
Charts: how low mortgage rates and even lower bond yields mean increased profit margins for mortgage originators – DealBook
Arizona and California, epicenters of the housing crisis, now have foreclosure rates below the national average – WSJ
Own to rent: a pilot program allows homeowners to avoid foreclosure by renting their homes – WSJ

New Normal
Fear-driven productivity gains: Scared workers are putting in extra, unreported hours – Businessweek

EU Mess
“We can do it alone”: cutting Italy’s debt by convincing Italians to pre-pay their taxes – FT

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