Economy cannot succeed without a big manufacturing base

Il a eu un excellent débat dans la revue The Economist :

This house believes that an economy cannot succeed
without a big manufacturing base.

L’économie manufacturière est la colonne vertébrale de ton économie, si tu la laisses délocaliser, toute la structure économique entourant cette activité économique va s’écrouler aussi.

Malheureusement, cette tendance à être délocalisé vers les pays émergents à moindre coût a réduit les recettes fiscales de l’État, au point que c’est la classe moyenne qui doit supporter, toutes les augmentations.

Un système manufacturier vigoureux  crée une économie forte et prospère, l'Allemagne est un bel exemple.

Economy cannot succeed  without a big manufacturing base

Economy cannot succeed  without a big manufacturing base


Faculty of Economics, University of Cambridge


Ha-Joon Chang teaches at the Faculty of Economics, University of Cambridge. In addition to numerous articles in journals and edited volumes, he has written 13 books and edited 10. His books include "The Political Economy of Industrial Policy", "Kicking Away the Ladder", "Bad Samaritans" and "23 Things That They Don't Tell You About Capitalism". By the end of 2011, his writings will have been translated into 24 languages. He has worked as a consultant for numerous international organisations, national governments, private-sector firms and NGOs. He is the winner of the 2003 Gunnar Myrdal Prize and the 2005 Wassily Leontief Prize

The proposer's opening remarks

Jun 28th 2011 | Ha-Joon Chang

I propose that the state of a nation's manufacturing base (its size and competitiveness) is the most important determinant of its prosperity.

Hearing this motion, some may ask: how about countries like Switzerland and Singapore, which have become rich through services, like finance, tourism and trading; don't they show the viability of service-based prosperity?

Actually, they show the exact opposite. According to UNIDO data, in 2002, Switzerland had the highest per head manufacturing value added (MVA) in the world—24% more than that of Japan, the second highest. In 2005, it ranked second, after Japan. Singapore ranked third. So these supposed "model" service-based economies are in fact two of the strongest manufacturing nations in the world.

Of course, there are some countries, such as Australia, that maintain high living standards without a big manufacturing sector, thanks to exceptional natural resource endowments. But most other countries are not so lucky. Without a substantial and productive manufacturing base, it is impossible for them to attain high living standards.

There is truth in the argument that above a certain level of development, countries become "post-industrial", or "deindustrialised". But that is only in terms of employment—the falling proportion of the workforce in engaged in manufacturing. Even the richest economies have not really become post-industrial in terms of their production and consumption.

From expenditure data in current (rather than constant) prices, it may appear that people in rich countries are consuming ever more services, but that is mainly because services are becoming ever more expensive in relative terms, thanks to structurally faster productivity growth in manufacturing.

By their very nature, many service activities are inherently impervious to productivity increases. In some cases, the very increase in productivity will destroy the product itself. If a string quartet trots through a 27-minute piece in nine minutes, would you say that its productivity has trebled? For some other services, the apparently higher productivity may be due to the debasement of the product. A lot of the increases in retail service productivity in countries like America and Britain have been a result of lowering the quality of the retail service itself—fewer shop assistants, longer drives to the supermarket, lengthier waits for deliveries, etc.

There are some service activities, such as finance, telecommunications and transport, which have had fast productivity growth in recent periods—sometimes even faster than those of some sub-sectors of manufacturing. However, these are mostly "producer" services, for which the main customers are manufacturing firms, so their growth is in large part dependent on the vitality of the manufacturing sector. Moreover, when it comes to financial services, the 2008 financial crisis has revealed that much of the recent productivity growth had been due to "financial innovations" that obscured (rather than genuinely reduced) the riskiness of financial assets, thereby allowing the financial sector to raise its productivity at an unsustainable rate. With the forthcoming tightening of financial regulation across the world, productivity growth in financial services will significantly slow down.

But, one may ask, if de-industrialisation is due to the very dynamism of a country's manufacturing sector, isn't it a good thing?

Not necessarily. The fact that de-industrialisation is mainly caused by the comparative dynamism of the manufacturing sector vis-à-vis the service sector does not tell us anything about how well it is doing compared with its counterparts in other countries. If a country's manufacturing sector has slower productivity growth than its counterparts abroad, it will become internationally uncompetitive, leading to balance-of-payments problems in the short run and falling standards of living in the long run. In other words, de-industrialisation may be accompanied by either economic success or economic failure.

Even if it is of the "successful" variety, deindustrialisation is likely to have a negative effect on a country's balance of payments because services are inherently more difficult to export. At the root of the low "tradability" of services lies the fact that many require their providers and consumers to be in the same location. No one has yet invented ways to provide long-distance hairdressing or house cleaning. Of course, this problem will be solved if the service provider (the hairdresser or the cleaner in the above examples) can move to the customer's country, but that in most cases means immigration, which most countries restrict heavily.

Given this, a rising share of services in the economy means that the country, other things being equal, will have lower export earnings. Unless the exports of manufactured goods rise disproportionately, the country will not be able to pay for the same amount of imports as before. If its de-industrialisation is of a negative kind accompanied by weakening international competitiveness, the balance-of-payments problem could be even more serious.

To be sure, not all services are equally non-tradable. There are some high-value producer services that are highly tradable, such as banking, consulting and engineering. However, even in Britain, which is most advanced in the exports of these services, the trade surplus they generate is well below 4% of GDP, just enough to cover the country's manufacturing trade deficits. In the case of America, the surplus is less than 1% of GDP, nowhere near enough to make up for its manufacturing trade deficits, which are also around 4% of GDP. America has been able to maintain such a large manufacturing trade deficit only by borrowing heavily from abroad.

Moreover, a country's ability to export many of these producer services cannot be maintained in the long run without a strong manufacturing sector. In services like engineering and design, insights gained from the production process are crucial. Given this, a weakening manufacturing base will eventually lead to a decline in the quality, and exportability, of these services.

While a simplistic "manufacturing good, services bad" viewpoint is unwarranted, we undervalue the manufacturing sector at our peril. It has been at the foundation of human material, and social, progress at least since the Industrial Revolution and it is likely to remain so in the foreseeable future

Les blogueurs:

Der Perfesser wrote:

Dear Sir,

Bhagwhati's view is now outdated. Ja-Hoong's view is now the more up to date, and the economic profession is swinging to this view among those who seriously consider this important issue.

Why? The revision stemmed from the strong empirical results which show that a country's prosperity is strongly related to its manufacture of hard tangible products which have a strong export demand, and that the service sector was largely "derivative" and dependent on the prosperity of the manufacturing sector. In economic speak, the service sector was NOT a substitute for the manufacturing sector, but was to a very large extent complementary.

As this result contradicted theory, it was ignored for many years. The "old" approach, epitomized by Bhagwhati's view, was that in economic terms, services and manufacturing were seamlessly interchangeable, and furthermore as an economy "matured" the service sector would grow at the expense of the manufacturing sector. And that was a good thing.

The more up to date theory is that manufacturing and services are separate. They involve a separate set of resources (not just subsumed in "capital" and "labour" - the old approach)requiring entirely different infrastructure and government policies. Obvious in retrospect. But furthermore what is important, the new theory explains the previously ignored empirical results, that the service sector does not exist is a vacuum, but depends on the manufacturing sector for its existence.

Yes, as the manufacturing sector prospers, increasing the average standard of living of a country, the service sector's proportion of the GDP increases.

But what happens when the manufacturing sector declines? The crucial answer is that the service sector collapses. The service sector is dependent on an internationally competitive manufacturing sector. It cannot exist just by itself, in an economic vacuum. The implication of the old theory, reductio ad absurdum, was that the manufacturing sector could disappear and everybody will be happy providing each other services, is nonsense. Also the belief in "internationally competitive services' is largely a fallacy. Most services are non-tradeable.(Even banking).

So, with all due respect to Professor Bhagwhati, he is a representative of the "mathematical school", whose very elegant mathematical models have been shown by recent experience to be based on false assumptions. Bye bye Ricardo. Welcome Mike Porter and his successors. A prosperous country has a strong and prosperous manufacturing sector.Without manufacturing you will have a very weak and small services sector. Oh yes, it will be a very high PROPORTION of the GDP - of a poverty stricken country.

Lectures complémentaires


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