The Manufacturing Imperative

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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