Why premature deindustrialization is really bad news for development

February 27, 2015

     By Duncan Green     

One of the many positives about development is that lots of good stuff is happening much earlier in a country’s trajectory – on average, falling infant rodrik (1)mortality, access to healthcare and education, rights, democracy etc all take place at lower levels of GDP per capita than in the past. Unfortunately, guru economist Dani Rodrik has also found something not so positive following the same pattern – premature deindustrialization. Here are some excerpts from his new paper.

From the Abstract:

‘The hump‐shaped relationship between industrialization (measured by employment or output shares) and incomes has shifted downwards and moved closer to the origin (see graph below). This means countries are running out of industrialization opportunities sooner and at much lower levels of income compared to the experience of early industrializers. Asian countries and manufactures exporters have been largely insulated from those trends, while Latin American countries have been especially hard hit. Advanced economies have lost considerable employment (especially of the low‐skill type), but they have done surprisingly well in terms of manufacturing output shares at constant prices. While these trends are not very recent, the evidence suggests both globalization and labor‐ saving technological progress in manufacturing have been behind these developments. Premature de‐industrialization has potentially significant economic and political ramifications, including lower economic growth and democratic failure. ‘

Skip all the equations, and get to this from the conclusions:

Rodrik fig‘Premature deindustrialization is not good news for developing nations…. The consequences are already visible in the developing world. In Latin America, as manufacturing has shrunk informality has grown and economy‐wide productivity has suffered. In Africa, urban migrants are crowding into petty services instead of manufacturing, and despite growing Chinese investment there are as yet few signs of a real resurgence in industry. Where growth occurs, it is driven largely by capital inflows, transfers, or commodity booms, raising questions about its sustainability.

In the absence of sizable manufacturing industries, these economies will need to discover new growth models. One possibility is services‐led growth. Many services, such as IT and finance, are high productivity and tradable, and could play the escalator role that  manufacturing has traditionally played. However, these service industries are typically highly skill‐intensive, and do not have the capacity to absorb – as manufacturing did – the type of labor that low‐ and middle‐income economies have in abundance. The bulk of other services suffer from two shortcomings. Either they are technologically not very dynamic. Or they are non‐tradable, which means that their ability to expand rapidly is constrained by incomes (and hence productivity) in the rest of the economy.

The political consequences of premature deindustrialization are more subtle, but could be even more significant. Historically, industrialization played a foundational role in Europe and North America in creating modern states and democratic politics. Its relative absence in today’s developing societies could well be the source of political instability, fragile states, and illiberal politics.’

Rodrik admits he’s on ‘speculative ground’ when discussing possible links between deindustrialization and politics, but I’m pleased to say he doesn’t let deindustrializationthat stop him. The premature disappearance of an industrial proletariat (historically, the basis for unions and social democracy) has profound political implications:

‘Politics looks very different when urban production is organized largely around informality, a diffuse set of small enterprises and petty services. Common interests among the non‐elite are harder to define, political organization faces greater obstacles, and personalistic or ethnic identities dominate over class solidarity. Elites do not face political actors that can claim to represent the non‐elites and make binding commitments on their behalf. Moreover, elites may prefer – and have the ability – to divide and rule, pursuing populism and patronage politics, and playing one set of non‐elites against another. Furthermore, elites themselves may be much more divided, based on clans or other loyalties. Consequently, grand political bargains become less likely. Political institutions remain fragile and personalized.   In short, premature deindustrialization may hamper both the development of middle‐ class values and the emergence of political settlements that allowed the consolidation of democracy in today’s advanced countries.

On the face of it, this conclusion appears to be contradicted by the spread of democracy around the world. More countries in the developing world are formally democratic today than has ever been the case. However, upon closer look, political life in many if not most of these countries is marred by civil rights abuses and popular discontent that periodically erupts in protests and riots. Governments pursue an illiberal brand of politics and are democratic only in name. For the most part, democracy in the developing world remains either a within‐elite affair or takes the form of populism.’

Brilliant, if depressing. Sorry.

February 27, 2015
Duncan Green