Manufacturing Still Matters

You took part in a recent Economist magazine online debate on the relevance of manufacturing, so let’s start with a simple question: Does industry still matter in the 21st century?

Well, the vast majority of those who voted in the online debate were in favour of the motion that I defended – that an economy cannot succeed without a big manufacturing base. It was 76% of the votes in favour. I argued that we shouldn’t reduce the debate to some kind of simplistic dichotomy between “manufacturing good, services bad”. It is a very complex picture, and we need to be willing to revise our positions according to changing trends, but, in many different ways, I showed that manufacturing still matters. Unless you are a very small economy like Monaco or the Seychelles, you cannot just rely on services to have a high standard of living.

And I might mention that in my argument that the state of a nation’s manufacturing base — its size and competitiveness — is the most important determinant of its prosperity, I used statistics supplied by UNIDO, which I always find very useful.

Much of the time when people in the North think of industrial development in the South, they associate it with “a race to the bottom”, with pollution and with low energy efficiency. Is industry in the South a part of the problem or a part of the solution for the world today?

There is indeed a lot of ‘racing to the bottom’, but it is not the whole picture. For example, Japan was one of the most polluting countries in the world, and South Korea had some of the worst working conditions, but eventually they overcame these problems, not by racing to the bottom, but by trying to go up. Some countries are stuck at the bottom, and have been running export processing zones for the last 50 years with no visible impact on industrial development. But, in other countries, like China, there is a lot of upgrading going on. In the short to medium term, the development of new producers in the South is going to lead to adjustment in the North, which might be painful, but, in the long term, this is going to be good for everyone, because, even if they lose some industries, the rich countries will have a bigger market to sell to and bigger economies to invest in. So, I don’t see it as a zero sum game, while admitting that there may be some elements of a race to the bottom. There is a tendency in some quarters in the rich countries to blame everything on China and I think that is quite deplorable.

There was a particular development framework that was dominant over the last 30 years, which was based on the notion that capabilities are not really an issue and that it is all about incentives. What is missing from this is vision. In a country like Haiti today you might have to do some unsavoury things in order to get the economy going, but there should be a plan to move it upward, to upgrade it, in the same way that it happened in countries like South Korea and Taiwan. Those countries were by-words for labour exploitation in the 1960s and 70s. In my book,Bad Samaritans, I wrote about some factories in South Korea that refused to serve soup in the canteens in case this would mean the workers would take an extra toilet break! But what happened in South Korea and Taiwan is that they didn’t say ‘this is what we are good at and we will do it forever’. They used it as a springboard to then make things like cheap electronics, and then to move up still further to make cars, ships, semi-conductors, and so on. And that’s how they got rid of cheap, exploited labour.

If you think that you have to make the most of whatever you have got today and that this is going to deliver development somewhere, a long way down the road – we don’t know when but it will happen – then you will have a situation like in Sri Lanka or the Philippines. Although on one level these countries are very popular on the investment side because they offer relatively well-educated and cheap labour, since there is no effort to upgrade the economy as a whole, their economies get stuck at this level forever. Just to put it into perspective, in the early 1960s, when South Korea was starting its development effort, its per capita income was US$82, while in the Philippines it was US$200. Today, in the Philippines it is US$2,000, while in South Korea it is US$20,000. In the end, these long term upgrading policies are the most critical things. So, if some countries do really cheap, low-yielding activities, it is not nice, but it is not a disaster, because what matters is what they do with the money that they make in the long run. Some countries stick at it, believing in the theory of comparative advantage and the power of free trade and the free market to lift everyone, while others say unless we do something with this money, we are not going to move out of it.

Industrial policies seem to have re-surfaced pretty much everywhere around the world, except in your discipline — development economics. Do you think this is another example of “kicking away the ladder”, to quote the title of one of your books?

It’s not that bad! To his credit, Justin Lin, the current World Bank chief economist, has been trying to bring this idea of industrial policy back into the zone of legitimate discussion, although he himself confessed that most of his economists are against him! There is a lot of resistance there but I think it slowly coming back in the sense that countries like the UK and the US are talking about rebalancing the economy which in their context means reviving manufacturing and restraining the financial sector. A lot of countries are interested in ‘green development’, or as UNIDO also terms it, ‘resource-efficient development’. They all know that without some sort of government intervention, some sort of industrial policy, it is not going to happen. When it comes to the so-called ‘green industries’, a lot of people admit that this is where you really need industrial policy. After the financial crisis, the legitimacy of the free market, free trade view – although surprisingly resilient – has been dented. People feel a bit more comfortable talking about heterodox policies, like industrial policy.

You say that green industry needs government intervention. Is it going to happen – in time?

That’s the important question – whether it is going to happen in time. In the end, everything happens but in this case we are up against the clock. By the time people say global warming is happening and we better do something about it, it will be too late! I have serious doubts, but you are seeing support for these issues from some surprising quarters. For example, over the last five years, look at the South Korean government. It’s a government of a very conservative party that is against the idea of industrial policy, and it is headed by someone who used to be the CEO of a big company, Hyundai Construction. He is not a ‘natural’ kind of green guy but, somehow, someone convinced him that this is the future growth industry. The government has been pouring money into the Global Green Growth Institute, despite the fact that the general tendency of the government is against industrial policy, and despite the fact that, in the political agenda of this party, the environment is low on the list of priorities. So, there are some interesting dynamics. I am not saying it will never happen.

Regarding industrial policies in the South, do you think anything can be learnt from other countries in the 21st century? Earlier in your career you focused on an alternative reading of the East Asian ‘miracle’, do you think the same can be done with the BRICS?

I did a lot of research on East Asia, but I also studied the economic policies of the United States and European countries in the nineteenth and early twentieth centuries when they were developing countries, and I found that there was a great willingness to learn from each other. And recently I have been researching agricultural development policy and have learnt that the Americans actually sent separate government and private sector missions to Scandinavia to learn about how agricultural cooperatives work and how cooperative banks work, and they reformed the agricultural credit system completely after those visits. History is full of examples – the Japanese more or less copied what the Germans were doing, and the Germans were copying what the British were doing. Learning from others’ successful experiences has been an integral part of the development process.

The interesting thing is that in the last 50-60 years we have seen a series of developing countries becoming very successful, so the potential pool to learn from has expanded enormously. It is no longer possible to say development is all because of European culture, because of Christianity – how about South Korea, and China, and Brazil?

This is an exciting time. I am not saying it is easy to learn lessons, because every country has different conditions: who has China’s economic size? who has Brazil’s natural resources? And so on. But there are lots of lessons to be learnt, especially when you go down to the sectoral level. Even in relatively undeveloped economies, you can always find one or two interesting examples of successful industrial policy. Perhaps UNIDO should compile this knowledge and come up with a quick reference book for industrial policymakers? Of course it would have to come with a health warning that you should not try to replicate the examples directly…Having this kind of ready-reference would be useful for developing country policymakers because unfortunately they don’t usually have many reference books, mainly just things that are easily available, like World Bank documents. Some of these are good but they are all about getting the prices right and getting the institutions right. Who would argue against that? The devil is in the detail. Economic development does not just happen because the government says, ‘now we have a free market’!

In the context of the global economic crisis, United Nations agencies are concerned that some donors will reduce their financial support. What is your view?

Unfortunately, in some countries the development policymaking establishment is still heavily influenced by people who believe that if you give people a mosquito net, six years of primary education and an offer of microfinance, then somehow they will create development. I am not against those things, but they are short-term palliatives, like pain-killers. Those things cannot create development. Some governments, while looking for an excuse to cut expenditure, are also heavily influenced by this particular outlook on development, which considers industrial policy as wasteful, issues such as productive capabilities as marginal, and questions about structural transformation as irrelevant. UNIDO is doing things to create results in 25-30 years, but these politicians want results next week!

You recently gave a lecture to the Occupy the London Stock Exchange protestors. What is your opinion of the Occupy movement in general?

I gave a lecture to the Tent City University in November, and in February I delivered a lecture on my latest book to about 150 people from the financial … – the same thing on the other side of the barricade, so to speak, which was interesting. The Occupy movement is too idealistic. It is completely decentralized and you can’t operate like that, although, on another level, that’s what made the movement legitimate and unique. It cuts both ways. The general impression that the mainstream media gives is that the Occupy movement is a collection of pot-smoking anarchists but I met a lot of people who were basically reformists who did not want to destroy the system. They had jobs – some worked in the financial sector. It was a channel for a more general concern about the health of the economic system.