PRINCETON – Most of today’s
advanced economies became what they are by traveling the well-worn path
of industrialization. A progression of manufacturing industries –
textiles, steel, automobiles – emerged from the ashes of the traditional
craft and guild systems, transforming agrarian societies into urban
ones. Peasants became factory workers, a process that underpinned not
only an unprecedented rise in economic productivity, but also a
wholesale revolution in social and political organization. The labor
movement led to mass politics, and ultimately to political democracy.
Over
time, manufacturing ceded its place to services. In Britain, the
birthplace of the Industrial Revolution, manufacturing’s share of
employment peaked at around 45% before World War I and then fell to just
above 30%, where it hovered until the early 1970’s, when it began a
precipitous decline. Manufacturing now accounts for slightly less than
10% of the workforce.
All
other rich economies have gone through a similar cycle of
industrialization followed by deindustrialization. In the United States,
manufacturing employed less than 3% of the labor force in the early
nineteenth century. After reaching 25-27% in the middle third of the
twentieth century, deindustrialization set in, with manufacturing
absorbing less than 10% of the labor force in recent years.
In
Sweden, employment in manufacturing peaked at 33% in the mid-1960’s,
before falling to the low teens. Even in Germany, often regarded as the
strongest manufacturing economy in the developed world, manufacturing
employment peaked around 1970, at close to 40%, and has been steadily
declining ever since. As Harvard University’s Robert Lawrence has argued, deindustrialization is common and predates the recent wave of economic globalization.
Only
a few developing countries, typically in East Asia, have been able to
emulate this pattern. Thanks to export markets, South Korea
industrialized exceptionally rapidly. With manufacturing’s share of
employment rising from the low single digits in the 1950’s to a high of
28% in 1989 (it has since fallen by ten percentage points), South Korea
underwent in three decades a transformation that took a century or
longer in the early industrializers.
But
the developing world’s pattern of industrialization has been different.
Not only has the process been slow, but deindustrialization has begun
to set in much sooner.
Consider
Brazil and India, two emerging economies that have done comparatively
well in the last decade or so. In Brazil, manufacturing’s share of
employment barely budged from 1950 to 1980, rising from 12% to 15%.
Since the late 1980’s, Brazil has begun to deindustrialize, a process
which recent growth has done little to stop or reverse. India presents
an even more striking case: Manufacturing employment there peaked at a
meager 13% in 2002, and has since trended down.
It
is not clear why developing countries are deindustrializing so early in
their growth trajectories. One obvious culprit may be globalization and
economic openness, which have made it difficult for countries like
Brazil and India to compete with East Asia’s manufacturing superstars.
But global competition cannot be the main story. Indeed, what is
striking is that even East Asian countries are subject to early-onset
deindustrialization.
Consider
China. In view of its status as the world’s manufacturing powerhouse,
it is surprising to discover that manufacturing’s share of employment is
not only low, but seems to have been declining for some time. While
Chinese statistics are problematic, it appears that manufacturing
employment peaked at around 15% in the mid-1990’s, generally remaining
below that level since.
China
is a very large country, of course, with much of its workforce still in
rural areas. But most migrant workers now find jobs in services rather
than in factories. Similarly, it is extremely unlikely that the new crop
of manufacturing exporters, such as Vietnam and Cambodia, will ever
reach the levels of industrialization attained by the early
industrializers, such as Britain and Germany.
An
immediate consequence is that developing countries are turning into
service economies at substantially lower levels of income. When the US,
Britain, Germany, and Sweden began to deindustrialize, their per capita
incomes had reached $9,000-11,000 (at 1990 prices). In developing
countries, by contrast, manufacturing has begun to shrink while per capita
incomes have been a fraction of that level: Brazil’s
deindustrialization began at $5,000, China’s at $3,000, and India’s at
$2,000.
The economic,
social, and political consequences of premature deindustrialization have
yet to be analyzed in full. On the economic front, it is clear that
early deindustrialization impedes growth and delays convergence with the
advanced economies. Manufacturing industries are what I have called
“escalator industries”: labor productivity in manufacturing has a
tendency to converge to the frontier, even in economies where policies,
institutions, and geography conspire to retard progress in other sectors
of the economy.
That is
why rapid growth historically has always been associated with
industrialization (except for a handful of small countries with large
natural-resource endowments). Less room for industrialization will
almost certainly mean fewer growth miracles in the future.
The
social and political consequences are less fathomable, but could be
equally momentous. Some of the building blocks of durable democracy have
been byproducts of sustained industrialization: an organized labor
movement, disciplined political parties, and political competition
organized around a right-left axis.
The
habits of compromise and moderation have grown out of a history of
workplace struggles between labor and capital – struggles that played
out largely on the manufacturing shop floor. Given premature
deindustrialization, today’s developing countries will have to travel
different, as yet unknown, and possibly bumpier paths to democracy and
good governance.( By Dani Rodik, Princeton University)
