Premature Deindustrialization

Economies which were hoping to establish an industrial foothold for themselves by using their low labour costs to wiggle onto a supply chain are increasingly out of luck.

Excerpt From: Avent, Ryan. “The Wealth of Humans: Work, Power, and Status in the Twenty-First Century.”

In the emerging world, deindustrialization is occurring at ever earlier stages of development: an ailment that economist Dani Rodrik has labelled ‘premature deindustrialization’. When manufacturing’s share of total value added in the South Korean economy peaked in 1988, real income per person in South Korea was about $10,000, or just less than half the American level at the time. When that same peak was reached in Indonesia in 2002, its real income per person was roughly $6,000, or about 15 per cent of the American level. And when India reached that point in 2008, its real income per person was only about $3,000, or about 6 per cent of the American level of income at that time.13 Indeed, Arvind Subramanian, an economist and chief economic adviser to the Indian government, reckons that the Indian experience actually represents something like premature non-industrialization, or the fizzling out of industrialization before it ever really got going.

Countries still compete for the factories in which the vehicles are assembled: such factories still mean jobs, if fewer than in the past, and jobs are useful things to have in an economy. Yet, from a value perspective, factory assembly is a drop in the bucket. Very nearly anyone can do it. It is no surprise that state governments compete to offer incentives to car firms looking to open new production plants: firms can shop around, and capture more of the value of production, because they are in possession of the scarce know-how needed to make a car – the design and programming knowledge, the capability to manage global supply chains, and so on – while the locations competing for the plant are largely interchangeable.

The story is very much the same for something like an iPhone: Apple captures the lion’s share of the return from making them despite its outsourcing of virtually the whole of the production chain because it is the creative force behind the product design. Indeed, it is true of our consumption in general; we once devoted most of our household budgets to physical things: food and drink, clothing and furniture. Now we spend vast amounts on things like education and healthcare, or on housing, the value of which is mostly dependent on the access it provides to social capital rather than the wood in the walls and the plastic in the pipes. Subramanian describes this shift as one from ‘stuff to fluff’, and it is reflected in the trade data.

Developing economies are discovering that this evolution presents them with serious difficulties. The growing importance of knowledge (and the growing irrelevance of other cost sources) means that the advantage to rich-world firms of moving anything abroad is decreasing. ‘Reshoring’ in manufacturing, or the relocation of industrial production back to the rich economies that were priced out of such businesses decades ago, is often framed as a labour-cost phenomenon and a potential boon for middle-skill workers in advanced economies: with Chinese wages rising, some believe, it is increasingly attractive for firms to keep assembly in America, and to employ thousands of manufacturing workers in the process. But that is not, for the most part, what is occurring. Reshoring is predominantly a function of the rising knowledge-intensity of production, which means that variations in the cost of unskilled labour no longer matter all that much. Better for Tesla to keep production close at hand (in Fremont, California, on the eastern shore of San Francisco Bay) where its skilled engineers can keep a watchful eye on the code operating the plants, than to move assembly abroad in search of modest savings on the wage bill. And sure enough, the reshoring phenomenon, where it has occurred, has not brought back mass employment of less-skilled workers.

That means that economies which were hoping to establish an industrial foothold for themselves by using their low labour costs to wiggle onto a supply chain are increasingly out of luck. There are exceptions, but they are of a particular and unhelpful sort: where labour is so incredibly cheap that it remains economical to use people in place of available technologies. But in these cases the advantage to firms of locating in poor economies is precisely that the use of more sophisticated technologies is not necessary, which means that any transfer of technological knowledge to the local workers will be extremely limited, and the rungs which might otherwise have led to a more productive, sophisticated state of economic activity have been removed.

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