History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and, more importantly, where productivity tends to (although does not always) grow faster than in agriculture or services.Walpole knew this nearly 300 years ago, when he asked George I to say in the British Parliament: ‘nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw material’, as I mentioned in chapter 2. In the US, Alexander Hamilton knew it when he defied the world’s then most famous economist, Adam Smith, and argued that his country should promote ‘infant industries’.Many developing countries pursued import substitution ‘industrialization’ in the mid-20th century precisely for this reason. Contrary to the advice of the Bad Samaritans, poor countries should deliberately promote manufacturing industries.
Of course, today there are those who challenge this view on the grounds that we are now living in a post-industrial era and that selling services is therefore the way to go. Some of them even argue that developing countries can, and really should, skip industrialization and move directly to the service economy. In particular, many people in India, encouraged by that country’s recent success in service outsourcing, seem to be quite taken by this idea.
There are certainly some services that have high productivity and considerable scope for further productivity growth – banking and other financial services, management consulting, technical consulting and IT support come to mind. But most other services have low productivity and, more importantly, have little scope for productivity growth due to their very nature (how much more ‘efficient’ can a hairdresser, a nurse or a call centre telephonist become without diluting the quality of their services?). Moreover, the most important sources of demand for those high-productivity services are manufacturing firms. So, without a strong manufacturing sector, it is impossible to develop high-productivity services. This is why no country has become rich solely on the basis of its service sector.
If I say this, some of you may wonder: what about a country like Switzerland, which has become rich thanks to service industries like banking and tourism? It is tempting to take the rather condescending but popular view of Switzerland summed up brilliantly in the movie, The Third Man. ‘In Italy for thirty years under the Borgias,’ he said, ‘they had warfare, terror, murder, bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love – they had five hundred years of democracy and peace, and what did that produce? The cuckoo clock.[2] This view of the Swiss economy, however, is a total misconception.
Switzerland is not a country living off black money deposited in its secretive banks and gullible tourists buying tacky souvenirs like cow bells and cuckoo clocks. It is, in fact, literally the most industrialized country in the world. As of 2002, it had the highest per capita manufacturing output in the world by far – 24% more than that of Japan, the second highest; 2.2 times that of the US; 34 times that of China, today’s ‘workshop of the world’; and 156 times that of India.[3] Similarly, Singapore, commonly considered to be a city state that has succeeded as a financial centre and trading port, is a highly industrialized country, producing 35% more manufacturing output per head of population than the ‘industrial powerhouse’ Korea and 18% more than the US.[4]
Despite what the free trade economists recommend (concentrating on agriculture) or the prophets of post-industrial economy tout (developing services), manufacturing is the most important, though not the only, route to prosperity. There are good theoretical reasons for this, and an abundance of historical examples to prove the point.We must not look at spectacular contemporary examples of manufacturing-based success, like Switzerland and Singapore, and mistakenly think that they prove the opposite. It may be that the Swiss and the Singaporeans are playing us along because they don’t want other people to find out the real secret of their success!
So far, I have shown that it is important for developing countries to defy the market and deliberately promote economic activities that will raise their productivity in the long run – mainly, though not exclusively, manufacturing industries. I have argued that this involves capability-building, which, in turn, requires sacrificing certain short-term gains for the sake of raising long-term productivity (and thus standards of living) – possibly for decades.
But neo-liberal economists may respond by asking: what about the low capacities of developing country governments that are supposed to orchestrate all this? If these countries are to defy the logic of the market, someone has to choose which industries to promote and what capabilities to invest in. But capable government officials are the last thing that developing countries have. If those making these important choices are incompetent, their intervention can only make things worse.
This was the argument used by the World Bank in its famous East Asian Miracle report, published in 1993. Advising other developing countries against emulating interventionist Japanese and Korean trade and industrial policies, it argued that such policies cannot work in countries without ‘the competence, insulation, and relative lack of corruptibility of the public administrations in Japan and Korea’[5] – that is, practically all developing countries. Alan Winters, a professor of economics at the University of Sussex and the director of the Development Research Group at the World Bank, was even more blunt. He argued that ‘the application of second-best economics [economics that allows for imperfect markets and therefore potentially beneficial government intervention – my note] needs first-best economists, not its usual complement of third- and fourth-raters’.[6] The message is clear – ‘Do not try this at home’, as TV captions say when showing people doing dangerous stunts.
There can be no dispute that, in many developing countries, government officials are not highly trained. But it is also not true that countries like Japan, Korea and Taiwan succeeded with interventionist policies because their bureaucracies were manned by exceptionally well-trained government officials. They were not – at least in the beginning.
Korea used to send its bureaucrats for extra training to – of all places – Pakistan and the Philippines until the late 1960s. Pakistan was then a ‘star pupil’ of the World Bank, while the Philippines was the second-richest country in Asia after Japan. Years ago, as a graduate student, I had a chance to compare the early economic planning documents of Korea and India. The early Indian plans were cutting-edge stuff for their time. They were based on a sophisticated economic model developed by the world-famous statistician Prasanta Chandra Mahalanobis. The Korean ones, I am embarrassed to say, were definitely written by Professor Winters’s ‘usual complement of third- and fourth-raters’. But the Korean economy did far better than the Indian one. Perhaps we don’t need ‘first-best economists’ to run good economic policy.
2
Welles says these lines, which he wrote himself, as Harry Lime, the villain of the movie. This script for
3
In 2002, manufacturing value-added
4
The figure for Korea in 2002 was $4, 589 and that for Singapore was $6, 583. UNIDO (2005), Table A2.1. Thus the Singapore figure is 18 times that of China and 84 times that of India
5
World Bank (1993),
6
A. Winters (2003), ‘Trade Policy as Development Policy’ in J. Toye (ed.),