1. Based on the book "How Asia works" isn't it clear that most of Africa should focus a lot more on increasing agricultural productivity until they are more-or-less self sufficient? That would allow them to expand their foreign currency earning portfolio besides mining ores or fossil fuels (if the country has them), increase national savings from farmers, and stop using up foreign exchange to artificially prop up their currency to import food? It appears having a base level of food and fuel self-sufficiency is a baseline for a country to pursue export led growth. You can't expect a poor country that depends on cheap food and energy imports, to depreciate its currency for manufacturing exports when that policy would make food imports dramatically more expensive.
Most of Africa is in the 1.75 tons of food per hectare. Kenya a relative "star" of Sub-Saharan Africa is even lower at 1.49, Ethiopia is one of the few Sub-Saharan African countries that massively boosted food fields from less than 1 to 2.79 which has contributed a lot to their growth. Bangladesh and Vietnam have had a massive productivity boom to 5 and 6 tons respectively.
To me it doesn't appear that export-led growth has failed. It literally hasn't even been tried yet in many poor countries in Africa since agricultural productivity has been neglected.
2. Would you agree that part of the reason why Asia sucked up manufacturing was because they were near Japan and Japan was basically the first foreign direct investor in Taiwan, SK, Thailand, and then later China when it opened up? Meanwhile, at the same time, large swarths of Africa were nationalizing industries and the would be big investor - South Africa - was an apartheid state focused on destabilizing its neighbors rather than invest factories in them.
1. Yes, absolutely. Increasing agricultural productivity is a very important for Africa.
2. Yes, absolutely. Proximity to Japan, Korea, and Taiwan helped China massively. Just as proximity to those countries plus China will help Southeast Asia and South Asia now. This is why I think Africa will have to wait a bit longer to industrialize -- they're much farther away from Asia.
But in what sense are trying to raise agricultural productivity and industrialization alternatives except on the margin -- investing ag R&D and rural roads vs improving the port that exporters can use? Sure, there are decisions to be made, but how much does "development strategy" matter?
Those two things are complementary. If you raise agricultural productivity, it frees people up to work in factories. This is Arthur Lewis' theory of development.
If you raise agricultural productivity, it frees people up to work in factories or otherwise emigrate to escape poverty and lack of opportunity in your own country or region. That's why industrial policies must be implemented along with agricultural productivity throughout the world.
The results ARE complementary. In looking at the return on increased agricultural productivity the benefit of releasing labor from agriculture (=cost of retaining labor in agriculture) would go into the investment decision. I don't see why any "strategy" beyond "increase per capita incomes" is necessary.
Hi Thomas I am not sure I understand your question.
Here is me rephrasing: Are you questioning the significance of specific development strategies and the allocation of resources between different sectors in driving overall economic development? Like are you saying yes while there are decisions to be made, the ultimate impact of these decisions on development may be limited?
I would argue that they are important, especially for developing countries. Because Ethiopia increased its agricultural productivity after the communist era with Meles, Ethiopia went from a country in 2002 that had an average income person of $120 to $1020 by 2022. That's averaging 11% growth per year, much faster than most of the African continent which hasn't had ethiopia's productivity gains in agriculture. Also, ethiopia has also had increased service led growth in its profitable state owned airlines.
Meanwhile manufacturing for Ethiopia is lower as a % of GDP than it was in 2002.
My "question" is how does "strategy" at the Stiglitz/Rocrick level help anyone decide how much to invest in agricultural productivity vs anything else?
I don't agree with the Stiglitz/Rocrick strategy. The idea of “strategic dialogue”, “policy coordination”, and “institutions” to support a new kind of industrial policy focused on nontradable services such as healthcare, education, retail and construction will never make a country rich.
I think the How Asia Works model of agri, manufacturing, and financing works best despite the fact that manufacturing will never be a huge employment absorber again. The problem is most African countries still can't get the agricultural part right and still rely on higher prices on volatile commodity cycles for growth.
As a bangladeshi citizen Noah being optimistic on the future of Bangladesh makes very optimistic as well. I have my own theory on the future of my country. Below I'm sharing a reddit post I wrote a few days ago.
Bangladesh economic prospects in 2041 (3 Possible Scenarios)
Scenario 1: Industrialisation stalls because of poor infrastructure investments. Unlikely since the recent government's actions and also because we're an easy country to build infrastructure for. We have huge population and a large network of waterways. Unlike Philippines which is a bunch of islands. Hence our infrastructure costs per capita is low and return on investment is also higher.
Per capita income stuck at 3.3k (modern Philippines)
Scenario 2: Unable to create globally competitive contract manufacturing because of weak electricity and gas supply. I think technology will solve some of this problem because of solar panels, batteries and industrial heat pumps. By the 2030s we should be privatising electricity generation and retail (with transmission in public hands). Gas pipelines will be largely irrelevant since both households and businesses will move to electric heating systems.
Per capita income stuck at 5.5k (modern Indonesia)
Scenario 3: We manage to become effective contract manufacturers but we can't innovate. Basically we can create Foxconn but not a Apple. Contract manufacturing is a low margins business, majority of the money is engineering design, marketing and after sales services. There is a reason Walton has their R&D labs in Korea and not in Bangladesh. This is because of weak legal institutions, political instability, and culture. A open society that enables innovation is an underrated thing. No one is entirely sure how something like this can be created.
Per capita income stuck at 7.7k (modern Thailand)
A falling fertility rate is also a big pain point. An aging society will place additional burdens on the next generation. Additionally there is less roam for innovation if the country is full of a bunch of old farts.
I'm curious on what you think about how climate impacts might affect this model. I've always heard Bangladesh mentioned as one of the countries likely to be hit the hardest by things like extreme weather, flooding and sea level rise due to its geography. It seems like chronic flooding issues could have a big impact on the infrastructure issue.
We kind of always had cyclones and floods. Climate change is making them worse. We're also losing arable land to floods but growth in cereal yields per hectares is going strong. We're worse in agriculture when compared to China but better than India. Comparable to Brazil I suppose.
On a side note, last I checked the number of deaths from natural disasters falls every decade. I'd imagine we'll be fine as long as the world hits the world stats within the warming targets of 1.5-2 degrees.
A big problem currently is the refugee situation at neighbouring Myanmar.
I highly doubt we’ll hit 1.5-2 without some sort of geoengineering or carbon storage breakthrough. Much more likely 2.25-2.5, but human impacts should still be largely mitigable for countries that develop in tandem with the warming world.
It’s not an accident Mexico has become the largest trading partner for the U.S. Maquiladoras established northern Mexico and industrial/manufacturing belt. Mexico also assembles/test high-end medical equipment, etc. ENPH (micro-inverters) was ahead of the curve, four years ago moving its manufacturing operation from China to Mexico. This moved it closer to its largest market (California), simplifying logistics and reaping significant savings in re shipping costs.
Why can something similar be tried/incentivized in Central America? A number of vendor business radiate from large manufacturing operations. Freight destined for the North American market creates truck driving and/or shipping port jobs and upgrades. This could help stem some of the migration from Central American countries (light from gang violence and lack of employment), a benefit to Mexico and the U.S.
There’s nothing wrong with working with India and Southeast Asian countries to develop economic ties, but that does little to ease migration. It seems more cost effective and politically beneficial to do more of this with our southern neighbors.
Lack of state capacity has been the primary bottleneck in Africa's development. Although technology is changing the need for governments to have an activity role in industrialisation. For example, for manufacturing you need at least three things, electricity, gas lines, railways or robust road network. Not having this stuff was a huge barrier to even basic labour intensive industrialisation. But in the coming decades, small scale manufacturers in Africa can benefit from solar, batteries and industrial heat pumps for their energy needs. Starlink for their internet needs. More speculatively airships as a replacement for a bad road/rail network.
I think both stories omit an even more important factor: state capacity and overall quality of institutions. You need a pretty effective government to be able to implement the kind of development path that Studwell, for example, advocates. First of all, you need to be able to reallocate land efficiently, rather than as a source of patronage. Then you need to allocate capital to where you might have a comparative advantage, and not to cronies. Finally you need to actually allow firms of wealthy and well-connected people to fail. I don't see how most developing nations (e.g. Chad, South Sudan) have anywhere near this level of state capacity.
This is my general problem with Studwell. Sure the success could be due to industrial policy, but it could also be due to an effective government that would have been successful regardless of the development path that it took. And even if industrial policy is optimal in the presence of high state capacity, it could be terrible for low state capacity countries because it provides so many opportunities for elite capture. I don't understand how you can even begin to talk about economic development without addressing this fact, and yet Studwell makes no mention at all.
Noah, I'm wondering if you've ever read Global Trade and Conflicting National Interests by Baumol. It's an older book and you may already know everything in it, but years ago it was my first exposure to serious, academic, non-neo-liberal, non-Ricardo-based trade theory. I still recommend it, and it has a lot to say about industrial policy.
Yep. This is great news. And it shows why Rodrik and Stiglitz are wrong to call for an industrial policy focused on green energy; that energy is going to be built anyway, since it's just so damn cheap! 🥳
I am reminded of something Jane Jacobs wrote in one of her books on economics. I can't remember the exact details, but she talks about "appropriate technology". She said that economists from Western, developed countries expected the economies in poor, undeveloped countries to behave like their home ones, forgetting the process of industrialization that occurred. Therefore they were recommending developing countries embrace high levels of automation because in the West, the idea that it could cause mass unemployment is Luddism, but in the global south, their economies simply weren't growing fast enough and so they were actually reducing the opportunities in agriculture and manufacturing as the population grew.
As usual, she didn't cite her sources or any statistics, but the similarities are striking.
I love green energy investment, and I think tons of it is going to happen! But I don't see how it replaces manufacturing as an export driver. And if you use industrial policy to promote more electricity for domestic supply...well, what's it going to power? 😉
Yeah! Where do you think those things are made? In China? And if they're all made in China, what do countries trade to China in return for those things?
Countries also generate wealth inside their own borders by increasing productivity, reducing illness, etc, right? They can use money to buy stuff from China.
1. Unsubsidized "green" energy is actually more expensive than fossil fuels and nuclear. If it weren't, companies would invest in it without subsidies. That may change in the future, but it remains true today.
2. Making EVs more affordable to operate might be nice, but it doesn't generate economic growth, especially if your dominant transportation means is bicycles (ala Bangladesh).
I can grant you #3, if your power alternative is coal. If it's nuclear though... also, "investing the green energy" could easily mean mining lithium (a very environmentally unfriendly part of the "green" movement) or recycling solar panels (not particularly safe work with all the heavy metals).
4 seems like a viable theory. Eliminating market variability from a critical input is very useful. Although since no country can achieve green power independence (too many separate pieces and materials needed) this will likely be illusory. Also, the same stability can be achieved via long-term oil and gas contracts with nearby allies (ala US & Canada for example.)
I don’t really read that link as refuting Brian’s point. It’s forecasted to be cheaper in the future with continued investment which aligns with what Brian said. At best it mentions wind and solar being cheaper for new projects which may mean unsubsidized but is light on details.
Interesting article.... though I find that the discussion is done in a vacuum. Industrialization in general or even in a focused vertical market form is not a complete enough discussion. Much like individuals or companies, one has to get very specific about the competitive differentiation which can be projected toward SPECIFIC customers/markets. Poorer countries have natural advantages in price, but that may not be enough for particular market categories.
Also, one idea which is not discussed very often is protectionism to allow for the formation of a local industry until the domestic industry is competitive worldwide. One of the successes for China, South Korea, and to a smaller degree India has been some policies which explicitly have these ideas in mind. Economically this is very inefficient. But has been famously said. we are all communists at home and capitalists outside the home. You might wonder where these countries learned about these sorts of policies....perhaps it was from the US in the 1800s as the US was trying to catchup with the technology juggernauts in Europe. We can thank most of the mills in New England based on some IP theft from England. it is best not to be too pious about these matters.
I'm sympathetic to Rodrik's thesis. Manufacturing used to be 32+% of global gdp before the 90s and now it's around 22%. So it is definitely a shrinking pie. I'm with Richard Baldwin who thinks the future of trade is services. Although no country today has gotten rich from services exports primarily, the theory does hold some potential. Since the late 2008s, trade as a share of global gdp has stagnated around 50%. However, trade in goods has dropped (as percentage of global gdp) but tradable services was making up an increasing share of trade. So tele-education, telemedicine, and telerobotics might unlock another wave of globalisation. This time it would enable a lot of developing countries in Africa who are not close to industrialising countries to develop as well.
Another important factor is the attitude of the government to be invested. These would also include law and order as well as dispossession towards FDI. For example, Latin America during their socialist movement was predisposed towards nationalizing those foreign industries, which was not done in Asia.
"After Asia is done developing, Africa will be the only region with low costs."
You are implying that this will result in development in Africa. But our regional history in the USA doesn't show such development without huge government subsidies. Do I misunderstand?
"while automation of manufacturing might make it less of a job creator for countries like India, it’s a huge jump to conclude that it’s therefore unimportant to the economy. It’s possible that robotic factories, tended by a few engineers, will be an important source of revenue generation for developing countries"
Absent the attraction of labor cost arbitrage went would anyone build factories in developing countries to supply rich countries? More geopolitical risk, more supply chain risk, more distance to consumers etc. And if you mean building these factories to supply the local market, 1. Market won't get truly big before country gets rich 2. These factories will kill current less efficient competition which will destroy employment and reduce consumption capacity 3. Factories will largely be financed and built by foreigners at first reducing your local halo effect argument. That's why past success stories have always been built on export models at first.
Labor costs dropping to a small fraction of total costs for factories is currently science fiction; we've never seen anything close to that. If factories becomes mostly automated, the few engineers who tend them will be paid very highly. So labor costs still matter; engineers in India work for much lower wages than similar engineers in America.
On top of a coat advantage in skilled labor, developing countries have other cost advantages. Land is a lot cheaper, because there aren't as many existing businesses to compete for land and push up the price. They also tend to be less tightly regulated.
that's fine. i was literally just commenting on your own words specifically "robotic factories, tended by a few engineers", you didn't posit that as science fiction. IF that does happen though the cost differential on the few engineers wouldn't be enough to offset the other costs items I mentioned, and as for land come on... there's plenty of places in US with cheap land and overall they are not a major driver of factory capex by a long shot. Regulations, permitting etc. do create a lot of barriers I'll admit. Also Europe dunno maybe different they have less spare land for sure.
I think it depends. Some places might benefit from increased exports.
For example, Latin America adopting some of EU strict agricultural/environmental legislation and making free trade deals is a win-win for both. We get even more modern practices, Europe gets cheaper food. Consumers in both countries benefit from industrial competition in cross-continent anti-monopoly laws. Latin America industrialize with Europe money, and Europe get cheaper goods to deal with their reducing workforce.
Another optimistic view I have is Africa and palm oil. It can be planted in marginal soil and produce high yields. Sustainable Aviation Fuel can come from there, and helps to make some high quality jobs and increase tax revenue to finance public services.
I think the nature of exports will get more complex, and the issue of exporting more challenging, but I agree with Noah that we shouldn't dismiss exports for an uncertain kinda of new service economy. We need to do both: Industrialize AND provide a robust service sector, it's more likely that one complements another than otherwise.
Poland and South Korea have a couple of very big advantages, access to big markets (EU and China/Japan respectively) and cheap(ish) labour. Some countries in Africa will be able to manufacture for that continent if they can quell unrest and corruption, Brazil should be doing it for South America.
Bangladesh, Vietnam, Thailand etc have taken over the less value add manufacturing from South Korea, again because they have access to huge markets on their doorstep, geography is a big advantage.
So, Rodrik and Stiglitz’s nontradable services plan strikes me as a recipe for resort towns. Is this off?
As an educator in Asia, I’m skeptical of any plan that suggests a developing country should educate their growing workforce into nontradable services. Maybe I’m missing something.
If anything, Noah’s solution rings much truer: First, upgrade your overall productivity by getting your workforce to that place where a few engineers can operate highly productive factories. Nontradable services will follow.
> It’s possible that robotic factories, tended by a few engineers, will be an important source of revenue generation for developing countries. That revenue will then be spread around locally via local multiplier effects […] and each manufacturing job will create some larger number of other jobs in exactly the kind of nontradable services that Rodrik and Stiglitz want.
Now, Noah seems to think this leads to a durable disadvantage in education:
> A subtler problem is learning. Productivity growth comes from learning new technologies and new business models. In a world where factories employ very few people, those factories won’t be as useful as schools for workers.
But I don’t think so. The “learning problem” solves itself. How can you get your developing country to a place where a small number of people operate highly productive factories without first getting a large number of people operating less productive factories (perhaps exporting to China) or an even larger number of people learning the skills and habits of timeliness, communication, and routine work?
I don’t see it. That’s like having the MLB but no Little League, or a Premier League but no youth football.
Great article Noah. Some questions.
1. Based on the book "How Asia works" isn't it clear that most of Africa should focus a lot more on increasing agricultural productivity until they are more-or-less self sufficient? That would allow them to expand their foreign currency earning portfolio besides mining ores or fossil fuels (if the country has them), increase national savings from farmers, and stop using up foreign exchange to artificially prop up their currency to import food? It appears having a base level of food and fuel self-sufficiency is a baseline for a country to pursue export led growth. You can't expect a poor country that depends on cheap food and energy imports, to depreciate its currency for manufacturing exports when that policy would make food imports dramatically more expensive.
Most of Africa is in the 1.75 tons of food per hectare. Kenya a relative "star" of Sub-Saharan Africa is even lower at 1.49, Ethiopia is one of the few Sub-Saharan African countries that massively boosted food fields from less than 1 to 2.79 which has contributed a lot to their growth. Bangladesh and Vietnam have had a massive productivity boom to 5 and 6 tons respectively.
https://ourworldindata.org/grapher/cereal-yield?tab=chart&country=BGD~VNM~THA~TWN~ETH~OWID_ERE~KEN
To me it doesn't appear that export-led growth has failed. It literally hasn't even been tried yet in many poor countries in Africa since agricultural productivity has been neglected.
2. Would you agree that part of the reason why Asia sucked up manufacturing was because they were near Japan and Japan was basically the first foreign direct investor in Taiwan, SK, Thailand, and then later China when it opened up? Meanwhile, at the same time, large swarths of Africa were nationalizing industries and the would be big investor - South Africa - was an apartheid state focused on destabilizing its neighbors rather than invest factories in them.
1. Yes, absolutely. Increasing agricultural productivity is a very important for Africa.
2. Yes, absolutely. Proximity to Japan, Korea, and Taiwan helped China massively. Just as proximity to those countries plus China will help Southeast Asia and South Asia now. This is why I think Africa will have to wait a bit longer to industrialize -- they're much farther away from Asia.
But in what sense are trying to raise agricultural productivity and industrialization alternatives except on the margin -- investing ag R&D and rural roads vs improving the port that exporters can use? Sure, there are decisions to be made, but how much does "development strategy" matter?
Those two things are complementary. If you raise agricultural productivity, it frees people up to work in factories. This is Arthur Lewis' theory of development.
If you raise agricultural productivity, it frees people up to work in factories or otherwise emigrate to escape poverty and lack of opportunity in your own country or region. That's why industrial policies must be implemented along with agricultural productivity throughout the world.
The results ARE complementary. In looking at the return on increased agricultural productivity the benefit of releasing labor from agriculture (=cost of retaining labor in agriculture) would go into the investment decision. I don't see why any "strategy" beyond "increase per capita incomes" is necessary.
Hi Thomas I am not sure I understand your question.
Here is me rephrasing: Are you questioning the significance of specific development strategies and the allocation of resources between different sectors in driving overall economic development? Like are you saying yes while there are decisions to be made, the ultimate impact of these decisions on development may be limited?
I would argue that they are important, especially for developing countries. Because Ethiopia increased its agricultural productivity after the communist era with Meles, Ethiopia went from a country in 2002 that had an average income person of $120 to $1020 by 2022. That's averaging 11% growth per year, much faster than most of the African continent which hasn't had ethiopia's productivity gains in agriculture. Also, ethiopia has also had increased service led growth in its profitable state owned airlines.
Meanwhile manufacturing for Ethiopia is lower as a % of GDP than it was in 2002.
Source for income per person:
https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=ET
Source for manufacturing proportion:
https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=ET
Happy to continue this dialogue.
My "question" is how does "strategy" at the Stiglitz/Rocrick level help anyone decide how much to invest in agricultural productivity vs anything else?
I don't agree with the Stiglitz/Rocrick strategy. The idea of “strategic dialogue”, “policy coordination”, and “institutions” to support a new kind of industrial policy focused on nontradable services such as healthcare, education, retail and construction will never make a country rich.
I think the How Asia Works model of agri, manufacturing, and financing works best despite the fact that manufacturing will never be a huge employment absorber again. The problem is most African countries still can't get the agricultural part right and still rely on higher prices on volatile commodity cycles for growth.
As a bangladeshi citizen Noah being optimistic on the future of Bangladesh makes very optimistic as well. I have my own theory on the future of my country. Below I'm sharing a reddit post I wrote a few days ago.
Bangladesh economic prospects in 2041 (3 Possible Scenarios)
Scenario 1: Industrialisation stalls because of poor infrastructure investments. Unlikely since the recent government's actions and also because we're an easy country to build infrastructure for. We have huge population and a large network of waterways. Unlike Philippines which is a bunch of islands. Hence our infrastructure costs per capita is low and return on investment is also higher.
Per capita income stuck at 3.3k (modern Philippines)
Scenario 2: Unable to create globally competitive contract manufacturing because of weak electricity and gas supply. I think technology will solve some of this problem because of solar panels, batteries and industrial heat pumps. By the 2030s we should be privatising electricity generation and retail (with transmission in public hands). Gas pipelines will be largely irrelevant since both households and businesses will move to electric heating systems.
Per capita income stuck at 5.5k (modern Indonesia)
Scenario 3: We manage to become effective contract manufacturers but we can't innovate. Basically we can create Foxconn but not a Apple. Contract manufacturing is a low margins business, majority of the money is engineering design, marketing and after sales services. There is a reason Walton has their R&D labs in Korea and not in Bangladesh. This is because of weak legal institutions, political instability, and culture. A open society that enables innovation is an underrated thing. No one is entirely sure how something like this can be created.
Per capita income stuck at 7.7k (modern Thailand)
A falling fertility rate is also a big pain point. An aging society will place additional burdens on the next generation. Additionally there is less roam for innovation if the country is full of a bunch of old farts.
I'm curious on what you think about how climate impacts might affect this model. I've always heard Bangladesh mentioned as one of the countries likely to be hit the hardest by things like extreme weather, flooding and sea level rise due to its geography. It seems like chronic flooding issues could have a big impact on the infrastructure issue.
We kind of always had cyclones and floods. Climate change is making them worse. We're also losing arable land to floods but growth in cereal yields per hectares is going strong. We're worse in agriculture when compared to China but better than India. Comparable to Brazil I suppose.
On a side note, last I checked the number of deaths from natural disasters falls every decade. I'd imagine we'll be fine as long as the world hits the world stats within the warming targets of 1.5-2 degrees.
A big problem currently is the refugee situation at neighbouring Myanmar.
I highly doubt we’ll hit 1.5-2 without some sort of geoengineering or carbon storage breakthrough. Much more likely 2.25-2.5, but human impacts should still be largely mitigable for countries that develop in tandem with the warming world.
You are getting a very nice nuclear plant too very soon.
Yeah. It should start this year (I think, fingers crossed)
"Additionally there is less roam for innovation if the country is full of a bunch of old farts."
Well, you could always go full-on Logan's Run on the old farts. That will solve your problem ...
It’s not an accident Mexico has become the largest trading partner for the U.S. Maquiladoras established northern Mexico and industrial/manufacturing belt. Mexico also assembles/test high-end medical equipment, etc. ENPH (micro-inverters) was ahead of the curve, four years ago moving its manufacturing operation from China to Mexico. This moved it closer to its largest market (California), simplifying logistics and reaping significant savings in re shipping costs.
Why can something similar be tried/incentivized in Central America? A number of vendor business radiate from large manufacturing operations. Freight destined for the North American market creates truck driving and/or shipping port jobs and upgrades. This could help stem some of the migration from Central American countries (light from gang violence and lack of employment), a benefit to Mexico and the U.S.
There’s nothing wrong with working with India and Southeast Asian countries to develop economic ties, but that does little to ease migration. It seems more cost effective and politically beneficial to do more of this with our southern neighbors.
Treating Central America as fly-over country doesn’t make long-term, economic sense.
Lack of state capacity has been the primary bottleneck in Africa's development. Although technology is changing the need for governments to have an activity role in industrialisation. For example, for manufacturing you need at least three things, electricity, gas lines, railways or robust road network. Not having this stuff was a huge barrier to even basic labour intensive industrialisation. But in the coming decades, small scale manufacturers in Africa can benefit from solar, batteries and industrial heat pumps for their energy needs. Starlink for their internet needs. More speculatively airships as a replacement for a bad road/rail network.
I think both stories omit an even more important factor: state capacity and overall quality of institutions. You need a pretty effective government to be able to implement the kind of development path that Studwell, for example, advocates. First of all, you need to be able to reallocate land efficiently, rather than as a source of patronage. Then you need to allocate capital to where you might have a comparative advantage, and not to cronies. Finally you need to actually allow firms of wealthy and well-connected people to fail. I don't see how most developing nations (e.g. Chad, South Sudan) have anywhere near this level of state capacity.
This is my general problem with Studwell. Sure the success could be due to industrial policy, but it could also be due to an effective government that would have been successful regardless of the development path that it took. And even if industrial policy is optimal in the presence of high state capacity, it could be terrible for low state capacity countries because it provides so many opportunities for elite capture. I don't understand how you can even begin to talk about economic development without addressing this fact, and yet Studwell makes no mention at all.
Noah, I'm wondering if you've ever read Global Trade and Conflicting National Interests by Baumol. It's an older book and you may already know everything in it, but years ago it was my first exposure to serious, academic, non-neo-liberal, non-Ricardo-based trade theory. I still recommend it, and it has a lot to say about industrial policy.
I have not! I should.
“Utility-scale solar PV and onshore wind are the cheapest options for new electricity generation in a significant majority of countries worldwide.“
https://www.iea.org/news/renewable-power-s-growth-is-being-turbocharged-as-countries-seek-to-strengthen-energy-security
Yep. This is great news. And it shows why Rodrik and Stiglitz are wrong to call for an industrial policy focused on green energy; that energy is going to be built anyway, since it's just so damn cheap! 🥳
I am reminded of something Jane Jacobs wrote in one of her books on economics. I can't remember the exact details, but she talks about "appropriate technology". She said that economists from Western, developed countries expected the economies in poor, undeveloped countries to behave like their home ones, forgetting the process of industrialization that occurred. Therefore they were recommending developing countries embrace high levels of automation because in the West, the idea that it could cause mass unemployment is Luddism, but in the global south, their economies simply weren't growing fast enough and so they were actually reducing the opportunities in agriculture and manufacturing as the population grew.
As usual, she didn't cite her sources or any statistics, but the similarities are striking.
What about these other economists’ encouragement to invest in green energy?
I’m thinking this
-lowers the cost of electricity
-makes EVs more affordable to operate
-reduces pollution & related healthcare costs, thus increasing productivity
-and reduces or eliminates variable fossil fuel costs, which lead to inflation and political instability.
I love green energy investment, and I think tons of it is going to happen! But I don't see how it replaces manufacturing as an export driver. And if you use industrial policy to promote more electricity for domestic supply...well, what's it going to power? 😉
Not arguing against manufacturing, but lots of things:
-water infrastructure (pumping, recycling, desalination, etc)
-home appliances (clothes washing, vacuums, electric stoves)
-EVs for delivery and tourism (even native tourism)
-street and home lighting
-TVs, cell phones, stereo systems and other forms of entertainment
Yeah! Where do you think those things are made? In China? And if they're all made in China, what do countries trade to China in return for those things?
Countries also generate wealth inside their own borders by increasing productivity, reducing illness, etc, right? They can use money to buy stuff from China.
1. Unsubsidized "green" energy is actually more expensive than fossil fuels and nuclear. If it weren't, companies would invest in it without subsidies. That may change in the future, but it remains true today.
2. Making EVs more affordable to operate might be nice, but it doesn't generate economic growth, especially if your dominant transportation means is bicycles (ala Bangladesh).
I can grant you #3, if your power alternative is coal. If it's nuclear though... also, "investing the green energy" could easily mean mining lithium (a very environmentally unfriendly part of the "green" movement) or recycling solar panels (not particularly safe work with all the heavy metals).
4 seems like a viable theory. Eliminating market variability from a critical input is very useful. Although since no country can achieve green power independence (too many separate pieces and materials needed) this will likely be illusory. Also, the same stability can be achieved via long-term oil and gas contracts with nearby allies (ala US & Canada for example.)
Renewable energy is cheaper:
https://www.bbc.com/news/science-environment-62892013
Nuclear is slow and expensive.
https://www.reuters.com/article/idUSKBN1W909I/
If Bangladeshi bicyclists could deliver products in vehicles, they would be more productive.
https://archive.ph/2023.11.09-120136/https://www.economist.com/finance-and-economics/2023/11/09/in-praise-of-americas-car-addiction
EVs do it without pollution, and soon they will be cheaper than combustion vehicles:
https://thedriven.io/2021/05/11/new-bnef-analysis-finds-that-evs-will-be-cheaper-than-ice-cars-by-2027/
Mining for lithium doesn’t need to be bad for the environment:
https://www.cnbc.com/2022/05/04/the-salton-sea-could-produce-the-worlds-greenest-lithium.html
I haven’t yet read about toxicity of recycling renewables.
https://www.cnbc.com/2023/05/13/recycling-end-of-life-solar-panel-wind-turbine-is-big-waste-business.html
> Renewable energy is cheaper:
I don’t really read that link as refuting Brian’s point. It’s forecasted to be cheaper in the future with continued investment which aligns with what Brian said. At best it mentions wind and solar being cheaper for new projects which may mean unsubsidized but is light on details.
https://open.substack.com/pub/noahpinion/p/do-poor-countries-need-a-new-development?r=pskf5&utm_campaign=comment-list-share-cta&utm_medium=web&comments=true&commentId=49120612
EVs are also perhaps 4X more energy efficient:
https://www.sustainabilitybynumbers.com/p/inefficiency-ice
Interesting article.... though I find that the discussion is done in a vacuum. Industrialization in general or even in a focused vertical market form is not a complete enough discussion. Much like individuals or companies, one has to get very specific about the competitive differentiation which can be projected toward SPECIFIC customers/markets. Poorer countries have natural advantages in price, but that may not be enough for particular market categories.
Also, one idea which is not discussed very often is protectionism to allow for the formation of a local industry until the domestic industry is competitive worldwide. One of the successes for China, South Korea, and to a smaller degree India has been some policies which explicitly have these ideas in mind. Economically this is very inefficient. But has been famously said. we are all communists at home and capitalists outside the home. You might wonder where these countries learned about these sorts of policies....perhaps it was from the US in the 1800s as the US was trying to catchup with the technology juggernauts in Europe. We can thank most of the mills in New England based on some IP theft from England. it is best not to be too pious about these matters.
I'm sympathetic to Rodrik's thesis. Manufacturing used to be 32+% of global gdp before the 90s and now it's around 22%. So it is definitely a shrinking pie. I'm with Richard Baldwin who thinks the future of trade is services. Although no country today has gotten rich from services exports primarily, the theory does hold some potential. Since the late 2008s, trade as a share of global gdp has stagnated around 50%. However, trade in goods has dropped (as percentage of global gdp) but tradable services was making up an increasing share of trade. So tele-education, telemedicine, and telerobotics might unlock another wave of globalisation. This time it would enable a lot of developing countries in Africa who are not close to industrialising countries to develop as well.
Another important factor is the attitude of the government to be invested. These would also include law and order as well as dispossession towards FDI. For example, Latin America during their socialist movement was predisposed towards nationalizing those foreign industries, which was not done in Asia.
Great article. But one thing bugs me:
"After Asia is done developing, Africa will be the only region with low costs."
You are implying that this will result in development in Africa. But our regional history in the USA doesn't show such development without huge government subsidies. Do I misunderstand?
I'm not sure exactly what you're asking! 😊
"while automation of manufacturing might make it less of a job creator for countries like India, it’s a huge jump to conclude that it’s therefore unimportant to the economy. It’s possible that robotic factories, tended by a few engineers, will be an important source of revenue generation for developing countries"
Absent the attraction of labor cost arbitrage went would anyone build factories in developing countries to supply rich countries? More geopolitical risk, more supply chain risk, more distance to consumers etc. And if you mean building these factories to supply the local market, 1. Market won't get truly big before country gets rich 2. These factories will kill current less efficient competition which will destroy employment and reduce consumption capacity 3. Factories will largely be financed and built by foreigners at first reducing your local halo effect argument. That's why past success stories have always been built on export models at first.
Labor costs dropping to a small fraction of total costs for factories is currently science fiction; we've never seen anything close to that. If factories becomes mostly automated, the few engineers who tend them will be paid very highly. So labor costs still matter; engineers in India work for much lower wages than similar engineers in America.
On top of a coat advantage in skilled labor, developing countries have other cost advantages. Land is a lot cheaper, because there aren't as many existing businesses to compete for land and push up the price. They also tend to be less tightly regulated.
that's fine. i was literally just commenting on your own words specifically "robotic factories, tended by a few engineers", you didn't posit that as science fiction. IF that does happen though the cost differential on the few engineers wouldn't be enough to offset the other costs items I mentioned, and as for land come on... there's plenty of places in US with cheap land and overall they are not a major driver of factory capex by a long shot. Regulations, permitting etc. do create a lot of barriers I'll admit. Also Europe dunno maybe different they have less spare land for sure.
I think it depends. Some places might benefit from increased exports.
For example, Latin America adopting some of EU strict agricultural/environmental legislation and making free trade deals is a win-win for both. We get even more modern practices, Europe gets cheaper food. Consumers in both countries benefit from industrial competition in cross-continent anti-monopoly laws. Latin America industrialize with Europe money, and Europe get cheaper goods to deal with their reducing workforce.
Another optimistic view I have is Africa and palm oil. It can be planted in marginal soil and produce high yields. Sustainable Aviation Fuel can come from there, and helps to make some high quality jobs and increase tax revenue to finance public services.
I think the nature of exports will get more complex, and the issue of exporting more challenging, but I agree with Noah that we shouldn't dismiss exports for an uncertain kinda of new service economy. We need to do both: Industrialize AND provide a robust service sector, it's more likely that one complements another than otherwise.
Poland and South Korea have a couple of very big advantages, access to big markets (EU and China/Japan respectively) and cheap(ish) labour. Some countries in Africa will be able to manufacture for that continent if they can quell unrest and corruption, Brazil should be doing it for South America.
Bangladesh, Vietnam, Thailand etc have taken over the less value add manufacturing from South Korea, again because they have access to huge markets on their doorstep, geography is a big advantage.
So, Rodrik and Stiglitz’s nontradable services plan strikes me as a recipe for resort towns. Is this off?
As an educator in Asia, I’m skeptical of any plan that suggests a developing country should educate their growing workforce into nontradable services. Maybe I’m missing something.
If anything, Noah’s solution rings much truer: First, upgrade your overall productivity by getting your workforce to that place where a few engineers can operate highly productive factories. Nontradable services will follow.
> It’s possible that robotic factories, tended by a few engineers, will be an important source of revenue generation for developing countries. That revenue will then be spread around locally via local multiplier effects […] and each manufacturing job will create some larger number of other jobs in exactly the kind of nontradable services that Rodrik and Stiglitz want.
Now, Noah seems to think this leads to a durable disadvantage in education:
> A subtler problem is learning. Productivity growth comes from learning new technologies and new business models. In a world where factories employ very few people, those factories won’t be as useful as schools for workers.
But I don’t think so. The “learning problem” solves itself. How can you get your developing country to a place where a small number of people operate highly productive factories without first getting a large number of people operating less productive factories (perhaps exporting to China) or an even larger number of people learning the skills and habits of timeliness, communication, and routine work?
I don’t see it. That’s like having the MLB but no Little League, or a Premier League but no youth football.