Home' Trinidad and Tobago Guardian : October 9th 2014 Contents BG20 THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 2014 • WEEK TWO
Thirty-five years ago Shenzhen was a tiny fishing
village across the river from British Hong Kong.
Its inhabitants, like most Chinese, lived in
poverty. In 1978 the average income in America
was about 21 times that in China.
In 1979, however, Chinese leader Deng Xiaoping chose Shen-
zhen as the country s first special economic zone, free to
experiment with market activity and trade with the outside
Shenzhen quickly found itself at the leading edge of Chinese
economic development, using the same model that Japan,
South Korea and Hong Kong itself had done at earlier stages.
In the late 1970s China was bursting with cheap, unskilled
labour. It opened its doors---a crack, in lucky places such as
Shenzhen---to foreign manufacturers waiting to take advantage
of these low labour costs. Even with wages at rock bottom,
both productivity and pay in urban factories were dramatically
higher than in agriculture, so China s fledgling industrialisation
attracted a steady flow of migrants from the countryside.
As time passed, local production became more sophisticated
and wages went up. Industrial cities served as escalators for
development, linking the Chinese economy with global markets
and allowing incomes to rise steadily.
The fruits of this process are clearly visible. As visitors
approach the checkpoints between Hong Kong and the main-
land, a modern skyline rises on the horizon. Great, glass-
sheathed skyscrapers reach upward in central Shenzhen, which
boasts some of the world s tallest buildings. At street level
Chinese workers stroll past shops displaying Western luxury
brands such as Bulgari, Ferrari and Louis Vuitton.
Governments across the emerging world dream of repeating
China s success, but the technological transformation now
under way appears to be permanently changing the economics
of development. China may be among the last economies to
be able to ride industrialisation to middle-income status.
Instead much of the emerging world is facing a problem that
Dani Rodrik of the Institute for Advanced Study in Princeton,
NJ, calls "premature deindustrialisation."
For most of recent economic history, "industrialised" meant
"rich." Most countries that were highly industrialised were
rich, and were rich because they were industrialised.
This relationship has broken down, however. Arvind Sub-
ramanian of the Peterson Institute for International Economics
in Washington, who reportedly is soon to become chief eco-
nomic adviser to the Indian government, notes that, at any
given level of income, today s countries are less reliant on
manufacturing, in terms of both output and employment,
than they were in the past, and that the level of income per
person at which reliance on manufacturing peaks also has
When South Korea reached that point in 1988, its workers
earnings averaged slightly more than US$10,000 per person,
in inflation-adjusted 2011 dollars. When Indonesia got there
in 2002, average income was not quite $6,000, and for India
in 2008 it was barely US$3,000.
Early loss of industry---or, in India s case, what Subramanian
calls "premature non-industrialisation"---is a distressing trend,
given the role that exports of goods have historically played
in economic development. Productivity in export industries
is generally high, because otherwise they could not compete
in global markets.
In time productivity in making traded goods tends to rise
as firms and workers in the industry become familiar with
the technologies involved. Past developmental success stories
such as the Asian tigers moved from low-margin, labour-
intensive goods such as clothing and toys to electronics assembly,
then on to component manufacture and, in the textbook cases
of Japan and South Korea, to advanced manufacturing, design
Export success trickles down to the rest of developing
economies. Since producers of non-traded goods and services,
such as housebuilders and lawyers, must compete with exporters
for labour, they need to pay attractive wages. At the same
time the chance of well-paid work in manufacturing creates
an incentive for workers to move to cities and invest in edu-
cation. An industrialising export sector is like a speedboat
that pulls the rest of the economy out of poverty.
Loss of industry at low income levels, by contrast, caps the
contribution that manufacturing can make to domestic living
standards. That is no small problem, because there is no
obvious alternative strategy for turning poor countries into
The change in technology s role in development began in
the 1980s. Richard Baldwin, an economist at the Graduate
Institute of International and Development Studies in Geneva,
explains that, for much of modern economic history, the
driving force behind globalisation was the falling cost of trans-
portation. Powered shipping in the 19th century and con-
tainerisation in the 20th brought down freight charges, in
effect shrinking the world. However, he said, since the 1980s
cheap and powerful IT has played a bigger role, allowing firms
to co-ordinate production across great distances and national
borders. Manufacturing "unbundled" as supply chains scattered
across the world.
According to Baldwin, this has meant a profound change
in what it is to be industrialised. The development of an indus-
trial base in Japan and South Korea was a long and arduous
process in which each economy needed to build capabilities
along the whole of a supply chain to manufacture finished
goods. That meant that few economies managed the trick,
but those that did were rewarded with a rich and diverse econ-
In the era of supply-chain trade, by contrast, industrialisation
means little more than opening labour markets to global man-
ufacturers. Countries that can grab pieces of global supply
chains are quickly rewarded with lots of manufacturing employ-
ment, but development that is easy come may also be easy
go. Unless the economies concerned quickly build up their
workers skills and infrastructure, wage increases soon lead
manufacturers to decamp for cheaper locations.
Another mechanism through which new technology is
changing the process of development is the dematerialisation
Continued on Page 21
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