Podcast Summary
Challenging the assumption of universal economic progress: The traditional development model may not be sustainable for all countries and alternative growth models should be considered for those that may not follow the manufacturing-to-services transition
The traditional development model of relying on manufacturing and a labor surplus may not be sustainable for all countries as we enter a new economic period. Principal Asset Management, with its global expertise and local insights, recognizes the complexities of the global economy. In a recent article in the American Affairs Journal, Henry Williams and David Ochs argue that the optimistic narrative of global progress, particularly the assumption that all countries can follow the manufacturing-to-services transition, may not hold true. They challenge the assumption that global poverty is decreasing at an unprecedented rate and that countries can all achieve the same level of economic growth. The authors suggest that alternative growth models should be considered for countries that may not be able to follow the traditional development path. Principal Asset Management's approach of combining local insights with global expertise is crucial in navigating the complexities of the global economy and identifying compelling investing opportunities.
Industrialization and Commodity Exports: A Historical Perspective: Historically, countries focusing on commodity exports instead of developing domestic manufacturing and industrial sectors have faced disparities in economic growth. Manufacturing plays a crucial role in increasing productivity, absorbing labor, driving economic complexification, and setting the foundation for growth in higher value-added activities.
While quantitative data may show economic progress and income growth across the world, a more nuanced and historical perspective reveals disparities, particularly when looking beyond China and East Asia. These countries have experienced industrialization and consequently, their demand for commodities has driven a distortionary effect, leading many economies to focus on commodity exports instead of developing domestic manufacturing and industrial sectors. Manufacturing plays a crucial role in this process as it not only increases national productivity but also absorbs surplus labor, drives economic complexification, and sets the foundation for the growth of higher value-added economic activities like services. The convergence of manufacturing productivity with the global average is a stylized fact that supports this theory.
Transitioning from manufacturing to high-value services: To foster economic growth and development, focus on building globally competitive industries and fostering high-value added services, rather than skipping manufacturing or relying on protectionist policies.
The transition from manufacturing to high-value added services is a crucial aspect of economic growth and development. While manufacturing can be a stepping stone, it's essential to become genuinely competitive in global markets to avoid becoming an uncompetitive "lost industrial sector." However, the idea of skipping manufacturing and directly moving to a services-oriented economy is a misconception. Most service jobs in developing countries are in the informal sector and offer low value added, which doesn't catalyze economic growth and development. Protectionist policies, such as tariffs, can harm global productivity and overall growth. Instead, a focus on building globally competitive industries and fostering high-value added services is the key to successful economic development.
Factors affecting industrialization and global competitiveness: The industrialization process is not automatic and depends on factors like human capital, social development metrics, and tacit skills in manufacturing. Countries with poor social development metrics may struggle to compete globally.
The process of industrialization and global competitiveness is not an automatic or linear progression, as evidenced by the experience of many countries outside of East Asia. For instance, locally produced cars in countries like Malaysia had limited international success due to their low productivity and lack of competitive edge. While manufacturing has declined as a share of employment globally since the 1970s, the rate of denasuralization and per capita GDP growth in many countries has been slower than expected. This can be attributed to various factors, including the importance of human capital, social development metrics, and the presence of tacit skills in manufacturing. Countries like India and Brazil, which had surprisingly good social development metrics in the 1980s despite their poverty, have seen different trajectories compared to China. However, many countries next in line for industrialization, such as Latin America, still lag behind in areas like primary education, hygiene, and health, which can hinder their ability to compete in the global market. This complex interplay of factors highlights the importance of a nuanced understanding of the industrialization process.
The role of social and institutional prerequisites in economic development: Effective policymaking and manufacturing require social improvements and strong institutions. The Chinese model's success shows the importance of prioritizing social development, but relying on one growth engine can lead to crises. Historical events like the Volcker period and current challenges add complexity to EM development.
The social and institutional prerequisites for effective policymaking and manufacturing are crucial for economic development. The Chinese model, which prioritizes social improvements before market entry, has led to successful industrialization in countries like Vietnam. However, the reliance on one engine of global growth, such as Chinese demand for commodities, can lead to devastating consequences when that growth slows down. This was evident during the commodity super cycle decline after 2014, which caused crises in commodity-dependent economies like Nigeria, Iraq, and Brazil. The Volcker period, marked by high-interest rates to combat inflation, is also a significant historical event in EM development, as it led to a world of debt and instability. These factors, along with current challenges like the coronavirus crisis and a potential slowdown in Chinese growth, contribute to a complex and uncertain development landscape.
The Golden Age of Development and its Challenges: From 1950-1980, developing countries experienced economic growth. However, starting in 1980, a commodity super cycle caused economic crises and debt crises, leading to mass tragedies. Monetary policy played a role in these crises, and developing countries now worry about potential trade blocs' impact on their progress.
The period between 1950 and 1980 saw impressive economic growth in many developing countries, often referred to as the "golden age" of development. However, starting around 1980, a commodity super cycle led to economic crises and debt crises in the developing world. This resulted in mass economic and social political tragedies, including civil wars and huge bloodshed. Monetary policy played a significant role in these crises by weakening global demand, increasing debt servicing costs, and causing financial instability. Decades later, as the world moves towards a more fractured global financial system, developing countries are expressing concern over the potential for autarkic trade blocs and the impact on their development. Cassandra, who was criticized for predicting economic downturns, was ultimately proven right during this period. It's important to remember that economic policies and global events can have far-reaching consequences, particularly for developing countries.
Challenges in financing green energy in developing countries: Developing countries struggle to finance green energy projects due to insufficient investment from rich countries and failed Chinese initiatives, leading to a 'devil's bargain' where environmental regulations may be compromised.
The lack of sufficient global financing for green energy development in developing countries presents a significant challenge. The failure of Chinese investment through the Belt and Road Initiative, combined with insufficient investment from rich countries, leaves many countries in a difficult position. They need energy for industrialization but face the paradox of contributing to climate change with every incremental amount of coal burned. The lack of global finance for green energy development forces these countries into a "devil's bargain," where they may have to loosen environmental regulations or renege on international agreements to secure the funding they need. A shift towards more balanced infrastructure investment and rebalancing domestic economies could offer potential solutions, but the political challenges are significant. The US and China, as developed and developing countries respectively, face similar issues in financing and constructing infrastructure domestically. The technology for green energy and cutting-edge infrastructure exists, but the financing and political deals to build it efficiently and equitably remain elusive.
Historically, strong states led by elite reformers drove economic development, but many poor countries lack a functional state and developmental coalition.: Strong states and developmental coalitions are crucial for economic development, but many poor countries struggle to achieve them, hindering their ability to compete globally.
Building a competitive and robust economy that can thrive in the global market is crucial for economic development, but political barriers and constraints often hinder this process. Historically, countries like China, South Korea, and Japan have achieved this through a hegemonic state led by elite reformers. However, in many poor countries, particularly in sub-Saharan Africa and South Asia, there is a lack of a developmental coalition and a functional state, making it difficult to rebalance economies and invest in social programs. The decline in complex institutions and the rise of domestic inequality have further complicated matters. While some argue that breaking the globalization model could force domestic political change, the reality is that a strong and functional state is necessary for economic development. The great depression era serves as a reminder of the consequences of failing to navigate these challenges.
The Great Depression: Beyond Economic Instability: The Great Depression was caused by economic instability, but also by the breakdown of the international monetary order and global trade, and the rise of political coalitions in emerging powers. Development progress requires collective participation and addressing structural issues.
The Great Depression was not just a result of economic instability, but also a breakdown of the international monetary order and global trade, as well as the rise of political coalitions in emerging powers seeking to build something different. This history serves as a cautionary tale against isolationism and highlights the importance of collective participation in a new global order. In the context of global development, there are improvements in areas like health and education, but structural issues persist, particularly for poorer countries aiming for industrial takeoff. Development institutions have limitations, and political forcing factors within the rich world are necessary for progress. Commodity exporters like Indonesia and Chile are making strides by moving up the value chain and implementing industrial policies, offering a more positive picture. However, significant challenges remain, and a truly effective response will require a multifaceted approach.
Investing in social development for a productive workforce: To move up the value chain, countries need to invest in education and health for a productive workforce. Vietnam's success story highlights the importance of this approach, but challenges like geography and resource dependency can hinder progress.
For a country to develop and move up the value chain, it's not just about industrial investment and policy. It's also crucial to invest in social development, particularly in education and health, to create a productive workforce. Vietnam is an encouraging example of this approach, with significant investments in health and education leading to high-value added industries. However, even with the right institutional and policy mix, geographical and structural challenges can hinder development. Botswana, despite strong institutions, faces challenges in accessing capital, finance, and global corporations due to its landlocked status and heavy reliance on mineral resources. Ultimately, a developmental coalition that prioritizes both economic growth and social development is necessary for long-term success.
Economic progress is more complex than it seems: Economic growth is not a natural phenomenon, but a result of active choices and politics. Diverse industries exist, but economies often rely on raw commodities and other countries for growth components.
The economic growth trajectory, while impressive, masks the complexity of the economy and the role of countries like China as a fulcrum for progress. The existence of niche businesses in complex economies, such as a Hungarian bookstore in New York City or a used cookbook store in the East Village, highlights the ability of economies to support diverse industries. However, beneath the surface of seemingly prosperous economies, there are often raw commodity exports and reliance on other countries for essential components of growth. The idea of economic progress being a natural phenomenon, like birds in flight, is an illusion. It's a result of active choices and politics. Countries have historically sought to replicate successful economic models, but the reality is more complex, and there is no easy copycat solution.
