Monday, June 20, 2016

On premature deindustrialization and other things

Tyler Cowen peeks into the economic prospects of a world buffeted by declining productivity, secular stagnation, stagnating global trade, premature deindustrialization, increasing automation, and so on.

On how little of the world economy is connected with trade,
Only a small fraction of firms export or even consider trying to export; the actual percentage of exporting firms is estimated at eighteen percent. Most firms which do export are selling a single product to a single country, and even the average magnitude here is to sell to only 3.5 countries. Most nations are not active competitors in most global economic sectors... We see also that exporting firms are much larger than nonexporting firms – 4.4 times larger as measured by sales – and that fact is consistent with the notion of a relatively high fixed cost to trading internationally.  
On the importance of manufacturing,
The lack of manufacturing exports for an economy also may feed into domestic growth by taking away potential economies of scale. Without the chance to export Toyotas, Japanese domestic cars probably would have been more expensive and of lower quality. Internally-driven growth would have less of a jump start from the export sector and also less of an ongoing surplus to draw from for future domestic investment. Manufacturing appears to create strong backward and forward linkages, whereby one set of successful manufacturing companies helps to fund input sectors and complementary sectors, also full of middle class jobs. For the United States, for instance... manufacturing accounts for about seventy percent of the country’s business research and development.
Cowen points to a "cell phones instead of automobile factories" growth path, wherein increasing returns to scale activities like IT, where research and innovation are increasingly focused, though largely produced in developed countries, will diffuse quickly and widely across developing countries, and become the drivers of economic growth there,
The new imbalance would be based on increasing returns to scale goods, which would trickle down to poorer countries, vs. constant and increasing cost goods, which would not trickle down. Developing nations thus would be very well supplied with (cheaper versions of) increasing returns to scale goods, but have relatively stagnant supplies of constant and decreasing returns to scale goods. In practice this would mean that cell phones, software, web sites, movies and television shows, pharmaceuticals, and ideas more generally would be plentiful in developing nations. Similarly, housing and many basic foodstuffs will have higher relative prices. “Living in the past,” so to speak, will become increasingly expensive, and living on or near the technological frontier may become relatively cheap, even in countries which are not thought of as especially technologically advanced. This probably would mean that younger individuals would gain more from economic growth than would older individuals, at least relative to a model of balanced growth; the younger individuals are more likely to use the newer technologies.
On the enclaves model of economic and social development, with the attendant implications for inequality,
Indian outsourcing activities, as practiced in Bangalore, Chennai, or Hyderabad, are examples of enclave construction. The outsourcing centers typically produce much of their own infrastructure, including electricity, water, web connections, and even roads. The goal is for the environment inside the firm, often set in walled-off medieval-style compounds, to approximate that of a fully developed nation. At the same time, the enclave is set in India and takes advantage of the lower wages there. It is another way of blending developed and developing country features, and future development models likely will involve a good deal of such blends, rather than the more straightforward construction of middle class societies as we have witnessed in South Korea, Japan, and Taiwan.
On India's growth prospects,
India is a striking example of a country which has been underinvesting in manufacturing. As we have seen in section two of this paper, the likely implication is that India will fail to develop a large (in percentage terms) middle class and thus will continue to develop along a path of extreme income inequality, with gains unevenly distributed and to the long-run detriment of the nation... India is not a natural candidate to succeed China as the world’s low cost manufacturing center. 
The world economy, especially for emerging economies, is at an intriguing point in their development trajectory. Apart from premature de-industrialization, there are several forces with very uncertain dynamics at play. The increasing use of robots and attendant automation of economic activities is likely to disrupt the labor market. The dynamics of modern capitalism, with skill-biased technologies and wage premiums for the higher income levels, appears to support widening inequality. 

Similar trends are visible within countries too. Consider urbanization. In contrast to the gradual and planned urbanization in developed countries, cities are developing countries are undergoing very rapid and massive, but extremely chaotic growth. This has had the effect of engendering sprawls and gentrification, both of which threatens to leave such cities with pockets of affluence and modernity in a sea of less than desirable living conditions. It is possible that most cities in developing world will never achieve the quality and vibrancy of cities like London and New York even if incomes reach the same levels.

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