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Are Developing Countries Missing Out on the Blue Model?


Developing countries may be transitioning to service economies too quickly, says Dani Rodrik in an excellent new piece for Project Syndicate. Most western economies got where they are by industrializing and then shifting to a service economy over the course of two centuries. Many developing countries today, by contrast, are skipping straight to services. Even purported manufacturing behemoths like China have only a small percentage of their workforce in manufacturing—the bulk of new growth is actually in services. Rodrik thinks it a disconcerting trend:

An immediate consequence is that developing countries are turning into service economies at substantially lower levels of income. When the US, Britain, Germany, and Sweden began to deindustrialize, their per capita incomes had reached $9,000-11,000 (at 1990 prices). In developing countries, by contrast, manufacturing has begun to shrink while per capita incomes have been a fraction of that level: Brazil’s deindustrialization began at $5,000, China’s at $3,000, and India’s at $2,000.

The economic, social, and political consequences of premature deindustrialization have yet to be analyzed in full. On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called “escalator industries”: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress in other sectors of the economy….

The social and political consequences are less fathomable, but could be equally momentous. Some of the building blocks of durable democracy have been byproducts of sustained industrialization: an organized labor movement, disciplined political parties, and political competition organized around a right-left axis.

So, while developed countries are worrying about the breakdown of the blue social model based on mass manufacturing jobs and lifetime employment, the real story is that developing countries may never get to the blue model. Automation and global competition mean than manufacturing jobs and their wages aren’t going to grow enough to support a middle class in China and other countries as they did in the US, Europe and Japan.

If this is true, the implications are enormous: social stability in countries like China could be much more tenuous than many think, and developing countries may have a much harder time reaching the levels of affluence found in the advanced world. Since we’ve never seen a global industrial revolution before, much less one that is taking place at the same time as a global information revolution, nobody really knows how it will all shake out. But it is trends like this, not budget fights in Washington, that will shape the future of the human race.

[Chinese factory image courtesy of Shutterstock]

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  • Corlyss

    “An immediate consequence is that developing countries are turning into service economies at substantially lower levels of income.”

    Let me get this straight. It’s better for us to have a spike in middle class income/earning power in the mid-20th Century and lose it almost precipitously, than it is for these emerging economies never to have had it? Did I get this right?

    • Andrew Allison

      I feel compelled to share an aphorism which my wife brought home this week: there’s nothing right in my left brain and nothing left in my right brain! That said, service economies are a relatively recent phenomenon. In western economies, they arguably took up the slack (on a national, not individual basis) created by the collapse of industrial economies In recent years, they have increasingly moved offshore due to lower labor costs. The question is: with what can western economies replace the loss. The answer, as VM has implicitly elucidated many times, is services which cannot be provided at a distance. These fall into two categories: personal services and, for want of a better word, I’ll call super-services (services which require, for example, high education).

      • Bruno_Behrend

        A good plumber, carpenter, or electrician, will always have a decent middle class job.

        A person who knows how to manage the above will always have a shot at getting very rich.

      • lukelea

        A lot of what we call the service economy consists of things we pay other people to do for us which we used to do for ourselves at home: cook, clean, childcare, elder care, lawn maintenance.

        When a bachelor marries his house cleaner, at least in the old days of stay-at-home moms, the GDP goes down even though nothing real changes except that the government takes in more revenue in taxes (FICA, sales, income, etc.).

        A lot of the economic growth in the last several decades, when the two-earner family became the norm, is illusory.

        • Andrew Allison

          Sorry, but I don’t see the relevance to either, “developing countries are turning into service economies at substantially lower levels of income.” or my comment relating to it.

  • Anthony

    “Since we’ve never seen a global industrial revolution before, much less one that is taking place at the same time as a global information revolution, nobody really knows how it will all shake out.” This is certainly a key sentence to thesis of above Quick Take.

  • Andrew Allison

    It appears to me that this analysis overlooks the fact that the tools which took western economies two centuries to develop, most notably IT, are immediately available to developing countries. The result applies not only to production technology (which greatly reduces the need for manufacturing labor) but, for example, to the outsourcing of what is today ironically referred to as “customer service” to Asia.

  • Bruno_Behrend

    In thIs day In age, why are we so worrIed about other natIons followIng the exact same path as the UnIted States?

    It makes no sense for natIons to IndustrIalIze sImply for the sake of IndustrIalIzatIon. The $60 /hour manufacturing jobs that existed in Detroit is never going to come back anywhere on this planet. Why Would We Want it to?

    As the new technologies mAke their wAy into the economy, there will be an entirely new mix of manufacturing and service Industries.

    This is a good thing. It’s tIme to stop thInkIng that successful economIes must make thIngs that wIll fall on your toe.

    • robin hood in reverse

      People remember who ripped them off longer than their loved ones but we need to make sure the low information voters know who to hate.

      Summary Tweet:

      Government is 20% more expensive than the free market. Each government job costs 6 jobs. A stable money supply creates an innovative middle class.

      The Backup

      A Harvard Professor and previous President of IMF wrote a book called “This time is Different” . Carman Reinhart and Kenneth Rogoff studied fiscal crisis in 65 countries over 500 years.

      Government is a monopoly that is 20% more expensive than the free market.

      If we go from a 38% tax rate to 20% tax rate with a balanced budget the private sector will grow from $11 Trillion to over $16 Trillion. Tax revenue won’t decrease 48%. Tax revenue will only decrease 24%. Half of Washington won’t have to go on a permanent vacation, only one out four. Employment will increase 25% so displaced bureaucrats will have lots of new opportunities to contribute to society.

      If we get down to a balanced 10%, $20 Trillion – more than a 60% increase in jobs if half of Washington goes on a permanent vacation, each dollar earned buys ($0.90/$0.62) 45% more, and hard America becomes a soft warm place and our soft power will return.

      John Nash’s beautiful mind recognized the importance of interactions in which the results of one person’s choices depend not only on his own behavior but also on the choices of another person. There is a related game called Ultimatum. You and your partner split $10. Less than $3 deals disgust and anger. The dealer has a pulpit.

      The Laffer effect is no joke. Charles Adams, an international tax attorney and historian, wrote books on taxes. Once tax rates rise above the disgust and anger point, the expected extra tax revenue never shows up. A flat tax system is part of Constitution. Everyone has to pay taxes to keep as many people’s tax rate below the disgust and anger tax rate or make sure an overwhelming majority is disgusted with high taxes.

      Carman, Kenneth, and John all sincerely believe dealers can routinely get an $8 to $10 deal by getting his or her partner work for a $3 to $5 deal. With each $3 to $5 of earned success the partner becomes a dealer that turns the $3 to $5 deal into $6 to $8 of earned success. Turning $10 into $13 is a win-win systemic solution that creates good people, great outcomes, and durable trust but when it rains, rainmakers show up and turn everything to dirt.

      There will always be zero-sum losers who just accept less than $3 deals and think the key to success is being an abusive dealer. A $7-$3 deal isn’t better than a $6-$4 deal because $7-$3 deals turn into $6-$2, $5-$1, and $4-two bit deals.

      Rainmakers turn everything to dirt because they feel entitled to $7up and someone else has to pay for the diet $7up. A shared sacrifice life is the unknowing bully master plan and then you die. The rainmaker coach treads through players who can’t make enough back court shots to win the game.There is another way to explain the same thing!

      When you walk into Monticello (Thomas Jefferson’s place) there is a bust of Turgot. Turgot inspired Smith, Mises, Hayek, Rothbard, Jackson, and Friedman. Before the Fabian Keynes reopened Pandora’s box, the political economic debate was largely over and the Austrian School of Economics won.

      Figuratively speaking, every state is a Prince. A good Prince only defends negative rights, sees the means of production as the small businessman, does not clip coins, lets the church provide charity, lets people make decisions on as localized as possible basis, and does not do the rich man any favors. Everyone has the right to free speech. A man’s house is his castle and a warrant is needed to forcibly visit. People take better care of their own property than the state takes care of public property. Limits on usury so that banking is a very boring endeavor. Indirect taxes make more sense than direct. The private market should always be allowed to compete with the public market. From 1776 to 1913, the sum of Federal, State, and Local taxes were less than 10% and the dollar only dropped 3% in value.

      Second place is the first place loser but a peek is worth ten free market estimators. “Wealth of Nations” is easy to summarize. Companies play free market basketball on a diving board because a company cannot maximize its’ profit if the company hits more often than the dummy.Friedrich Hayek introduced himself to Fabian Keynes by asking about Sir John’s predecessor Francis Edgeworth. Edgeworth did the invisible hand check math but what about the poor and the middle class!

      Thanks to Thomas Jefferson and company, we were a 10% tax soft warm place for 150 years. Switzerland, much of Eastern Europe, and Russia are on the 16% flat tax plan.From 1776 to 1914, the dollar only dropped 3%. Over the last 100 years, the dollar dropped 95%.

      The 10% public sector bottom 20% to top 20% ideal distribution is around $3.50,$4.50,$6.25,$8.25, and $11.25. We went off the gold standard 40 years ago. Over that period the average overall tax rate was about 30%. Over the last 40 years relative wealth distribution went from ($2.75,$4.00,$5.25,$7.00,$9.25) to ($1.25,$2.00,$2.75,$3.50, & $18.50). 30% to 40% Obama has taken us to ($1.00,$1.75,$2.50, $3.25, and $16.75). If the dollar is no longer the world currency,($0.75,$1.31,$1.87,$2.41,$12.19).

      George Washington never told a lie, created guerrilla warfare, and was our first President. Soon after the Fertile Crescent created the first city-state, someone else created guerrilla warfare.After winning, Humpty Dumpty sat on the wall and won’t leave. Useless third party Humptovation is folly of the elite until freely associating masses revolt well …. if there is no free market innovation, a smart humpty dumpty will tax up to the disgust and anger set point and clip coins until he or she takes a digger.

      Free market innovation and it’s relationship with humptovation is a standard of living educated guess. All these rough guess are based on China going from a 100% tax nation state to a 50% tax nation state improving the standard of living 14 fold over 35 years. With approximately 30% overall tax rate, the standard of living has been increasing in the 2.6% or 30% improvement over 10 years based on a stable money supply something that $1.00 last year cost $0.974 this year. Judging from our 10% tax rate past, reducing the tax rate to 10%, reducing government to the same size, and a stable money supply, the standard of living improved 4% to 6% or 50% to 80% improvement over 10 years after a 16% improvement as a consequence of going from 30% to 10%. 40% tax rate and government equals 11% to 14% improvement over 10 years after 10% reduction due to going from 30% to 40%. 20% tax rate and government equals 50% to 60% improvement over ten years after a 15% improvement as a consequence of going from 30% to 20%.

      Smaller government means more happiness, innovation, and wealth but despots constipate the economic diving board of bailouts, barriers, codes, and clipped coins in order to turn the board into a czar mat so they can play with their drone stick. That’s the only way despots can get some loving. Humptovation can still double the wealth of the top 20% and as a society we need to put as stops in place to prevent that from happening.

      If we continue on the path Obama and company put us on we are going to go from ($1.25,$2.00,$2.75,$3.50,$18.50) to ($1.10,$1.93,$2.75,$3.67,$18.34) or even worse over the next ten years. If we change course and follow our founding fathers’ path, bottom 20% to top 20% wealth distribution should be ($5.25, $6.25,$9.37,$12.27, & $18.32) – no skin off the lovable ruling elite’s back.

      The Federal Reserve was created on Jekyll Island. The Prince of Hyde Park game is over!

  • Peakview

    Rodrik writes as if economies have a mind of their own and planned out what occurred. Like the economies deindustrialized on purpose. He then assigns all types of outcomes which he considers good – a left/right political axis? – to industrialization as if it were the outcome the “economy” had in mind. He should stick to observations of outcomes rather than assigning reasons and causes.

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