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]