Why Industrialization is no longer the Answer

3D printing represents an even more fundamental challenge to concentrated industrial complexes.

Industrialization and manufacturing-based export-led economic growth will not be the answer for Africa. The industrial path towards riches is not just temporarily blocked by China; it is fast receding under the pressures of globalization and routine-biased technological change. Instead, the continent must look towards a more expedient mix of domestic-driven growth, tourism, and leap past the secondary sector straight into a service-based and knowledge-intensive economy.

Introduction

How should sub-Sahara Africa lift itself out of poverty? Although it has been doing rather well as of late, there are no indications that Africa is on a growth path that will inexorably lead to high-income status, especially as the continent’s population continues growing at breakneck speed: the UN forecasts African population to nearly quadruple by the end of this century. In spite of recent good news such as sub-Sahara Africa’s rise through the ranks of the World Bank’s ‘ease of doing business’ index, record levels of private-equity investment, and a surprising resilience to falling commodity prices, it still remains by far the poorest continent on earth and there is no indication this is bound to change anytime soon. This essay will therefore examine how Africa can follow Asia in the rise of nations, and speculate whether the tried and tested recipe of economic development through industrialization will work for the cradle of mankind, the same kind of magic it did for rich countries in Asia. It will not.

After taking stock of the specific pattern of economic development that has led to prosperity in today’s rich countries, we briefly illustrate through the example of industrialization in Taiwan. We proceed by identifying two indications that this avenue towards economic anticipation will not be available to sub-Saharan Africa: premature deindustrialization and job polarization, which lead us to conclude that convergence to the rich economies based on industrialization will not be the answer for sub-Sahara Africa. The essay then briefly argues that the same forces that restrict Africa’s access to an industrial manufactures export-led convergence also contain the seeds of opportunity for new patterns of economic development. We shortly discuss the difficult challenges for institutional formation during growth, absent an industrial base, prior to concluding.

The Tried and True Path to Prosperity

Our point of departure is explaining why some other countries, but not Africa, grew to be rich. For most of human history after all, widespread poverty at subsistence-level has been the norm rather than the exception: until a few centuries ago, living standards tended to be low and most of the world was caught in the poverty trap famously described by Malthus: economic growth caused by technological progress would mostly express itself through higher agricultural productivity which quickly translated into population growth; a food surplus and healthy caloric intake enhances fertility whilst depressing mortality. As population density gradually grew however, there came a point where society’s accumulated technology reached a critical threshold. At this instance the benefits of investing in quality of offspring overtook those of increasing the quantity. Efficient use of new technology necessitated education, or human capital, in effect causing people to send their children to school and have less of them. Not only did this investment in education and the concomitant rise in skill-levels of labour in manufacturing processes accelerate the accumulation of knowledge, productivity and thus of economic growth; it moreover divided these gains over fewer people, leading to dramatic improvement in individual incomes and allowing for even further human capital investments and restraint of birth rates. Through this virtuous cycle, economic growth thus evolved into its modern guise of productivity growth per worker, rather than its historical form of population growth at barely-above-subsistence levels.

This is known as a demographic transition, and it’s the process by which the first societies where prosperity was not restricted to narrow political elites emerged. England’s industrial revolution is the prime and first example of a country undergoing such a transition, famously conferring upon this small island nation economic and military predominance on a global scale until the turn of the twentieth century.

Many explanations have been offered for the emergence of industrialization in Western Europe, including a fortuitous initial endowment of productive crops and animals for husbandry, a favourable cultural ‘ethic’, just the right amount of genetic diversity, and political fragmentation leading to non-absolutist institutions responsive to property rights. What is clear however, is that industrial development is not the exclusive prerogative of Western countries, as towards the late nineteenth century, Japan began climbing the industrial ladder to economic significance: Its process of industrialization, accelerated by importing technology and exporting industrial manufactures to international markets, transformed the Japanese standard of living in a short span of time, and laid the foundations for its politically more durable convergence to the frontier of development and wealth, after the Second World War. After Japan, numerous other ‘Asian little dragons’ followed.

The example of Taiwan is instructive. In 1951, shortly after mainland China’s Kuomintang regime, ousted during the 1949 civil war, established themselves on the island, Taiwan’s GDP per capita stood little over $1,200 in 2005 international dollars, adjusted for purchasing power. This placed it on equal footing with African countries such as Congo. By 2010 however, this number had risen to exceed $32,000, comparable to Western European countries. How was such a sensational and rapid transformation possible?

The answer lies in its use of international trade for accessing new knowledge and a far larger market for demand than could ever have been realized domestically. When Britain industrialized, technological progress had to come from learning and acquiring experience within the context of its own evolving production practices. Taiwan however, could import knowledge allowing it to start ahead and progress much more efficiently.

Furthermore, strong international demand for its manufactures allowed for a much higher degree of specialization and greater economies of scale than would have ever been possible in isolation. As a result of these strong international forces, leveraging Taiwanese productivity growth, low-skilled factory workers had enough income to invest strongly in their children’s education, who in turn earned much higher wages. Just one generation further down the road, most Taiwanese had left behind the factory halls and taken up high-paying jobs in an office or R&D department. Within three generations, a nation living in abject poverty had become wealthier than Southern Europe.

It should be noted however, that these developments could only occur because the Taiwan had relatively much starting capital (and US aid), a high propensity to save, and a state which facilitated the necessary conditions: It undertook extensive land reforms, distributing property and property rights, thus giving enterprising farmers an incentive to start manufacturing. Furthermore, Taiwan initially shielded its industries from international competition by restricting imports.

Thus, provided the necessary starting conditions and institutional framework are present, such as starting capital, protection of property rights, and enough time for new industries to mature, industrialization coupled to international trade can be a powerful force for economic transformation. For a long time, it has been hoped that this process would sooner or later befall sub-Sahara Africa and lift its countries out of poverty like it did Western and East Asian nations before, an understandable hope considering the mechanism’s track record. There are however reasons to believe that its heyday has come and gone.

The Writings on the Wall

Globalization-associated Premature Deindustrialization

Over the past decades, a trend has emerged where countries, both developing and developed, tend to rely less and less on industrial manufactures for their economic output and employment; this is deindustrialization. Services and knowledge-intensive industry (the tertiary and quaternary sectors) have grown tremendously, both as a share of GDP and as a share of global trade flows. This means that manufacturing has lost relative clout, and with it has lost at least some of its former capacity for lifting poor countries out of poverty and propelling them into middle- and eventually high-income status.

More significantly from a sub-Saharan perspective however, is the related phenomenon of ‘premature deindustrialization’: the progressive dwindling in the levels of employment and income per worker at which industrialization peaks, and stops growing or even starts declining. In the case of India, this point of ‘peak industrialization’ was reached so early on in development, that one leading economist deemed deindustrialization an understatement and has instead dubbed the incident ‘premature non-industrialization’.

There are three reasons for this to occur: Firstly, the unbundling of production processes, where multinationals, facilitated by ICT solutions, have developed ‘global value chains’ that distribute different parts of their production over different countries. This effectively means that countries with low wages are able to capture only smaller parts of economic activity related to manufacturing, typically those parts which maximally exploit cheap labour and least suffer from lacking infrastructure and associated facilitative services. As a result the broad and deep local investment, with many positive side-effects, that in the past kept manufacturing internationally competitive even after wage rises, is no longer needed. Secondly, due to World Bank and IMF policies promoting free trade with minimal barriers in recent decades, countries whose comparative advantage in the manufacturing sector was not already strong, have been exposed to very competitive international prices essentially stopping industrialization in its tracks. Whereas several developing nations (most famously, the United States, but more recently also South Korea) used protective trade measures to shield nascent industries until they were developed enough to compete internationally. Tellingly, Asian manufacture-exporters that were already experienced did not see their industrial output share fall like India and Latin America did. Even in these nations however, the share of the population employed in manufacturing has fallen, which ties in to the third reason: technological change.

Job Polarization

Job polarization refers to the observation that since the late eighties, both the share of jobs that can be classified as ‘low-skill’ and the share considered ‘high-skill’ have been steadily rising at the expense of the share of ‘middle-skill’ jobs, in both the US and Europe. The most widely accepted explanation for this development is that technological change since the late eighties, in particular the rise of low-cost computer power, has tended to substitute for medium-skilled labour, whilst mostly complementing the work done by workers of relatively low and high skill-levels. The underlying thought is that jobs that computers perform well at work that is very procedural and rule-based (that can easily be formalized in programmed instructions), whilst struggling with activities demanding flexibility, creativity, or judgement. The advent of the computer age then, meant that jobs featuring many ‘routine’ or ‘codifiable’ tasks could be reliably performed by machines and software, rather than by humans. To a great extent, these jobs turn out to fall mostly within middle-skill category, such as clerical work and manufacturing. Many low-skill jobs –such as those involving participation in traffic, or direct interaction with humans– and high-skill jobs – which tend to require more abstract problem-solving and creativity– however, are non-routine and actually complement the routine tasks now productively performed by computers. Thus, as ICT becomes ever cheaper, more ubiquitous, and more adaptive, pressure has mounted on these middle-skill jobs (including in manufacturing) leading to the observed ‘polarization’ of jobs.

Why Africa’s Industrialization Ship has Sailed

The argument should by now be evident: In a world where export-oriented manufacturing will remain the dominion of China and some other industrial centres in close proximity, Africa has to wait its turn. On a longer timescale however, industrial production is waning in economic significance and industrialization processes seem to have lost their potency to lift developing countries to middle-income status. With the scope of substituting digital automation and robots for labour ever expanding, and the costs falling precipitously, it is doubtful that cheap labour will long remain competitive with physical capital and technology in low-cost production.

Furthermore, the prospect of rising productivity and income through a large share of the population being involved in industrial production is severely dampened by the phenomenon of job polarization. This means that to the extent that cheap labour is still to some extent an attractive industrial input, it is likely that such workers will remain trapped in low-skill, low-pay employment for lack of middle-skill jobs to grow into.

In short African labour won’t be able to compete with machines in the most lucrative segments of manufacturing. Whilst some manufacturing will indubitably occur as part of Africa’s economic development and diversification, perhaps a significant portion of it will even be for exports, however this will not occur on the scale nor deliver the economic surplus required to drive the human capital investments necessary for halting uncontrolled population growth and entering into an age of modern productivity driven growth.

This is quite disconcerting in light of the earlier description of the usual road to riches involving industrialization as an ‘escalator ride’ from a low-income, high fertility state of affairs, to one characterized by middle-income and high investment in education. Africa therefore needs to develop its own distinct strategy for realizing economic prosperity.

On to Roads Less-Travelled: Development in the 21st century

Africa has other options though: changes in the sectorial make-up of the world economy and the structure of production processes do not however necessarily prohibit sub-Sahara Africa from leveraging their economic development through integration in much larger world markets. Shifts in economic patterns should however also imply opportunities in novel places. We briefly outline some of these opportunities and explore the main challenges in pursuing development without the benefits specific to manufacturing.

First off, new technologies may be utilized as a vehicle for leapfrogging. Some investments in physical assets can be foregone in favour of newer technologies that substitute older infrastructure that current rich countries had to invest in. Consider telecommunications, much of Africa has skipped the phase of landlines altogether as cellular coverage rolled out across the continent with astonishing speed and coverage. Consider also banks’ reliance on this infrastructure and the ubiquity of cell phones, reducing the need for extensive networks of branch offices.

Secondly, a growing service and knowledge sector that is ever less constrained by physical location also offers manifold opportunity for small-scale integration in global markets with relatively small investment in physical capital, no machine parks, supporting industries, and harbours are needed to export these products. One example of a model for emulation might be Bangalore’s (India) success in exporting IT-services, though the African experience is likely to be characterized by smaller scale and more modest concentration. Similar to manufacturing, such clusters of export-oriented service sectors have the potential to attract other complementary economic activity, including stimulating growth in domestic economic activity. The aforementioned process of job polarization suggests that demand for such high-skill labour should continue to increase, offering high-premiums to talent. As both the youngest and least developed continent on the planet, Africa arguably has the world’s largest pool of latent talent to be tapped into.

The flip-side of this is that fairly high investment in human capital is required to be competitive in these sectors, something that is less tangible and ostensibly harder to copy or import than physical goods. This implies dramatic investment in solid public education, both on the primary and secondary level. The good news here, is that technology may help in this regard too: study materials, once produced, are far easier and cheaper to spread than the physical books on which previous generations of developing nations relied. Moreover, the advent of online learning through novel education models such as Massively Open Online Courses (MOOC’s), which rely on video-recorded instruction by top-notch educators, and peer-evaluation based assessment (which cut costs on grading, traditionally a large drain on educators’ time) hold tremendous potential for upscaling affordable intermediate and higher level education, even with modest initial endowments in terms of educational infrastructure and teaching staff. If technological change is rewarding labour with the ability to perform non-routine tasks, the world’s most youthful continent should be well-placed to reap the benefits.

Finally, the whole notion that economic ascendency must be founded on exporting manufactures or even services and knowledge reeks somewhat of mercantilist tendencies, even if partially counter-balanced by foreign investment. As the demographically youngest and fastest-growing continent on earth, the promise of Africa’s domestic market holds great allure and potential. This immediately invokes negative associations to development-retarding cheap imports from more developed nations, however sub-Saharan African nations are currently experiencing great investor demand for a share of the growing pie of those sectors of the economy that must be developed locally, and there seems to be no immediate reason not to ‘export’ some of this potential in exchange for sorely needed capital. Governments can help by improving rule of law and in particular the protection of property rights to entice more investors to jump on board.

Challenges abound

Although it has just been argued that the dark cloud of industrialization not leading Africa growth to prosperity features many silver linings, the general outlook remains quite bleak. There are good reasons all historical examples of transition into modern economic conditions were preluded by industrialization. Industrialization features very significant spill-over effects, and manufacturing sector has tended to exhibit higher rates of productivity growth than the service sector. It is also characterized by significant economies of scale, which mean that production tends to be scaled up in one locale, and pull along the rest of the economy with it, as infrastructure and facilitative services develop in close proximity. These are blessings that Africa will have to do without, but to a lesser degree services and knowledge-intensive economic activity do also feature some scope for all of these boons.

Finally there is reason to believe that the effect of income growth on political outcomes is moderated by industrialization. A large manufacturing sector has a penchant for aligning the interests of the non-elite, whose political representation can organize itself and countervail the interests of elites. When lower- and middle-classes are spread over smaller informal and service-oriented economic activity, political fragmentation may result, crippling the efficacy of political opposition to powers-that-be. However, even fragmented opposition may be expected to unite when political elites act directly contrary to societal interests, especially when education levels are high, which is a prerequisite of the proposed alternative development strategy.

All things considered however, the industrial path still seems highly preferable over domestic demand and service/knowledge-intensive export-led growth. However as this path seems closed off, even more so with the prospect of 3D printing technology upending traditional production processes, Africa should look to its two greatest distinguishing assets: Relative resource-abundance and demographic vitality. As the scope for spill-overs and sustained productivity growth in former seem rather limited, it would make more sense to focus on the latter and pursue growth based on domestic demand, and providing knowledge-intensive services. This is a tall order, given Africa’s current underdevelopment and the educational investments required; if its countries however, can harness their resource wealth to this agenda, it’s a more plausible strategy than any currently on offer.

Conclusion

In an era of prolonged languid economic growth in developed economies and all-time low Treasury bond yields foreign investment should be relatively easy to attract; those African nations with strong governance, relatively benign institutions, and good recent track records, should find themselves uniquely placed to turn a decade of annual growth in excess of 5% into double digit growth rates. They should not miss the opportunity in the belief that the Western or Asian models will work for them, once East Asia passes on the baton of the world’s factory. This requires heavy investment in education and infrastructure, as well as significant institutional improvements. Sub-Sahara Africa’s recent pattern of responsible counter-cyclical spending however, offers hope that volatile income streams owing to its relative commodity wealth may indeed be harnessed to sustaining such a programme of investment for a prolonged period. The process of investment and leapfrogging should however be leveraged by adopting policies geared towards stimulating further foreign direct investment and private-equity inflows. In effect, Africa may still partake of the world economy as a lever to its growth, though its main avenue of access to international capital markets lies not in the export of manufactures, but the export of a share of its domestic potential as the world’s youngest and most dynamic continent. Africa should therefore not try to emulate precepts of industrialization-based development of centuries gone by. Its road lies elsewhere and must navigate the terrain of twenty-first century circumstance. This means acknowledging that globalization and and routine-biased technological change have neutered industrialization’s potency for growing low-income economies to high-income ones, and betting on advanced services and domestic market growth instead.

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