News of a so-called coup d’état and Erdogan’s subsequent overreaction have generated elevated levels of unease amongst Western leaders. Turkey’s geographical proximity to Europe, its revitalized role as a windscreen filtering the consequences of the Syrian Civil War and its military relevance as a NATO member have played a determinant role in fostering this feeling. Even in the face of blatant violations of liberal values, Western leaders have in fact remained hesitant guardians of their values in an attempt to maintain a necessary, yet uneasy allegiance to Erdogan’s rule.
As Turkey is a key destination in the early stages of our expedition to China, we decided to investigate Turkey’s economic history to better interpret this country when en route. Interestingly, one of our favourite sources for readings on globalization and development (take a look at our Reading List) is the Harvard economist Dani Rodrik, who also happens to be Turkish. In an interview with Tyler Cowen last year, he discussed some of Turkey’s worst problems. Amongst these, the phenomenon of premature deindustrialization appears repeatedly in the interview. As Cowen argues: “Even if I think of your work on premature deindustrialization, if I think of Turkey in the 19th century, a big theme from my understanding is that Turkey is then prematurely industrializing, and that’s why the Ottoman Empire becomes the sick man of Europe”.
As we prepare a more detailed write-up of the coup d’état in Turkey, we’ve decided to repost an article written by Giulio on Edinburgh University’s Insight Magazine on the topic of premature deindustrialization. Many of the developing countries on our road to China should fear this phenomenon.
Premature Deindustrialization - Migrating Companies
Sebastião Salgado, a former World Bank economist and one of the most renowned photographers alive, dedicated the vast majority of his career to portrait photography. His prolonged infatuation for the human eye ended abruptly when he embarked on a project documenting humans’ migrations around the world, and in the war-ridden African regions. His realization of men’s inherent violence, and hardship in the act of migration led him to shift his lenses towards the study of nature’s purer forms through landscape and wildlife photography in his acclaimed book Genesis. Salgado’s unforeseen search for an immaculate reality following his research on humans’ migrations reveals the extent of our specie’s clumsiness as migrators relative to the inhabitants of the natural world.
Nature’s great migrators, contrary to humans, are expert observers of the maturity of seasons and have reaped the fruits of a borderless world centuries before our invention of the term “globalization”. In our world, globalization has entered vocabularies hand in hand with a vast array of promises and a dangerous occlusion of the natural concept of maturity. Neoliberal theories suggest that globalization has the ability to encourage competition, enlarge markets, spread technology, and enhance good governance. As Martin Wolf famously declared: “we need more global markets, not fewer, if we want to raise the living standards of the poor of the world”. Contrary to expectations, globalization has been a key driver of economic growth for only few developing countries, as a Panglossian convergence of living standards has remained an aspiration for the majority. One of the possible causes of this lack of convergence has been identified as the premature migration of resources from the manufacturing to the service sector within developing countries. While this trend had been experienced by developed countries from the late 1960s, the causes of deindustrialization were natural consequences of sustained growth. Meanwhile, partly due to globalization, the manufacturing sectors in developing countries have been crippled prematurely. The economist Nicholas Kaldor was one of the main champions of the sectoral superiority of manufacturing over agriculture and services. In his view, the manufacturing sector encourages the accumulation of technologies, skills and capital, which are three essential components for long-term growth. Meanwhile, the service industry often has limited potential for productivity increases as the productivity enhancing features of standardization and replication are not as readily available as in the manufacturing sector. Within the framework, one can discern that the premature deindustrialization trend should be considered an eminent enemy of economic growth.
Deindustrialization affirmed its presence in history by drastically transforming modern developed countries during the second half of the twentieth century. Industrial countries’ share of manufacturing employment collapsed from twenty-eight per cent in 1970 to approximately eighteen per cent in 1994. This process is sharply delineated when juxtaposed to the opposite rise in the relative and absolute share of the manufacturing labour force between the end of World War II and the mid-1960s.
In the 1970s, as world trade expanded, the manufacturing share of employment started declining and the first symptoms of deindustrialization appeared. The figures are clear: between 1982 and 1992, the direct investment flows from OECD to non-OECD countries increased from 20 billion U.S. dollars to 200 billion, while manufacturing imports from non-OECD countries increased from 87 to 426 billion U.S. dollars. Therefore, if correlation were to imply causation, globalization would seem to be the main culprit of deindustrialization. Theoretically, this correlation will appear to be more than a simple coincidence, yet, many academics have argued against the importance of this cause. In the United States, for example, manufacturing imports from developed countries were worth only two per cent of GDP in 1994, a portion that many trade economists have judged to be too small to alter the North American low-skilled manufacturing sector. Therefore, the vast majority of the literature on the causes of deindustrialization seems to agree that internal causes were the main drivers of deindustrialization in developed countries. Economists, infallibly competing with the many-handed god Vishnu, have argued that internal deindustrialization predominantly depends on manufacturing goods’ negative relationship with income levels, manufacturing sector’s tendency to outperform the service sector’s productivity growth, a rise in education levels and the statistical illusions related to the creation of a subcontracting service industry. The view that internal causes have been the main driver of past deindustrialization aligns with the perspective that this process is a natural and inexorable feature of economic development.
Deindustrializing Too Soon
Since the 1980s, developing countries in Africa and Latin America started following a deindustrialization trend that appeared to be similar to the one experienced by modern developed countries. This trend though has been labelled with a variety of gloomy labels such as “premature”, “spurious”, “negative”, “non-conforming” and “anomalous”. The labour forces in Africa and Latin America have predominantly flown out of the manufacturing and agricultural sectors towards the service sector. In these countries, the manufacturing share of employment has been falling before reaching the peaks and income levels achieved by modern developed countries. Developing countries begun deindustrializing when reaching a level of only US$3,000 GDP per capita, compared to the U.S.’s level of U.S.$10,000 GDP per capita.
While the main drivers of past deindustrialization were internal endogenous factors linked to economic growth, developing countries have faced stronger pressures from external exogenous factors linked to globalization. Describing globalization as a Ponzi scheme where developed countries convince developing countries to become shareholders of an unsustainable growth fraud would be overly pessimistic. On the other hand, the altered nature of globalization and its power to encourage deindustrialization during the past three decades have limited developing countries’ access to the growth opportunities experienced by past industrializers.
The transformations in the dominant ideological framework during the 1980s led to a deepening of international markets and an alteration of the relationship between state, growth and the market. Policymakers’ inability to adopt a range of interventionist policies sentenced the manufacturing sector to the powers of volatile capital markets and the competition of well-established rivals. In addition, global supply chains have been dramatically altered by the advent of information and communication technologies (ICTs). Multinational corporations are empowered by this type of “footloose” supply chain as they can easily change supplier and treat developing countries as extractive sites. Countries joining a supply chain struggle to maximize technological spillovers as the supply chain remains in control of a third party. Finally, one should note that the rise of offshoring has not been limited to the manufacturing industry. Offshored services have become a source of job creation competing with or substituting the role of the manufacturing sector in developing countries. Developing countries with strong deindustrialization trends such as Malaysia, Chile, India and the Philippines amongst others have been the main absorbers of offshore services.
Does it Hurt?
Historically, only a minority of countries succeeded in becoming prosperous without building a strong manufacturing industry. The opening lines of a United Nations report titled “Development Strategies in a globalizing world” published in 2003 explain that: “in almost all successful cases of rapid and sustained growth in developing countries, a dramatic shift in economic structure from the primary sector to manufacturing has triggered a progressive rise in productivity and income levels”. Notable cases of successful growth such as Japan, Korea, Hong Kong, Singapore, Taiwan and China relied heavily on the expansion of their manufacturing industries. One should note that industrial policies have also had a less lustrous history in Latin America where inadequate management and corruption in the manufacturing sector have triggered unintended consequences for the economy. Overall though, while a strong manufacturing sector is not a sufficient factor for growth, history proved that only few countries were able to grow without industrializing.
The renowned Roman poet Ovid delineated the imagination of ancient and modern thinkers by vividly describing Icarus’s death while attempting to imitate birds’ flight with wings made with wax. Following Ovid’s advice, ancient Romans learned not to imitate birds and rather observed their migrations to interpret omens and auspices. Today, policymakers should observe these experienced migrators once again to learn the importance of timing when migrating. If this happens, Salgado might decide to turn his lenses to human faces once more.
On an interesting side note, in the same interview mentioned earlier, Cowen asks Rodrik: “If you could make one change to help produce more Dani Rodriks for all the rest of us, what would that be?” In turn, Rodrik cautiously replies: “I don’t know. Maybe a gap year, spending a year in a developing country between your first and second year?” We look forward to following Rodrik’s advice in the upcoming months.