Will the World Ever Boom Again?
Let’s step back and take a look at global economic development. In the last two or three decades, we’ve seen a remarkable phenomenon. Since the Industrial Revolution, a few countries in Europe, North America and East Asia raced ahead of the global pack and maintained their lead for much of the 19th and 20th centuries.
That confounded the predictions of basic models of economic growth, which say that national living standards should converge over time. Only since the 1980s, has the rest of the world been catching up, and catching up fast. Global growth has been strong -- usually more than 3 percent, often even higher. And developing countries have grown much faster than developed ones, helping to make global income distribution much more equal. It looks like the old economic models are working after all.
But can it last? The main engine of global growth since 2000 has been the rapid industrialization of China. By channeling the vast savings of its population into capital investment, and by rapidly absorbing technology from advanced countries, China was able to carry out the most stupendous modernization in history, moving hundreds of millions of farmers from rural areas to cities. That in turn powered the growth of resource-exporting countries such as Brazil, Russia and many developing nations that sold their oil, metals and other resources to the new workshop of the world.
QuickTake China's Pain Points
The problem is that China’s recent slowdown from 10 percent annual growth to about 7 percent is only the beginning. The recent drops in housing and stock prices are harbingers of a further economic moderation. That is inevitable, since no country can grow at a breakneck pace forever. And with the slowing of China, Brazil and Russia have been slowing as well -- the heyday of the BRICs (Brazil, Russia, India and China) is over.
But the really worrying question is: What if other nations can't pick up the slack when China slows? What if China is the last country to follow the tried-and-true path of industrialization?
There is really only one time-tested way for a country to get rich. It moves farmers to factories and imports foreign manufacturing technology. When you move surplus farmers to cities, their productivity soars -- this is the so-called dual-sector model of economic development pioneered by economist W. Arthur Lewis. So far, no country has reached high levels of income by moving farmers to service jobs en masse. Which leads us to conclude that there is something unique about manufacturing.
What is manufacturing’s special property? It may be much easier to import foreign technology in manufacturing than in other activities. Harvard economist Dani Rodrik has shown that if you just look at manufacturing, countries’ productivity tends to rapidly converge -- poor nations are very good at copying manufacturing technologies from rich countries. But in services, productivity doesn't tend to converge. This may be because manufacturing technologies are embodied in the products themselves and in the machines that are used to make the products, while service businesses get their productivity from organizational models, human capital and other intangibles that are harder for poor countries to imitate, and harder to grow quickly.
But here’s the problem: manufacturing is shrinking. Although the total amount of physical stuff that humans make keeps expanding, the percent of our economic activity that we put into making physical goods keeps going down. This is happening all across the globe, even in China. This may partly be because manufacturing has been a victim of its own success -- the sector has grown so productive that it’s now pretty cheap to make all the stuff we need. That is exactly what happened in agriculture, after all.
If manufacturing becomes a niche activity, the world’s poor countries could be in trouble. China might have been the last country to hop on board the industrialization train. In that case, India, Africa, Latin America and the Middle East might get left behind. This is the unsettling gist of a presentation by the aforementioned Dani Rodrik at the U.K.’s Overseas Development Institute. Rodrik concludes: “As domestic rather than global trends drive growth, significant heterogeneity in long-term performance across developing countries is likely.” In other words, the remaining poor countries might not be able to catch up, as China is doing.
So while the leaders of developing countries, such as India’s Narendra Modi, should continue their push to improve infrastructure, it may be even more important for them to focus on education. As building things becomes less important and doing things becomes more important to the global economy, human capital will be more crucial than ever.
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