Wednesday 4 March 2015

Deindustrialization: What it means for China, India, and Africa

This post reflects a few thoughts on a book, a paper, and my priors. The book is William Easterly's, The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor. The paper is Dani Rodrik's, Premature Industrialization. And my priors are that when it comes to economic development there has to be some lessons to learn from the very few that have pulled off the feat successfully: South Korea, Taiwan, Singapore, and currently China.

Economic development, measured by poor people getting richer (and usually freer), is in my opinion the most important thing going. Obviously, the simple outcome is as complex as a problem gets, but we do have a relatively flushed out highlevel roadmap. Agrarian - Industrial - Post-Industrial.

Perhaps two of the best examples of this phenomenon in recent history have been South Korea and Taiwan. Both took cues from Japan, who went through a similar climb towards the end of the 19th century (the post WWII climb, along with others in Europe, isn't as interesting given the war was an economically exogenous impact, institutions needed to be recreated rather than reimagined).

The book.

I picked up Easterly's book mostly looking forward to getting his take on the East Asian development story. I have to admit to being disappointed. It's not that I strongly disagree with anything. I just don't think he dug in deep enough.

The books is largely a takedown of, 'so called experts'. In this case development professionals that typically try to exert, well intentioned, exogenous forces on the developing world, while failing to recognize (or advocate) the best method of development: getting the hell out of the way.

In the Chinese context this is almost certainly true. South Korea and Taiwan also achieved high income status by increasing the market's hold on the country and it's resource allocation.

So maybe I just picked up a book looking for something that it wasn't. The book clearly and convincingly (disclosure: it confirms my priors in this regard) that freedom is, itself, an end goal. That, at the very least, policy should require a push in this direction (or a very convincing explanation why it doesn't).

But, it seems to me, there is a case to be made for gradualism. In this case, the interesting questions are a). When should China embrace more economic/political freedom? And, b). How best can India (sustain/improve) and Africa (begin) to emulate Chinese economic progress?

After reading Studwell, I talked about this here, as it relate to China the path seems relatively consistent. South Korea and Taiwan acted first to stabilize, then push the agricultural portion of their economies into surplus conditions (via land reform, incentive structuring, increasing market conditions, etc.). Some form of financial repression and/or corruption based incentive structures enticed a significant build up in capital investment that pushed the industrialization of the country forward. Then a loosening of these controls pushing the country into fairly free and democratic entities.

The key difference between the countries that succeeded in making the leap to high income countries and those that stagnated and/or slid back to low-income status (most of SE Asia) was the ability of these countries to push the right sort of industry. This took the form of a difficult balance between market based and expressly anti-market policy.

The reforms that led to the gains and stability at each step were certainly to make them more market based. The surplus agrarian conditions enabled a steady surplus of crop that both freed individuals to migrate to areas with capital accumulation, while also building a savings pool that could be exploited via financial repression to subsidize the investment required in capital accumulation. I think Easterly needs to wrestle with how that financial repression enabled a higher level of development.

The creative destruction of capitalism having a socially sub-optimally high level of capital as it pushed into industrialization (in a fairly market competitive nature) might have added in a level of redundancy that increased the chances of success.

Market and economy sized changes typically happen best at the margins and so aggregate iteratively. This sequential development has been successful because the redundancies that it builds in don't require big perfect pushes to succeed. It requires many gradual trial and errors.

Perhaps if the World Bank and development professionals at large could figure out a way to create a market disciplined pool of excess capital for entrepreneurs to employ in these markets to recreate this financial repression the East Asian model could be exported. Good luck with that.

The paper.

Which brings me to the paper. Rodrick's contention is that the push from industrialization to post-industrialization economies (that also roughly coincided with the final democratization in Taiwan and South Korea) is occurring at an earlier stage of development than we have previously seen.

IF this is true (the case seems compelling, although I wonder if social media and the ability for developing country citizens to see how the richer countries live might push for sub-optimally early reforms; where sub-optimal refers to long run gdp level), and if this is simply a function of changing technology and consumption preferences, then we are forced to consider the implication for those who have yet to achieved developed standards; ie. what does this mean for the poor people we want to see get rich?

My hope has always been that the simple act of moving labor intensive industrial production of 'items' from high income countries to low income countries would move on from China's newly minted (trending towards) high income eastern coast inland to the low income secondary cities. From there, they'd migrate to India. And from there, to Africa. Simplistic certainly, but that's a high, high, level trent that I could simply hope for.

Industrialization certainly doesn't guarantee a result of high income status. But coupled with increasing levels of economic and (hopefully) political freedom; as we've seen in China, it does seem to be the best bet in moving from VERY low income levels, to simply low or middle income status. The catch up process is fairly simple to implement. The quantity of human capital required is huge and the quality of human capital required is low. That's ideal for this initial transition.

But what if China's eastern coast doesn't get to a level of income that sustainably establishes it as an importer of labor intensive goods? What growth model can India and Africa look towards (I know, I know, referring to Africa as one political entity doesn't make sense, I'm just using it to refer to a large mass of people I'd like to see become richer)?

Rodrik points out that growth/development is becoming more and more dependent on capital inflows, transfers, or commodity booms. He suggests this brings sustainability into question. More specifically it takes alot of the onus off the country and places it on exogenous factors, namely those with excess capital; ie. the rich world.

The conclusion.

Which ties this all together. The more existing growth models require exogenous factors, these developing countries will become more and more reliant on the whims of the rich. Often in the guise of the experts (well intentioned or not) that Easterley skewers.

It's hard to say how this dynamic will play out, but it adds to the already intriguing development/reform story going on in China.