Paul Krugman won the 2008 Nobel Prize in economics for his contributions to new trade theory, which offers a new explanation of what is produced where. One of Krugman’s most important contributions to our understanding of economic activity is his analysis of why certain activities tend to cluster in certain areas—finance in New York, software outsourcing in Bangalore and design in certain Italian towns.
Illustration: Jayachandran / Mint
A new report by a United Nations (UN) agency reminds us of the importance of nurturing such clusters, not through subsidies but through better infrastructure and research networks. The report mentions the leather cluster at Chennai as one of the 10 most dynamic clusters in the world.
Global manufacturing is in a state of crisis. Industrial output is either falling or stagnating in most major economies. Job losses are growing.
This can be terrible news for the world’s poor—and the countries they live in. The United Nations Industrial Development Organization (Unido) said in a report released on Monday that the world’s poorest countries need to move beyond the export of raw materials to manufacturing.
Most countries recognize this challenge, though their usual response is unthinking industrial policy to protect and subsidize certain industries that are either prestigious or deemed to be of strategic importance. The UN agency points to the need for a more subtle approach.
It calls for a focus on tasks rather than products. “In some manufacturing activities, a production process can be decomposed into a series of steps, or tasks. Many countries may be manufacturing the same product, but each is working on a different step in the process,” says Unido. The challenge is to understand which task a country can have comparative advantage in.
The agency cites the example of a cluster of button producers in Qiaotou, a town in China’s rice belt that makes two out of every three buttons produced in the world. “The economies of scale in buttons are, to a large extent, not a matter of hard technology, but of production sophistication, including design and marketing. Buttons are only one small input into the consumer product of garments, but they have provided a sufficient niche for Qiaotou to prosper,” says Unido.
The data for the Unido report ends in 2005, much before the current recession brought China’s famed export engine to a halt. But there is an implicit lesson to be learnt by policymakers across Asia, including India.
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