Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Can India develop without industrialization?

Across the world, large, labour-abundant economies have all relied on a manufacturing boom to climb the ladder of economic development

In a previous Economics Express column, I considered worrying new evidence from the World Bank which suggests that the convergence in income per capita between emerging and advanced economies has slowed down in recent years. This means that it may well take many more years for poorer countries to catch up with richer ones, if at all they do, than had been optimistically believed during the quarter-century of rapid growth preceding the global financial crisis.

But what if it’s not just convergence speed we should worry about, but the nature of that convergence, for those emerging economies which are still growing at a healthy clip? In other words, is the pattern of convergence, not just its speed, changing?

This is the question, and implied possibility, put forward in a recent challenging and thought-provoking research paper by the well-known economist and polymath blogger Tyler Cowen. His suggestion is that the growth successes of the future may be “less inclusive and involve higher levels of income and wealth inequality" than has heretofore been the norm.

Why would this be the case? Cowen’s hypothesis is that a more inegalitarian pattern of growth and convergence in the emerging economies may be driven by a change in the nature of manufacturing success stories, which, he contends, are becoming, and are likely to remain, less productive of gainful middle-class employment than has been the case historically.

This, in turn, is a function of the changing nature of the structure of production, which, Cowen argues, reflects underlying technological changes. In a nutshell, modern manufacturing technologies are highly intensive in the use of capital (physical, human and embodied technology) and skilled workers and less intensive in the use of unskilled workers, a process of change accelerated by the information technology (IT) revolution, he contends.

Basic economics suggests that such technologically driven changes to the pattern of production are likely to have deleterious effects on the wages and employment prospects of unskilled workers and, by extension, are likely to lead to increased wealth and income inequality, as larger slices of an expanding pie are captured by skilled workers and capitalists.

It follows as well that the structure of production, in both advanced and emerging economies, may tilt towards highly capital- and skill-intensive manufacturing and services, to the detriment of large-scale labour-intensive manufacturing of a type that has driven every growth miracle from Victorian-era Britain to modern-era China.

Such a process, which hollows out conventional manufacturing industries and strips away remunerative blue-collar jobs, is known as “deindustrialization" in the jargon of economics.

Cowen credits, among others, Harvard economist Dani Rodrik with having laid the intellectual foundations for this line of argument, citing a series of recent papers by the latter. Interested readers should consult this 2013 op-ed, and a November 2015 research paper, which incorporates the findings of many of his previous papers.

While Rodrik has, indeed, been widely associated with the worry that premature deindustrialization may be afflicting emerging economies, it is worth noting that the argument that technological change favours capital and skilled workers at the expense of unskilled workers—and the associated fear of deindustrialization—is new neither to Rodrik nor Cowen. Rather, it harks back to a series of older debates during the post-war era of globalization.

Thus, for instance, as early as 1966, in an inaugural lecture, “Causes of the slow rate of growth of the United Kingdom", Cambridge economist Nicholas Kaldor worried that the UK might be entering a phase of “premature maturity", by which he meant a declining share of manufacturing in total income as compared to other economies at a similar level of economic development. (The lecture was published as a book, no longer in print, and is catalogued here.)

Meanwhile, a similar fear gripped policymakers and analysts in the US in the early 1990s, a time at which it was felt that the greater integration of that country into the global economy was driving a process of deindustrialization, job loss and wage degradation for blue-collar workers.

Indeed, in a 1993 research paper, Columbia University economist Jagdish Bhagwati and I explicitly pointed to the nature of technological change and increased churn in the labour market as plausible drivers of these phenomena.

While the argument is, thus, not novel, what, perhaps, lends salience and urgency to Cowen’s thesis is that recent trends appear to bear out the contention that the share of manufacturing in total income—and relatedly the share of manufacturing employment in total employment—appears to be peaking in major advanced and emerging economies. This is a trend which was not necessarily so apparent at the time that Bhagwati and I wrote about it in the early 1990s.

What is more, it would appear that manufacturing is peaking in emerging economies at lower levels of economic development than was the case in the presently advanced economies. Thus, for instance, manufacturing as a share of total employment peaked at 45% in the UK before World War I, while in the US, it peaked in the range of 25-27% in the 1970s, before dropping off in both cases. But the UK and the US were both prosperous economies at the respective point in times at which this deindustrialization occurred.

In contrast, emerging economies are exhibiting the phenomenon at much lower levels of income per capita. Thus, as Cowen notes, manufacturing as a share of employment peaked at about 15% for Brazil in the late 1980s, and has been declining ever since. In India, manufacturing peaked at 13% in 2002 and has been in decline since then.

Indeed, India poses something of a puzzle within a puzzle, since it is less industrialized than even comparable emerging economies. This has been well documented, as here for instance, in a 2014 Mint column by Dipti Jain and Pramit Bhattacharya.

The argument that India faces an uphill struggle if it is to achieve success in manufacturing is most associated with economist Arvind Subramanian. Drawing inspiration from his sometime co-author Rodrik, Subramanian, together with Amrit Amirapu, argued in a 2014 op-ed that: “Time, or rather the weight of history, is not on the side of Indian manufacturing."

What they meant was that, given the already declining trend in manufacturing seen across many Indian states, it would be a tall order to reverse this within any kind of a plausible time frame.

Subramanian co-wrote the op-ed just cited in May 2014, before Narendra Modi and the Bharatiya Janata Party’s sweeping electoral victory. The Modi government has, of course, made “Make in India" a key plank of its economic policy, a programme that aims to boost manufacturing in India, both for export and for the domestic market. The likely success of this plan would be difficult to square with the manufacturing pessimism of Rodrik, Subramanian and Cowen.

Not surprisingly, in his current avatar as chief economic adviser to the Union government, Subramanian has been somewhat reticent in rehearsing the manufacturing pessimism thesis he until recently embraced, although, interestingly, hints of it may be found in the 2014-15 Economic Survey. (See chapter 7 of volume I, here.) For the record, I have criticized the survey’s manufacturing pessimism in a 2015 Mint column.

Cowen is as pessimistic on India’s prospects of achieving manufacturing success as Subramanian, if not more. Cowen also argues that India’s failure to become an industrial powerhouse means that the growth process in India is unlikely to be inclusive and egalitarian.

Given that India’s share of manufacturing is low, however measured and compared to whichever relevant benchmark, Cowen predicts that India will likely fail to generate a large middle class (in terms of percentage of its population, not absolute numbers). He suggests, further, that India “will continue to develop along a path of extreme income inequality, with gains unevenly distributed and to the long-run detriment of the nation".

Although based on a different analytical apparatus, Cowen’s concern with rising inequality mirrors that of economist Thomas Piketty. Indeed, on a visit to India earlier this year, Piketty explicitly warned of the dangers to India of rising inequality, a topic which is explored in greater depth in a previous Economics Express column by Sumit Mishra. Again, for the record, I have criticized Piketty’s focus on inequality as the wrong policy priority for India, in a 2016 Mint column.

Be that as it may, the crux of Cowen’s argument is that it is premature deindustrialization which will drive an uneven pattern of development in India, with the country being unable to reap the fruits of globalization as a consequence.

In contrast, staunch free traders such as Bhagwati and Columbia economist Arvind Panagariya, currently vice-chairperson of NITI Aayog, have on many occasions argued the case that further liberalization and an embrace of globalization will be broadly beneficial to India and other emerging economies, as income rises and poverty rates drop due to improved employment opportunities and higher wages.

Bhagwati, further, has decried the concern with manufacturing as a “fallacy", such as in this 2010 op-ed. His critique is directed towards the arguments of Kaldor in the 1960s and the deindustrialization debate in the US in the 1990s, both of which I have discussed earlier. But, in principle, it could be applied to those present-day economists such as Rodrik and Cowen who raise the alarm about the dropping share of manufacturing around the world, especially in emerging economies.

Bhagwati’s view, essentially, is that market incentives will decide what industries an economy will tend to specialize in, and there is nothing magical about manufacturing.

Meanwhile, in a 2014 Mint column, I made the case that manufacturing takes on greater importance for a large, labour-abundant economy such as India, not because of alleged productivity spillovers to other sectors, which may not exist, but because of its importance to employment generation. Historically, only manufacturing has managed to soak an economy’s surplus labour force and turn it into an engine of growth.

There is, to be sure, no iron law of economics which says that an economy has to go into manufacturing into a big way if it is to rise up the ladder of economic development, but modern industrial history does not furnish us with examples of large, labour-abundant economies who have been able to do it any other way thus far.

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