Can everyone on Earth live a modern life? Can most or all countries succeed in economic development? Is it possible over time for the entire human race to enjoy the living standards of most inhabitants of today’s advanced industrial economies?
These are urgent questions. The global population is expected to grow from a little over 7 billion today to 9.7 billion in 2050 and 11.2 billion in 2100, according to the United Nations.1 Roughly half of the growth will take place in Africa. Ensuring that a much larger global population enjoys a decent standard of living will be an enormous challenge. The United Nations predicts that by 2050 the human race will require 60 percent more food—100 percent more in the developing world.2 By 2040, the US Energy Information Administration predicts that global energy consumption will increase by 56 percent; more than half of this energy will be consumed by industry.3
But even as living standards rise in the newly industrialized, urbanizing middle-income countries of East Asia and Latin America, a sizeable minority of humanity, concentrated in rural regions of Africa and Asia, lacks access to basic modern infrastructure and amenities. 1.2 billion people lack access to electricity.4
According to the World Health Organization, around 3 billion people rely for home heating and cooking on open fires or stoves that burn coal or biomass (woods, animal dung, crop waste), which produce deforestation and cause high levels of mortality thanks to the inhalation of particulate pollutants. Inhaled household soot accounts for more than half of pneumonia deaths among children around the world.5
For these reasons, it is profoundly important that the entire human race over time should acquire the ability to enjoy living standards like those of today’s middle-income countries and perhaps those of high-income nations. Achieving that outcome, however, is not guaranteed. Poor governance and changing fashions in international development programs have both undermined traditional development pathways. No less daunting, free trade, globalized supply chains, and rising manufacturing efficiency have reduced opportunities for employment in the manufacturing sector, the traditional pathway to modern economic life for large agrarian populations. In this essay, I consider the best strategies by which poor and less-developed countries and regions can catch up with richer societies in a twenty-first-century globalized economy.
As a description of global political and economic trends, modernization has fallen out of fashion. In part that is because the very concept of “modernity” has come under attack. Within the First World, an influential current of thought holds that modernism has given way to postmodernism. In some intellectual circles, “high modernism” is a pejorative term, redolent of technocratic and bureaucratic authoritarianism.
It is also the case that the concept of modernization has been plagued by competing definitions. At one extreme there are approaches that focus on what economists in the tradition of “evolutionary economics,” influenced by Joseph Schumpeter, call the “techno-economic paradigm”—how technologies, like the water wheel, the steam engine, and the internal combustion engine, combine with new institutions, like the large national or multinational corporation of the industrial age, to transform modernizing economies.
At the other extreme, there are theories that equate modernization with the adoption of particular social and political structures and even ethical values. Modernization has been equated with the movement from status to contract (Henry Maine), from Gemeinschaft (community) to Gesellschaft (society) in the thought of Ferdinand Tönnies, and has been identified with secularization and with political and economic liberalization.
As a catchall term to describe everything from industrialization to economic and political liberalism, then, modernization has perhaps been deployed too broadly. But whatever one chooses to call it, there remains the fact that human societies have undergone a series of profound transformations over the past three centuries. The Industrial Revolution remains the fundamental fact of our time. Industrialization, and the urbanization that it makes possible, represent the greatest transformations in human life in the last ten millennia.
Modernization, in this regard, is mechanization, and development is industrialization. The replacement of hand-looms by mechanical looms. Using tractors, harvesters, and other farm equipment along with artificial fertilizers to grow more food with less labor. Replacing equines and equine-drawn vehicles by automobiles, and replacing galleys or sailing ships by ships powered by steam engines, internal combustion engines, or nuclear engines, as well as by locomotives and aircraft. Whatever else may characterize it, a developed economy is one based on machinery and powered by modern energy technology.
The step-wise mechanization of modern economies brought with it a step change in the capability of economies to produce wealth and surplus. For most of human history, all industries had constant or diminishing returns. An industry with constant or diminishing returns to scale is one in which the marginal cost of each additional unit is the same. For example, in the restaurant industry, it costs as much to make the twentieth meal as it does to make the first.
Premodern manufacturing was more like modern restaurant work than like modern factory production. Just as the number of restaurant meals is limited by the number of cooks in the kitchen and the time required for each meal to be cooked, so the number of nails, horse-shoes, skillets, and knives was limited by the number of blacksmiths working in a labor-intensive smithy and the time that their tasks required. In contrast, in a modern highly robotic factory one human worker with the help of machinery might be able to produce hundreds or thousands of nails, horse-shoes, skillets, or knives a day. Each additional unit produced in a modern factory costs less to manufacture than the unit that preceded it.
Mechanization and the birth of industries with increasing returns to scale allowed for an enormous expansion of the traded sectors of modern economies, which includes goods and services that, while they can be consumed at home, can also be exported to customers in other countries.
In the premodern world, economic activity was dominated by nontraded goods. Agrarian societies could spare few able-bodied laborers to produce specialized and labor-intensive goods, such as metal goods, and the cost of transporting goods was high. Mechanization and increasing return to scale production in the factory allowed workers to produce more manufactured goods than could be consumed domestically. Meanwhile, mechanization on the farm increased yields and lowered labor requirements, producing agricultural surplus to feed growing urban populations and freeing up more labor to work in factories and other traded sectors.
Mechanization also increased labor productivity, allowing for rising wages and greater consumption of traded goods, and dramatically lowered the cost of transporting goods. Today, the technology of mass production allows countries to produce far more automobiles or phones or shoes than their own consumers want or can afford, and regional and global freight transportation costs have fallen dramatically thanks to container shipping and modern waterways and rail and road grids. Together, these developments have driven a large-scale shift in the structure of modern economies, which are characterized by much larger traded sectors than premodern economies.
Along with increasing returns to scale and larger traded sectors, modernizing economies are also characterized by higher-value-added production. More mechanized and technologically advanced production and complex supply chains add greater value to the goods that are produced. With each different stage of production, additional value is added to a product. The farmer grows wheat, then the baker adds value by baking bread. Some stages of production add more value than others. The task of extracting oil from the ground adds less value than refining it into gasoline or various other complex chemical by-products.
In almost every industry involving material production, most of the value—and most of the profit—results from design, processing, or manufacturing, not from the raw material inputs: the automobile factory, not the iron ore mine; the chemical refinery, not the oil well or coal mine; the textile factory, not the sheep farm; the diamond-cutting workshop, not the diamond mine.
At the risk of oversimplification, the development of an economy can be viewed as progressive movement along a spectrum from nontraded industries characterized by constant or diminishing returns and low-value-added production toward traded sector industries characterized by increasing returns and high-value-added production.
Consider the four poorest countries in the world: Malawi, Burundi, the Central African Republic, and Niger. Here are the top exports for each, respectively: raw tobacco, coffee, wood, and for Niger, a single category encompassing ores, slag, and ash. Now consider the top exports from the United States, Japan, and Germany, the three largest advanced developed economies: machinery, vehicles, and vehicles again, respectively.
The pattern is unmistakable. Rich countries export mostly high-value-added manufactured goods, like cars, planes, computers, machine tools, and complex drugs. Poor countries export mostly low-value-added commodities like tobacco, sugar, tea, and hides, much of which are harvested by hand using primitive, ancient, labor-intensive methods instead of modern machinery.
A few countries with relatively small populations and enormous natural resources have high per-capita incomes and wealth, most of them oil-producing countries like Qatar and Norway. But for two centuries the general rule has been that countries that specialize in manufacturing and manufacturing-related services are richer than countries that specialize in commodity exports or tourism.
Even before the rise of mechanized factories powered by modern energy sources, policy-makers in premodern city-states, empires, or nation-states understood the desirability of monopolizing higher-value-added production within their borders.
Before the American war of independence, the British Empire outlawed most manufacturing in the British North American colonies that became the United States. The role of the colonies was to supply raw materials to the British Isles, where all processing and manufacturing would take place, followed by the sale of finished goods to the Anglo-American colonists, who were forbidden by law to purchase manufactured goods from other sources.
Even in the absence of mercantilist laws controlling trade, modern machine-based mass-production industry by its nature could promote a monopoly of manufacturing in one or a few countries. Mechanized factories made possible the low-cost mass production of staple goods for ordinary people at very low cost. In turn, the export of machine-produced staple goods made possible large-scale international trade in consumer goods like clothing for ordinary people, in addition to old-fashioned upper class luxuries like snuff.
As George Washington’s aide during the American War of Independence, Alexander Hamilton was struck by the dependence of the largely rural American states on French and European military and industrial supplies during the struggle with Britain. As America’s first Secretary of the Treasury, Hamilton urged Congress to promote the development of industrial manufacturing in the United States. In his Report on Manufactures of December 5, 1791, in addition to emphasizing the importance of manufacturing for national security, Hamilton emphasized how Britain had gained from the mechanization of its economy:
The employment of machinery forms an item of great importance in the general mass of national industry. It is an artificial force, brought in aid of the natural force of man; and, to all the purposes of labor, is an increase of hands; an accession of the strength, unencumbered too, by the expense of maintaining the laborer. . . . The cotton mill invented in England, within the last twenty years, is a signal illustration of the general proposition, which has been just advanced. In consequence of it, all the different processes for spinning cotton are performed by means of machines, which are put in motion by water, and attended chiefly by women and children; and by a smaller number of persons, in the whole, than are requisite in the ordinary mode of spinning. And it is an advantage of great moment that the operations of this mill continue, with convenience, during the night, as well as through the day. The prodigious effect of such a machine is easily conceived. To this invention is to be attributed, essentially, the immense progress which has been so suddenly made in Great Britain, in the various fabrics of cotton. . .6
Britain, the first industrial nation, built its global primacy in the nineteenth century on its mechanized textile industry. The effects abroad were sometimes benign, like falling prices for clothing. But the side effects of British textile manufacturing and export were sometimes malign, as well. They included the devastation of British India’s native textile craft industry, and the specialization of the American South in slave-picked cotton destined for British mills.
Indeed, a vision of monopolizing global industry, not through world conquest but through mass production combined with global free trade, inspired Britain’s intellectual and political leaders in the middle of the nineteenth century. Britain had successfully used protection and various kinds of subsidies and regulations to promote its own manufacturing industries, from the Tudor era to the Victorian era.
By the 1840s, however, Britain was the unsurpassed manufacturing power in the world. Supported by capitalists in the British manufacturing sector, British liberals argued that if Britain adopted free trade and the rest of the world followed suit, Britain would almost certainly monopolize global manufacturing. Britain began to preach and practice free trade, reducing its protectionist corn [wheat] laws unilaterally beginning in 1846. British free traders hoped to encourage Europe, the United States, and Latin America, in the name of free trade, to specialize in growing cotton for British textile factories and growing wheat to feed British industrial workers.
The British economist David Ricardo provided the rationalization for a permanent British monopoly of machine-based industry in the form of the principle of “comparative advantage”: “It is this principle which determines that wine shall be made in France and Portugal, that corn [wheat] shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.”
But in 1838, Disraeli warned his fellow Britons that other countries would not “suffer England to be the workshop of the world.” He was soon proved to be right. Global economic history, since the beginnings of the Industrial Revolution in the eighteenth century, has largely consisted of efforts of backward countries to catch up with more industrial nations, beginning with the attempt of the early American republic to catch up with industrial Britain.
In 1851, Henry Carey, a leading American economist in the Hamiltonian tradition, argued that the protection of their infant industries by the United States and other nations would “break down” Britain’s “monopoly of machinery” and create the great powers of the future: Germany, Russia, and the United States. Behind a wall of tariffs and national infrastructure investments in the decades after the Civil War, the United States became the world’s largest economy. Like Britain, the United States chose to adopt and preach free trade only after its own manufacturing industries no longer needed protection from foreign competition.7
Influenced by the tradition of Hamilton and Carey, called the “American School” of economics or the school of “national economy,” the German-American economic thinker Friedrich List urged his native Germany and other European countries to follow the example of the United States by uniting and pursuing import-substitution industrialization.
List restated the central insight of the developmental tradition: “The power of producing wealth is therefore infinitely more important than wealth itself… [T]he power of production…not only secures to the nation an infinitely greater amount of material goods, but also industrial independence in case of war.” List died in 1846, but his vision of a United States of Germany was partly realized following the unification of the German states outside of the Hapsburg empire by Prussia in 1871. Imperial Germany quickly became an industrial powerhouse, adding its own innovations to the arsenal of industrial policy, including social insurance and public support for R&D.
For its part, following the Meiji Restoration Japan was determined to avoid formal or informal subjection to the European great powers. In addition to trying to carve out an empire of its own in its region, Japan emulated the German-American model of state-backed industrial capitalist development. Following its defeat in World War II, Japan lost its foreign policy autonomy and became a military protectorate of the United States. But it continued to promote its industries by civilian mercantilism—using nontariff barriers like regulations to reserve its domestic market for its own producers, while using currency manipulation to subsidize its exports.
Import Substitution Industrialization (ISI) is the name of the strategy undertaken in different ways by the United States, Germany, Japan, and other countries that sought to catch up with industrial Britain by protecting and promoting their “infant industries” until they were mature enough to compete in global markets. The success of developmental protectionism in the second wave of industrialization that included the United States inspired other countries in the twentieth century to adopt versions of the policy.
For over two centuries, the most successful examples of modernization-as-mechanization have been carried out by developmental states, not on behalf of consumers or humanity as a whole, but to secure their own position in global struggles for relative wealth and military power. The history of global industrial development is impossible to separate from the history of global great-power struggles since the eighteenth century.
In 1956, the economist W.W. Rostow identified five stages of growth that characterized the shift from premodern to modern economies: traditional society, based on subsistence agriculture; pre-conditioning, characterized by agricultural modernization, infrastructure, and the beginnings of industrialization; take-off, characterized by high investment and industrialization; the drive to maturity, based on economic diversification; and maturity, identified with mass consumption and a dominant service sector.
Rostow’s analysis was challenged by Alexander Gerschenkron, who argued in Economic Backwardness in Comparative Perspective (1962) that late-developing countries could skip some of the stages that early leaders had gone through.8 Gerschenkron echoed many of the themes of the developmental statist tradition, including the idea that state capitalism could substitute for private capital in the financing of local infant industries.
Unfortunately, Gerschenkron’s work did not lead to a renaissance of the developmental statist tradition. Instead, the backlash against government associated with Reaganism and Thatcherism in domestic politics found parallels in development economics following the 1960s. The British economist P.T. Bauer mingled sensible criticisms of development policy with free-market fervor in his influential books Equality, the Third World, and Economic Delusion (1981) and Reality and Rhetoric: Studies in the Economics of Development (1984).9
In the 1980s and 1990s, the older emphasis on the transition from agrarianism to industrialism and service sector employment was replaced by “the Washington Consensus.” According to the Washington Consensus, the most important policies for developing nations included reducing fiscal deficits and controlling inflation, “structural adjustment” or the opening up of domestic markets and banking systems to international trade and international financial flows, and the privatization of as much of the public sector as possible.
At the same time, on the center-left, younger thinkers in the spirit of the New Left rebelled against the equation of modernization with large-scale industry and infrastructure. While mid-century American liberals, European social democrats, and Third World socialists alike had celebrated large infrastructure projects like hydropower dams, James C. Scott demonized “megaprojects” for wrecking rural peasant communities and denounced “high modernism” as technocratic and authoritarian in his influential book Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (1998).10 Influenced by the counterculture, a newer American left abominated big government and big industry and took guidance from E. F. Schumacher in Small is Beautiful: A Study of Economics As If People Mattered (1973).11
The World Commission on Environment and Development, known as the Brundtland Commission, convened by the United Nations in 1983, popularized the term “sustainable development” in its 1987 report, Our Common Future. In the name of “sustainable development,” the western environmental movement has sought to move developing countries toward its own Rousseauian visions of a green utopia, based on wind and solar power and biofuels instead of fossil fuels or nuclear energy; labor-intensive, local agriculture instead of modern, capital-intensive, industrialized agriculture; and village life instead of modern cities and automobile-based suburbs and exurbs.
A third element was added to the mix by the United Nations Millennium Development Goals, which emphasized immediate reductions in disease, poverty, child mortality, and illiteracy, even in the absence of nation-building and economic development in the traditional sense. As billionaires like Bill Gates and Warren Buffett pledged parts of their fortunes to causes like combating malaria in Africa, private philanthropy by western tycoons came to play a role that it had not played since the days of European and American missionaries in the colonial era. While many of these efforts were noble and worthwhile, the entire point of development, in the traditional sense, was to free countries from dependence on the charity of benevolent foreigners.
In the early years of the twenty-first century, many international development agencies promoted a kind of synthesis of Washington Consensus neoliberalism and Green sustainability, using their bargaining power as lenders to encourage austerity and privatization on the one hand, and to discourage fossil fuel use or dam construction and nuclear power plant construction on the other. “Big push” industrialization based on hydropower dams and electric grids and highways was out. “Microfinance” was in. Large-scale foreign aid to governments for infrastructure construction was out. The Grameen Bank, a “microcredit” development bank in Bangladesh, was celebrated as an icon of a new age of globalization.
The nation-state as the intermediary between the global economy and the local economy was airbrushed out of the picture, by the evangelists of neoliberal globalization. At the macro level there would be one single rule-governed global economy, with the same rules imposed on all countries—the “golden straitjacket,” in the words of the journalist Tom Friedman. At the subnational level, there would be micro-credit, micro-finance, micro-enterprise—and, perhaps, micro-development.
The delegitimatization of the state as an actor in development was symbolized by the replacement of the term “developing country” by “emerging market.” The phrase “emerging market” implied that successful development could result from the interaction of international private investors and multinational corporations with local entrepreneurs. The role of the state in the “emerging market” was reduced to that of an umpire, enforcing the rules of the Washington Consensus and strictly neutral in disputes among its own producers and foreigners.
Post–Cold War trade organizations like the World Trade Organization and the Trans-Pacific Partnership Treaty (TPP) sought to literally outlaw many of the techniques by which developing countries, including the United States, had helped their own industrial producers in the early stages of industrialization—not only tariffs but also subsidies, government procurement requirements, and other methods of infant industry protection.
Ironically, at the very moment American and European neoliberals were celebrating the triumph of micro-enterprises and global free trade, the most successful episode of rapid, large-scale industrialization in human history was occurring in East Asia, as a result of classic mercantilist and protectionist techniques that were the complete opposite of the Washington Consensus.
In How Asia Works: Success and Failure in the World’s Most Dynamic Region (2013), Joseph Studwell describes how Japan, South Korea, and Taiwan developed successfully on the basis of three key policies: promotion of small farmers as a market for domestic manufacturing goods; subsidies of internationally competitive domestic manufacturing industries; and postponement of financial deregulation that would interfere with national industrial policies.12
Unlike Japan and the Little Tigers, China did not use agricultural and social reforms to build up a domestic middle class as the basis for its traded-sector industries. Instead, China focused on production for export from coastal enclaves financed by foreign investment. But in its own ways, the Chinese model of state-sponsored industrialization violated the tenets of neoliberal economics.
Instead of liberalizing its financial markets, China used government banks to steer credit to subsidize its factories and invest in infrastructure. China used cheap labor, cheap land, government subsidies, and currency manipulation to encourage foreign multinationals to engage in industrial production on Chinese soil—and then pressured them to transfer their technology to Chinese nationals and Chinese companies.
Instead of promoting small business, the Chinese regime, inspired by similar policies earlier in Japan and South Korea, sought to encourage giant national champion corporations and groups in strategic industries. Having initially industrialized on the basis of foreign investment in low-value-added industries, the Chinese government sought to push the economy up the value chain by means of policies of indigenous innovation that western countries denounced as protectionist.
China’s version of developmental statism came at a high price, including high debt and asset bubbles as a result of easy credit, overinvestment, and overcapacity in steel and other industries, and a profound divide between the impoverished rural interior and the more developed coast. But the industrialization of Britain, the United States, and Germany, not to mention that of the Soviet Union under Stalin, had proceeded with similar fits and starts, inequities, and disruptions.
Today the Washington Consensus is widely considered to be discredited, and major developing countries like Brazil, Russia, India, and China (the so-called BRICs) all deviate from free-market orthodoxy in one way or another as part of their economic development plans. While the leading East Asian economies industrialized in defiance of the Washington Consensus, no developing country has succeeded by following the rules of neoliberal globalization. That should come as no surprise. Industrialization means that a country acquires its own share of increasing-returns industries, a sector dominated by large-scale manufacturing enterprises. No country in history has ever become rich thanks to the efforts of small-scale peddlers taking advantage of free markets to sell each other low-value-added items in the equivalents of flea markets and garage sales.
The very existence of already-industrialized great powers like those of North America, Europe, and East Asia presents a challenge to societies in the global South in their quest for what deserves to be called, without apology, modernization. The methods employed by those of today’s late-developers will not necessarily be the same as those used by countries and regions that industrialized earlier. But the broad lessons of several centuries of developmental statism must be learned and applied by the leaders of the developing world, if their countries are to escape poverty and geopolitical subordination.
The first of those lessons is that what drives prosperity in the long run is not markets, in themselves, but the substitution of human and animal labor by machinery or software, powered by energy sources other than human and animal muscle and biomass.
The second insight of developmental statism is that regions and societies do not develop in isolation from one another. This is a source of both risk and opportunity for less developed societies. On the one hand, late-developing societies risk military conquest or economic subordination to more technologically advanced communities. On the other, they can borrow technology from the more advanced, and they can skip stages of development rather than repeat the histories of the early industrializers.
The third insight is that the primary units in the world economy are not private actors—workers, consumers, investors, firms—but states. Today, the nation-state is the dominant form of polity, but developmental statism is relevant to city-states like Singapore and to multinational blocs like the European Union.
Like today’s advanced industrial nations at earlier stages of their history, today’s developing countries face two challenges. The first challenge is to move from an agrarian economy to an industrial economy. The second challenge is to make their traded-sector industries competitive in regional and global markets.
The first challenge is simple and straightforward, even if achieving it is difficult in particular poor countries because of political factors. Basic modernization requires moving from the agrarian era into the industrial era. It means building the essential infrastructure of a modern technological society—indoor plumbing and sanitation systems, electrical grids, paved roads, airports, and telecommunications infrastructures. And it means turning traditional manufacturing, agriculture, and mining into industrialized industries of the kind familiar in the developed nations of North America, Europe, and East Asia.
Great gains in living standards can be obtained by the initial deployment of technology even in the poorest countries. Relatively old and mature technologies like indoor plumbing, electrical grids, and asphalt roads can make a profound difference in the quality of life of the inhabitants of the poorest countries, like many in Africa. The installation of modern infrastructures—many of them the large-scale grids demonized as “high modernism” by romantic leftists like James C. Scott—must be the priority for reasons of humanitarianism as well as economic strategy.
But once a country has succeeded in achieving basic modernization, a second, harder challenge remains. That is the challenge to create a traded sector whose industries are efficient and internationally competitive.
Tariffs, subsidies, or other measures can create a national automobile industry, by keeping out imports and forcing the nation’s citizens to buy the locally made automobiles. But in the absence of severe competition within the protected national market, the national automakers may have no incentive to create quality automobiles that foreign customers would choose to buy. The most successful developing countries in the last few generations, as we have seen, have been those of East Asia, which protected their infant industries but also pressured them to sell their products in foreign markets.
Unfortunately for today’s developing nations, the favorable geopolitical conditions that enabled East Asia’s export-oriented industrialization (EOI) no longer exist. During the Cold War, in order to keep them in the anti-Soviet alliance, the United States was willing to let its East Asian protectorates like Japan and South Korea and Taiwan protect their home markets for their own producers, while enjoying one-way access to America’s vastly larger consumer market. The United States ran permanent merchandise trade deficits, to the benefit of East Asian producers and to the detriment of many American manufacturers. The American market for East Asian imports was enlarged even further by the reliance of many American consumers on credit.
The geopolitical rationale for US toleration of East Asian mercantilism ended with the Cold War and the rise of China. And the American credit bubble collapsed with the Great Recession. Slow growth, high debt overhangs, and rising inequality mean that the US market will not be able to drive EOI strategies for other countries in the future. And the three largest industrial economies other than the United States—China, Japan, and Germany—prefer to maintain merchandise trade surpluses with other countries over buying imports. Unless one or more major economies is willing to run permanent merchandise trade deficits, EOI strategies by developing countries are impossible.
The irrelevance of export-driven development like that of Japan, the Little Tigers, and China prior to the Great Recession means that developing countries have only two major options for creating and expanding their increasing-returns traded sector industries: one old and familiar, import substitution industrialization (ISI), and one relatively new, global value chain-oriented industrial policy.
Innovations in low-cost global freight transportation and communications, including container ships and satellite telephony, have made it possible for companies that once dispersed production among different regions within a single nation-state to decentralize aspects of production in a number of countries in global value chains (GVCs). As a result, about a third of what is counted as international trade is actually international production within a single transnational company or group of suppliers and contractors whose activities are coordinated by a transnational company known as an original equipment manufacturer (OEM).
Much cross-border trade now involves intermediate goods—for example, auto parts made in one country, which are incorporated into an automobile component in a second country, with final assembly then occurring in a third country. This pattern of regional or global industrial production was unknown to Alexander Hamilton and Friedrich List and W.W. Rostow.
But the basic logic of developmental economics remains the same. Even if no single country manufactures the entire good, from the raw materials going into one door of a factory to the finished product rolling out of the opposite door, it remains important to specialize in higher-value-added parts of the transnational chain—generally the ones that involve the most complex processing or design—rather than in the lower links of the value chain that add little value.
Global value chains do not eliminate the need for national industrial policies, but they alter their details. While a developing country in the 1950s might have tried to create an entire vertically integrated automobile industry within its borders, today it might make more sense for the country to try to specialize in the most lucrative, high-value-added portions of an international automobile manufacturing supply chain.
Mexico, for example, has become an important link in the automobile production supply chain, because of its proximity to the US automobile market and the fact that automobile production tends to be regionalized rather than globalized. In South Africa, automobile manufacturing, primarily for African markets, is the largest part of the manufacturing sector, making up 7 percent of GDP in 2012.13 Tunisia has similarly benefited from its proximity to Europe in developing its textile and clothing sector and, more recently, electronics and engineering.14
Like the changing nature of global supply chains, the changing nature of global manufacturing presents new challenges to late developing nations. Countries like Britain, the United States, Germany, and Japan went through a phase of mass manufacturing employment during the transition from an economy of farmers and farm workers to a service employment economy. The coming robotics revolution may sever the link between mass employment and the most technology-intensive, productive industries but will not render national participation in high-value-added production for both domestic use and exports any less important.
In the twenty-first century, the remaining countries with large, premodern agrarian sectors may skip the phase in which large populations of workers are employed in the manufacturing sector. Labor shed by an increasingly productive agricultural sector may go directly into a burgeoning service sector. But even if high-value-added production industries or lucrative piecework niches in global value chains employ relatively few citizens, they will continue to be important assets for national economies as a whole.
For one thing, manufacturing and other increasing-returns industries have positive spillover effects, generating growth in the domestic sectors of the jurisdictions in which they are located. Already in developed nations, thanks to technology-enabled productivity growth, most workers are employed in the non-traded domestic service sector.
For another, economies that specialize wholly in agriculture, mining, or tourism may find it hard to export enough low-value-added goods or services to pay for the costly manufactured goods and high-tech services that they seek to import in the quantities they desire. This is why, contrary to what one might expect, most world trade is not between countries that export manufactured goods and countries that export raw material inputs and energy, but rather among similar developed industrial nations, which both export and import high-valued-added merchandise.
If societies are not to be polarized into rich minorities of investors and managers and poor service proletariats, some of the gains from the advanced industrial enterprises will have to be shared with the population as a whole, through methods other than the twentieth-century system of high wages for numerous industrial workers. This will probably be as true of advanced developed economies as of late developing economies.
Highly automated enterprises and their managers and investors could be taxed, to support public services like health care, education and child care, and elder care; or subsidies to low-wage workers or employers; or even a universal basic income. A more speculative possibility is allowing citizens to own shares of the robot factories and other profitable enterprises, in some form of “universal capitalism.” And we cannot dismiss the possibility that in at least some countries there will be efforts to socialize the high-tech means of production, undeterred by the poor records of socialism and communism in the twentieth century.
While the context and global conditions continue to evolve, the lessons of two centuries of modernization are clear. Apart from city-states that specialize as financial or commercial entrepôts, and a few well-governed countries rich in natural resources, no country has joined the first ranks in prosperity without being represented in at least some high-value-added, increasing-returns industries. And no country, from the leader Britain through the United States and Germany to Japan and China, has made that transition without having a relatively strong and competent state promoting some kind of high-value-added production within its borders.
Countries with strong states and relatively large domestic markets such as China, India, and Brazil have more options than smaller countries. They can condition access to their markets by foreign producers on transfers of technology or requirements for local production. A large domestic market can also allow them to build up large “national champions” capable of competing in global markets. In contrast, countries that are both poor and small have little leverage with rich countries or rich-country corporations and investors. This is a problem that regional blocs can only partly overcome, given problems of collective action.
But competent governments can still help to diversify the economies of smaller and poor countries and try to move them into increasing-returns industrial sectors. Each nation will need to take stock of its own resource and human endowments, its proximity to global supply chains and markets, and its relations with the great global economic powers. Nations that are small and poor are the most reliant upon international finance and development institutions, which can play a constructive role when they are able to wean themselves off of neoliberal dogma and green post-modernism and remember the distinction between economic development and charity.15
The basic story remains the same. “There is no alternative,” British Prime Minister Margaret Thatcher insisted, so often that TINA became an acronym. Thatcher was wrong that there is no alternative to small-government, free-market neoliberalism. But in the case of economic development, the generations-old developmental state tradition can take credit for every major case of successful modernization and industrialization in the world, from Europe to North America to East Asia. Strong developmental states drive economic modernization by mechanizing, increasing production of traded sector goods, and shifting production toward higher value added goods and services. TINA.
1. United Nations Department of Economic and Social Affairs, Population Division, “World Population Prospects: The 2015 Revision (New York: United Nations, 2015).
2. UNESCO, “Water for a Sustainable World” (New York: United Nations, 2015).
3. U.S. Energy Information Administration, “EIA projects world energy consumption will increase 56% by 2050,” July 25, 2013.
5. World Health Organization, “Household Air Pollution and Health,” Fact Sheet No. 292, Updated February 2016.
6. Alexander Hamilton, Report to Congress on the Subject of Manufactures, December 5, 1791.
7. Michael Lind, Land of Promise: An Economic History of the United States (New York: HarperCollins, 2012).
8. Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, Mass.: Belknap Press, 1962).
9. P.T. Bauer, Equality, The Third World, and Economic Delusion (Cambridge: Harvard University Press, 1981); Reality and Rhetoric: Studies in the Economics of Development (Harvard University Press, 1984).
10. James C. Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven: Yale University Press, 1998).
11. E. F. Schumacher, Small is Beautiful: A Study of Economics As If People Mattered (Blond & Briggs, 1973).
12. Joe Studwell, How Asia Works: Success and Failure in the World’s Most Dynamic Region (Grove Press, 2013).
13. Ibid., P. 57.
14. African Development bank, Development Centre of the Organisation for Economic Co-Operation and Development and United Nations Development Programme, “Global Value Chains and Africa’s Industrialization: African Economic Outlook 2014,” p. 173.