Emerging markets, hitting a wall

by on June 23, 2013 at 1:05 am in Current Affairs, Economics, History | Permalink

That is the title of my new New York Times column.  Here is an excerpt:

The disconcerting truth is that the great “age of industrialization” may be behind us, a possibility that has been outlined most forcefully by the economist Dani Rodrik, who is leaving Harvard for Princeton next month. And evidence for this view is coming from at least four directions:

THE RISE OF AUTOMATION First, machines can perform more and more functions in manufacturing, and sometimes even in services. That makes it harder to compete via low wages.

Say you run a company in a developed nation and have been automating many of its processes. Because your total bill for employee wages would be low, why not choose the proximity and familiarity of investing in labor in or near your home country? This change would help the jobs picture in the United States and probably countries like Mexico, but could hurt many other lower-wage nations.

GLOBAL SUPPLY SOURCES Supply chains are now scattered across many countries. Think of the old development model as a nation, such as South Korea, trying to build a nearly complete domestic supply chain for its automobile and other industries. The newer model is more distributed, as reflected by the iPhone, with the bounty from the investment spread across many locations, including the Philippines, Taiwan and mainland China. As for cars, Thailand has courted automobile factories with success, but the parts usually come from outside the country and the benefits for the Thai economy are limited.

Richard Baldwin, professor of international economics at the Graduate Institute in Geneva, refers to the internationalization of the supply chain as “globalization’s second unbundling.” He sees the new world as one of “development enclaves,” in which parts of countries will stand out as advanced or wealthy, without fundamentally transforming the entire economy.

I end with the following:

In any case, we should be prepared for the possibility that, while Seoul now looks a fair amount like Los Angeles, perhaps La Paz, Accra and Dhaka will never look much like Seoul.

Keeb June 23, 2013 at 1:37 am

“In any case, we should be prepared for the possibility that, while Seoul now looks a fair amount like Los Angeles, perhaps La Paz, Accra and Dhaka will never look much like Seoul.”

The idea that they would always seemed like the great lie of neo-liberals. A national system for us, but not for you, http://en.wikipedia.org/wiki/Friedrich_List

Korea is 99% Yellow June 24, 2013 at 12:01 am

Seoul is 99% yellow. Do you know what you are talking about? LA looks like a Zoo. Steve Sailer’s HBD dream come true. this is not left vs right, GOP vs Dems, Socialism vs liberty. This is war against White people.

Why do hostile globalist elite defend Israel as a Jewish ethnostate with Jewish only immigration, but ravage White majority Europe/North America into a multi-ethnic, multi-cultural Gulag with dystopian non-White colonization?

The world is 93% non-White, only 7% White. But 3rd world colonizers, Muslims, Sikhs, Hispanics, are aggressively advancing their agenda to annihilate gullible Whites, just as China annihilates Tibet.

How long will gullible Whites cuckold for murderous anti-White elite, who confiscate our guns, infiltrate/subvert our banks/FBI/CIA, indoctrinate White kids in academia/mass media, plunder White jobs/wages, & butcher White soldiers in bankrupting wars?

“Native” Americans invaded from East Asia. Yellow & Brown races committed 10-times more genocide, slavery, imperialism than Whites. Since Old-Testament, Whites have been victims of Jewish/Crypto-Jewish, Turkic, Muslim, N.African imperialism, slavery, genocide.

Gullible Whites should reject subversive ideologies- libertarianism, feminism, liberalism- & reject hostile slanders of racism. Peace to all humanity, but White people must organize to advance their interests, their fertility, their homelands. Spread this message. Reading list: goo.gl/iB777 , goo.gl/htyeq , amazon.com/dp/0759672229 , amazon.com/dp/1410792617

Rahul June 23, 2013 at 1:52 am

Popular discussions often focus on mechanical or electronic assembly but puzzlingly forget Chemicals which is such a large sector of the Economy. Here there’s a different comparative advantage to developing nations (not cheap labor alone, but a laxer sink ) and it looks like it has been growing stronger over the last few decades.

I don’t see a reversal of that comparative advantage any time soon.

Willitts June 23, 2013 at 2:05 am

I was thinking the same thing. At least part of the cost advantage of producing outside developed nations is a lax regulatory…environment. It might also include the right kind of corruption.

“perhaps La Paz, Accra and Dhaka will never look much like Seoul.”

I don’t know why anyone ever though they would. Indianapolis doesn’t look like Seoul.

Brian June 23, 2013 at 2:03 am

*Seoul now looks a fair amount like Los Angeles*

Has the author ever been to Seoul or Los Angeles?

Street widths, store front designs, traffic patterns and density, pedestrian density, water features, botany, weather, parking design, building heights, and building density are all on far opposite sides of the world city design spectrum in Seoul and LA. The do both have mountain ranges nearby defining part of the urban boundary, but that’s a lot to hang such a statement on. Maybe the author just checked them both out on the widest zoom setting of Google Earth.

Willitts June 23, 2013 at 2:13 am

When he said “looks,” I don’t think he meant it literally. I’m pretty sure he meant being an economic, political, and social development Mecca, not that either of those places resemble the actual Mecca. If I were to disagree with the author’s point, there is quite a lot of poverty and degradation in Seoul and Los Angeles.

So which city is a shining beacon of development? Singapore? Hong Kong?

Jonah June 23, 2013 at 5:08 am

While they’re certainly not identical, they do have a lot in common; LA is certianly the most Asianesque American city in its development pattern:

LA is the densest major urban area in the US, Seoul is… dense.

Bad traffic, check. Expanding metro systems, check. Lots of Koreans, check…

Both have a wide array of innovative and ugly storefronts.

Most plants that grow in Seoul can be grown in LA.

Both have a large number of separate business districts, with dense towers in them and areas of lower density in between.

A cemented over river in varying stages of reclamation?

Jan June 23, 2013 at 12:25 pm

I think some of those are interesting commonalities, but I remember thinking Seoul was way more dense than LA. And LA is the densest major urban area in the US? Are you talking about something besides population density?

Ted Craig June 23, 2013 at 5:33 pm

LA is nowhere near NYC in either the city proper or metro area.

Steve Sailer June 23, 2013 at 9:46 pm

It all depends upon where you draw the borders of the metropolitan area. Nevertheless, Los Angeles today is remarkably densely populated.

Especially if you measure residents per room — there are a lot of areas like eastern Hollywood and the LAPD’s old Ramparts Division where apartments are seldom over 2 or 3 stories, but the number of people living in the average room would astonish most Americans.

mulp June 23, 2013 at 2:09 am

Where are the robots for replacing all the decaying bridges while traffic keeps flowing? Where are the robots for expanding congested highways in dense urban areas? Where are the railroad repair robots? Where are the powerline building robots? Where are the pipeline replacement robots for the water, the sewer, gas, oil pipelines?

A huge reduction in labor demand that has occurred over the past quarter century has been from letting the transport infrastructure decay.

The privately owned parts must compete with the underpriced public systems – the rail lines are in much worse shape than around 1950 even though they carry twice as much on half the trackage.

And none of this infrastructure can be imported.

I find it interesting how economists and futurists are the ones who believe it will soon be possible to deliver food and drink over the wireless Internet without the need for roads, so we never need to think about depreciation which means capital gains is impossible.

Sbard June 23, 2013 at 4:09 am

You mean railroad repair robots/machines like this? http://www.youtube.com/watch?v=_MKcTbYDP7w

Not entirely automated, but requires a heck of a lot less labor than doing it the old fashioned way.

dan1111 June 23, 2013 at 4:34 am

Excellent point, and there has been lots of other labor-reduction technology in infrastructure, too.

Oil pipelines have robots that crawl inside them to check for flaws. Power line inspection robots are an emerging area of technology.

Road paving is highly mechanized.

Peter Schaeffer June 23, 2013 at 4:22 am

mulp,

Sbard beat me to it… You do need to watch a railroad repair machine. It is pretty amazing. Sbard’s link is to a machine that handles concrete ties (standard in Europe). Other YouTube videos show machines that handle the wooden ties used in the United States.

dan1111 June 23, 2013 at 4:27 am

Since this kind of work is not portable, it does not really speak to the point of the article.

You have a point about infrastructure in general, but freight railroads are booming, and infrastructure is in much better shape than it was in the 1950′s, when it was extremely bloated with too much track and decaying because railroads were losing money.

There are some localized problems (like Chicago, in the news recently) due to local political gridlock that prevents railroads from even spending their own money to fix things, but in general the U.S. freight rail system is the best in the world. Europe, by contrast, uses extremely outdated technology and desperately needs clearance improvements to be able to handle modern intermodal traffic.

Incidentally, U.S. railroads are also a huge success story of deregulation.

Taenk June 23, 2013 at 7:48 am

I always hear that US railroads are a huge success story of deregulation but I also hear a lot of complaints about human transport. Then again, here in Europe people say competition in rail road transport is impossible, citing the ‘failed’ privatisation of British rail road. Can you point me to some kind of source describing what the US did with their deregulation and what we can learn from it?

Rahul June 23, 2013 at 10:33 am

It probably is a success story and that can be consistent with it being a failure for human transport. With the kind of distances and low population density the US has there probably was very little chance of making rail a success story for human transport, especially after the advent of cheap air transport and higher time premiums.

In terms of cargo transport US rail isn’t doing too badly. 40% share of total cargo ton-miles isn’t bad.

Yancey Ward June 23, 2013 at 1:37 pm

I can go from New York to San Diego on almost a moment’s notice, and do it in less than 6 hours. Why would anyone care about rail transport of humans in the US?

Al June 23, 2013 at 2:27 pm

for shorter trips

JWatts June 24, 2013 at 2:04 pm

I always hear that US railroads are a huge success story of deregulation but I also hear a lot of complaints about human transport.

Freight rail by tonne-kilometer per capita
Russia 12,599
Canada 10,517
US 9,165
EU 782

Passenger-km of rail transport per year
India 1046
China 815.7
EU 398
US 17

Essentially, the EU’s railroad network is designed to move people and the US’s network is designed to move freight.

Marian Kechlibar June 23, 2013 at 6:53 am

Not everywhere is the USA. The Americans seem to invest more in their prison and law enforcement than anything else.

As for railroad robots, even here in the Czech Republic, which isn’t exactly one of the most developed countries in the EU, we have things like this: http://www.zelpage.cz/fotogalerie/big/sukl068.jpg

Austrians and Germans are even better equipped.

Note that such a machine easily substitutes 15 workers, and is much safer to operate. One side effect of automation is that the amount of work-related fatalities in industry plummeted in the last 20 years.

Thomas June 23, 2013 at 2:27 am

The disconcerting truth is that the great “age of industrialization” may be behind us, a possibility that has been outlined most forcefully by the economist Dani Rodrik, who is leaving Harvard for Princeton next month. And evidence for this view is coming from at least four directions:

“And now the two forces, Industry and Finance, are in a struggle to see whether Finance is again to become the master, or creative Industry.” — Henry Ford

affenkopf June 23, 2013 at 6:52 am

“”Every year makes them more and more the controlling masters of the producers in a nation of one hundred and twenty millions; only a single great man, Ford, to their fury, still maintains full independence. “

Phil June 23, 2013 at 2:43 am

Evolutionary dynamics 101:

Horizontal transmission evolves virulence.

Vertical transmission evolves symbiosis.

A world without borders lets us take the money we’ve earned fair and square and engage in jurisdictional arbitrage. I mean, after all, those nasty people we’re escaping from are just jealous haters. Time to go where people, or at least their leaders, will appreciate what we bring!”

The answer?

Instead of politics carried out by any means, including war, let people assortatively migrate to test strongly held beliefs in human ecology (aka practice their religion) and allow them to establish border controls to keep out cross contamination from those who insist on bringing in “diversity”. Treat all who actively oppose this emergence of the social sciences out of the dark ages as a biohazard.

Andrew_M_Garland June 23, 2013 at 3:21 am

This is vague stuff. “Automation might be bad in some way. Four other sources also think automation might be bad in some way.”

Economies are complex and not easily analyzed. They may be impossible to analyze. Absent that analysis, why should I be concerned about broad speculation about automation?

Say automation is “bad” in some way. Would you set regulations in play to prevent further automation? If not, then this speculation about automation is both vague and useless.

The current, high living standards for many people in the world is clearly due to automation, mass production, and the distribution of products (solutions to problems) world-wide. This doesn’t come from stealing anything from the poor, so this is great.

Automation has made most people better off. Why not everyone?

I will speculate that two things are going on. Automation is raising productivity and freeing the labor of millions for application to other production and/or services. This is what automation has done for at least 200 years.

The second is that the controlling, regulatory state is growing stronger in the Western world. The least-productive people in the West are not as demanded for work because it has become more expensive to employ them, and they (irony) are receiving greater benefits while not working.

x June 23, 2013 at 5:04 am

The solution to problem of developing nations is likely going to be global welfare, not global economic development.

Once computers and robots can produce and maintain everything without human involvement, there is no longer “scarcity”, and thus no need for an economy at least for basic goods, and it can all just be given out for free without anybody needing to work, subject to population not being high enough to exhaust natural resources.

Also, of course, if human-level artificial intelligence becomes a reality this will happen far faster, since that would make all human work including engineering redundant.

There’s still the problem of giving everyone access to unlimited sex partners with no effort, but it might just be a matter of turning all new children homosexual via genetic manipulation, which would also solve the population control issue, or developing a realistic human-like robot once AI is there.

mike June 23, 2013 at 12:00 pm

As long as humans care even a little bit about relative status rather than absolute material comfort, there will always be scarcity.

Rafael June 23, 2013 at 11:33 pm

Time is scarce. Hence, scarcity will always exist since even if material goods are abundant and nobody needs to work, people will have to allocate their limited time to maximize utility among the various available leisure activities.

Marian Kechlibar June 23, 2013 at 7:01 am

I think that a lot of people in the academia have no clue about just how dangerous was industrial work before the current level of automation was introduced.

Have a talk with some older physicians from industrial cities to find out.

I incidentally grew up in one such city (Ostrava, former Czechoslovakia, basically a huge aglomeration of steel mills and coal mines), and heard a good deal of such stories. 90% burns, explosions, mining disasters, suffocation from a variety of poisonous gases, meh.

There were two families in our (big) block of flats who have lost a father and a son, respectively, to an industrial disaster, in the 1980s.

Rahul June 23, 2013 at 9:12 am

To be safely unemployed or riskily employed……

It’s a tough trade-off. In an ideal world, people just find something safer to do, of course.

PS. I’m not anti-automation, but just an observation. Safer automated workplaces can cut both ways. e.g. Say India suddenly enforced equal-to-west safety laws, I bet the rivers would be a lot cleaner, but how do we compensate the lost jobs because of one big forgone competitive advantage?

JWatts June 24, 2013 at 2:11 pm

Say India suddenly enforced equal-to-west safety laws, I bet the rivers would be a lot cleaner

I bet the rivers would be a lot redder… ;)

Hoover June 23, 2013 at 12:03 pm

And the limbless would be a frequent sight in the streets. I lived in Ostrava and noticed this, and it reminded me of my home town in the north of England. Also the coughers in trams.

Still, at least the shift system resulted in 24-hour bars and amazing night transport. Small mercies…

Michael June 23, 2013 at 11:39 pm

Reminds me of a guy who grew up in the coal mine area of Appalachia. Apparently he slept in a boarding house where he recalls a man driving a mule out of the mines with his whip in his dreams. He went through Normandy perhaps a couple of weeks after D-Day. He said war was an organized industrial accident.

john personna June 23, 2013 at 9:13 am

I don’t see too huge a win in the idea that technology will reduce low skills jobs, but that we might capture some of the few remaining.

Claude Emer June 23, 2013 at 10:05 am

Let’s see, industrialization has been the way underdeveloped countries emerged, thanks to cheap labor, but automation is taking that cheap labor away so underdeveloped countries today are doomed. I have a few issues with that view.
1. Isn’t it confusing employment with development? For development to occur, there needs to be a government investing in infrastructure, education and a lot of other factors, no? Just employing a bunch of people doesn’t necessarily result in a 1st world country.
2. What industry related cheap labor model are Ghana, Kenya, Indonesia, Qatar, Dubai to name a few riding to their economic development?
3. Is it a case of epistemic closure to declare that there is only one way to emerge because it’s what’s been observed recently, or all we know because we’re not very familiar with other parts of the world?
4. Shouldn’t an economist conclude that underdeveloped countries would best find another way to develop rather than declare they can’t?

mw June 23, 2013 at 12:21 pm

4. Shouldn’t an economist conclude that underdeveloped countries would best find another way to develop rather than declare they can’t?

not on this blog–all about the fatalism, here.

Engineer Dad June 23, 2013 at 5:40 pm

“not on this blog–all about the fatalism, here.”

Or a blog for those realists, who are more widely read.

Stanford scientists have discovered that the size and wiring of specific brain areas predicted how much a child will benefit from math tutoring.

The research is the first using brain scans to look at ability to learn math and brain structure or function.

“We can actually predict how much a child is going to learn during eight weeks of math tutoring based on measures of brain structure and connectivity,” said Vinod Menon, the study’s senior author and a professor of psychiatry and behavioral sciences at Stanford’s Department of Psychiatry and Behavioral Sciences.

The researchers focused on third-grade students. Children at that age — 8 and 9 — are at a critical stage for acquiring basic arithmetic skills, the scientists said. The study’s 24 third-graders received 15 to 20 hours of individualized math tutoring over eight weeks, including lessons on new concepts.

Children also practiced math skills with an emphasis on speed. The sessions were tailored to each child’s level of understanding.

All 24 children who received tutoring improved their arithmetic performance, the researchers discovered … But individual gains varied widely, ranging from 8 percent to 198 percent.

http://med.stanford.edu/ism/2013/april/math.html

Steven Kopits June 23, 2013 at 11:37 am

When making capital versus labor trade-offs, business managers respond to market conditions. They do not lead them.

When I was in Hungary, I was chairman of a packaging company, and we were faced with rapidly escalating Hungarian wages as the country began to recover from the communist period. But we were very careful with capital investments. We were only semi-automated as a result. For example, our printing and stamping equipment was (west) German, but purchased second hand. Nor did we automate our packaging line at all, as we had ready access to students who wanted to work part time at quite affordable wages.

JWatts June 24, 2013 at 2:20 pm

We were only semi-automated as a result.

That describes virtually all factories, outside of the movies. Plants have capital budgets and they look at the ROI of each different part of the manufacturing process. If you get a low (or negative) ROI for adding a given piece of automation, you leave it manual.

It’s all about the capital to labor expenditure. Even the term robot, is pretty useless, since an automatic carton erector, loader and sealer isn’t considered a robot, but is far better at it’s task than a general purpose robot would be.

sam June 23, 2013 at 12:40 pm

The law of one price gives me hope.

collin June 23, 2013 at 1:37 pm

I know you are concerned about aging populations and falling birth rates. Please name a competitive nation that has a high fertility rate and a reasonably competitve and functional economy. I know there is Israel but they have a theocrasy, an noted enemy and a massive fertility subsidies for the ‘right’ population. Otherwise, I can not name one except India which still has a lot of disfunctionality and the more dynamic South India has a low birth rate.

Have we become so competitive, the average family don’t feel comfortable having large families? Does it take so long to fit into a reasonably paying job, that nobody has economically stable enough to start a family.until they are 30? Isn’t Singapore the most functional country in the world also has an absurdly low birth rate?

Eric H June 23, 2013 at 5:31 pm

Is Dani really arguing that Tanzania cannot have a miracle because Chinese growth has slowed? And are you arguing that growth has slowed because manufacturing is all automation and outsourcing? Not sure I buy it.

It is possible to find manual processes in both mature and relatively immature industries. While a portion of our manufacturing processes are necessarily automated, the glue in between is all human. And the further downstream you go from epi growth to engineered aerospace projects, the less automation there is. Also, we like to keep our suppliers closer to home because there is so much customization and QC oversight. While my space might be a special case, this is also true, or perhaps especially true, in The Fundamental Manufacturing Industry, apparel. There is not likely to be automation on the horizon for that industry for at least another generation, and outsourcing has seen a small reversal. Bangladesh looks remarkably similar to the US at that inflation-adjusted per capita GDP.

If there are a couple of problems limiting more miracle growth bursts, especially in Africa, I think those would be agriculture policy (subsidization of corn, cotton, etc.), and international IP agreements. Just a few more “benefits” of trade policy.

Rafael June 24, 2013 at 12:01 am

Africa doesn’t develop because people there haven’t developed the whole civilized culture thinguie. China is developing because they are a three thousand old continuous civilization (in fact, older than Europe if you understand that European civilization had a discontinuity in the Early Middle Ages). While Africa was a just a bunch of tribals when the continent was colonized the 19th century. They still are a bit far from developing the cultural habits that characterize civilized society and these habits don’t spring up in a decade.

Pretty Much Everything, Ever June 23, 2013 at 10:57 pm

Reports of my death are greatly exaggerated.

msgkings June 24, 2013 at 2:17 pm

Ha! Outstanding.

Rafael June 23, 2013 at 11:55 pm

The growth potential of developing economies is fundamentally determined by their distance to the developed world: the poorer they are, the greater their growth potential. Given that the developing world is still very far from the developed world, the potential for growth over the next decades is enormous. Period.

Maybe the developing world is hitting a wall because the present level of institutional development there means that their per capita incomes tend to converge to only a fraction of the level of the developed world. In Brazil, my country, growth has stopped since 2010 mainly because the growth between 2002 and 2010 wasn’t sustainable: in 2002 the unemployment rate was 13%, by 2010, it was 5-6%, which appears to be the country’s NAIRU, the growth between these years was caused by the greater utilization of installed capacity rather than increase in potential GDP, this reduction of unemployment was caused by the economic stability that followed the establishment of inflation targeting and fiscal discipline. So the long growth trend in Brazil is not very good looking, and also, now the current government is relaxing their fiscal discipline and inflation is getting out of control, so things are getting worse.

All the rest of this talk is nonsense. Rodrick loves to talk about which sectors are better and think of development as a problem of national strategy (manufacturing > agriculture, etc). But the fact remains that market prices guide factor allocation with greater efficiency than any individual economist could ever hope to – even though there are externalities the sheer complexity of the informational problems required for an industrial policy to successfully improve over market allocation makes such ideas rather ludicrous to my ears.

Anyway, things taken for granted in developed world are the main causes of the economic failure of the developing world: macroeconomic and institutional stability. Here in Brazil we have had a dozen drastic changes in macro policy and in our institutions over the past 60 years, our constitution is from 1988! That’s ludicrous. Business here does not have a nice decent environment in which it is able to operate.

There are also cultural problems involved in the problem of convergence to developed living standards. The bulk of the population of my country still doesn’t have developed a mentality compatible with life in a society based on the division of labor – if you say to someone to show up at a certain time they never do – for example. Respect for the property rights and contracts is also not taken for granted. Developed countries have a culture that reflects their institutions and that is compatible with a society based on the division of labor. Chinese culture is perhaps more similar to the Western European and Japanese cultures in terms of compatibility with a civilized society than those of Brazil, India, Turkey and even Russia, explaining their much more robust tendencies of convergence in per capita incomes.

And culture is not something that you can change by a substantial margin in a decade or two.

Iván Carrino (@ivancarrino) June 24, 2013 at 8:51 pm

I Don’t understand the fuss about the end of the “era or industrialization” (and, thus, your pesimism). As if industrialization – and not institutions that foster human creativity to satisfy infinite consumer needs – was the source of prosperity.

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