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Deindustrialization, Distribution, and Development
List of Figures
2.1 Global inequality (Gini), including China (black) and excluding China (grey), 1990–2015
2.2 Trends in the components of global inequality, 1995–2015: Relative contribution of within- and between-country components to the mean log deviation 26
2.3 Global inequality (Gini), between-country component, national accounts data (2011PPP), population weighted, 1990–2018 26
2.4 Number of countries by World Bank income group, 1987–2018 30
2.5 GDP per capita (constant prices) growth, annual average, all developing countries, 1990–2018 31
2.6 Population of world (top) and of world excluding China (bottom) by daily consumption per capita group, 1981–2018 33
2.7 Population of all developing countries (top) and of developing countries excluding China (bottom) by daily consumption per capita group, 1981–2018 34
2.8 Net transfers (US$bn) for the use of intellectual property (developing countries minus high income countries), 1970–2018 (2011 constant US$) 41
3.1 Varieties of industrialization and deindustrialization 50
3.2 India’s manufacturing shares (left) and manufacturing labour productivity (right), 1980–2012 52
3.3 China’s manufacturing shares (left) and manufacturing labour productivity (right), 1980–2012 52
3.4 Indonesia’s manufacturing shares (left) and manufacturing labour productivity (right), 1980–2012 52
3.5 Brazil’s manufacturing shares (left) and manufacturing labour productivity (right), 1980–2012 53
3.6 Simulated manufacturing employment shares, pre-/post-1990, GGDC dataset 59
3.7 Simulated manufacturing employment shares, pre-/post-1990, UNIDO dataset 60
3.8 Simulated manufacturing output shares, pre-/post-1990, GGDC dataset 60
3.9 Simulated manufacturing output shares, pre-/post-1990, UNSD dataset 61
4.1 Marginal effects of GVC participation on labour productivity growth (left-hand side) and employment growth (right-hand side), in developing countries by levels of labour productivity in exports, 1970–2008
4.2 Marginal effects of GVC participation on labour productivity growth (left-hand side) and employment growth (right-hand side), in developing countries by levels of labour productivity in exports and sub-sector technological intensity, 1970–2008
5.1 Sectoral employment shares and gross income inequality
5.2 Sectoral output shares (constant prices) and gross income inequality
5.3 Annual average growth rate of employment and labour productivity (black line = all sample, dotted line = developing countries), pre-1990/post-1990
1 Introduction
1.1 The Myth
In O Mito do Desenvolvimento Econômico Celso Furtado (2020a [1974]) discussed the ‘myth’ of economic development.1 The myth for Furtado was that ‘economic development, as it has been practiced by the countries that led the Industrial Revolution, can be universalised’ (p. 2) and as a result ‘poor peoples can one day enjoy the lifestyles of currently rich peoples’ (p. 63, emphases as original). The purpose of this and any myth for Furtado was to ‘function as lighthouses that illuminate the perceptual field . . . allowing . . . a clear vision of certain problems and to see nothing of others’ (p. 1).
Furtado’s ‘myth’ remains today the common discourse on the economic catch-up of poor peoples and poor countries (or in the case of the latter, what he refers to as peripheral or underdeveloped countries) with the rich(er) peoples and advanced industrial countries of the world (or core economies). Furtado argued that the superstructure of the world’s capitalist economy— the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT, later the World Trade Organization (WTO))— would limit the universalizability of the advanced countries’ industrial revolution. Periphery countries could progress, though economic growth may come without economic development he posited. As peripheral economies grew, he argued that national inequality would inevitably rise and consequentially, only the top five to ten per cent of the population of developing countries could ever achieve the living standards of developed countries. Furtado put it thus:
[T]he predominant evolutionary tendency is to exclude nine people out of ten from the principal benefits of development, and if we observe the group of peripheral countries in particular, we realise that the tendency there is to exclude nineteen out of twenty. (p. 62)
1 Furtado (2020a [1974]) was written as a response to the ‘Limits to Growth’ report of the Club of Rome and its dire predictions related to economic growth and planetary boundaries. The English translation cited here is of the abridged Portuguese version. See also Furtado (2020b).
The ten per cent figure is based on a rough estimate that the income per capita of core countries is ten times that of peripheral countries (Furtado (2020a [1974], p. 59). Furtado wrote of this myth over forty years ago. Today in exchange rate terms, the average income of advanced countries (highincome countries (HICs) or OECD members) is indeed tenfold that of developing countries (low- and middle-income countries, LICs and MICs) or respectively approximately $5,000 versus $50,000 in GNI per capita (World Bank, 2020). And the average proportion of the population of a developing country in 2018 living at a level approximate to being non-poor in a richer nation is, as Furtado predicted, about 10 per cent (Furtado (2020a [1974, p. 59).2
Four decades after Furtado wrote of his myth, the book at hand argues that there is a new mirage of economic development that has strong resonance with Furtado’s myth though with new, contemporary characteristics. The global capitalist superstructure that Furtado pointed to has been reshaped due to a set of inter-related, system-wide ‘great transformations’ leading to a structural evolution of the global economic system since the end of the Cold War. In contrast to Polanyi’s (1957) ‘great transformation’—the disembedding of the economy from society by processes of commodification— the set of inter-related transformations identified in this book relate to the changes in the global economy since the end of the Cold War that have led to a dis-embedding of what can be called ‘deep’ industrialization as per the advanced nations from the very idea of economic development in developing countries. Each of the four transformations which will be outlined shortly has an accompanying myth related to economic development. It is the juxtaposition of these myths that produces the mirage of economic development. Put another way, the four transformations of the global system, and the accompanying myths each transformation has generated, have reconfigured Furtado’s myth in a new, more complex guise operating as a set of constraining parameters to the qualitative nature of, and quantitative extent of, economic development attainable by developing countries. Deep industrialization—like the industrialization of advanced countries—is evaporating as an idea and practice and is being replaced with a diminishing form—shallow and stunted—of economic development rather than one which is a genuine economic transformation. This is diminishing development. It is diminished compared to a more substantive meaning of economic development—as taken in this book—that
2 Even in PPP$ the GNI per capita of advanced countries is fivefold, respectively approximately $10,000 versus $50,000. See discussion in Chapter 2 on these matters, including new estimates.
encapsulates a genuinely transformative, emancipatory economic development in keeping with Furtado’s (1965, pp. 39–40) own definition of economic development as ‘a process of social change through which a growing number of human necessities, pre-existing or created through the change itself, are satisfied through a differentiation in the productive system generated by the introduction of technological innovation’ (though later in life Furtado delegated defining development to the masses (see Loureiro et al., 2020, p. 39–40). In other words, substantial and sustained structural transformation as per Seers’ (1963, pp. 81–3) codification of the ‘special case’ of advanced nations.
What then are the four great transformations of the global economy and their accompanying myths that have led to diminishing development? The first great transformation is the shift in most developing countries, due to economic growth, from aid-dependence to countries where traditional aid (official development assistance) is much less significant vis-à-vis the size of domestic resources. In short, some aspects of the superstructure of the 1970s when Furtado wrote of the myth—the IMF and World Bank—matter less today, as in most developing countries aid is less important. It remains to be seen if the COVID-19 pandemic and its aftermath will change this. Other aspects, notably the GATT, now the WTO remain, as does the dominance of transnational corporations (TNCs).3 At the same time this has happened under a new mode of orchestration of global production which does not necessarily require the ownership of production by TNCs. Accompanying the undeniable economic growth that has been achieved in many developing countries, there is a shift of many people—living in absolute poverty at low poverty lines at least—to a burgeoning new precariat class (to use the term of Standing, 2011) living in a fuzzy zone between absolute poverty and security from future poverty. As noted above, the data concurs with Furtado’s forecast that only the top decile of the population of developing countries is likely to achieve the standards of living of the non-poor in advanced countries, at least to date. Precarity is likely to remain prevalent for many years given a shift of employment towards informal services. The myth accompanying this first transformation—substantial economic growth and consequentially, the decline in importance of aid in many developing countries—is that growth has become easier, and thus that the process of economic development has become ahistorical, even easy. In reality, this book argues, ‘late development’ remains a crucial concept in understanding contemporary development.
3 Furtado (2020a [1974], p. 70, n. 17) preferred to use ‘large companies’ as he argued every large company is international in the sense of operating in various countries, even if the capital is controlled by a nation state: ‘the difference between “national” and “international” tends to secondary; what matters most is the relative clout of the company’.
A second great transformation is the empirically observable shift in many middle-income developing countries towards an era of stalled industrialization and the spectre of premature deindustrialization (a term first coined by the United Nations Conference on Trade and Development (UNCTAD) 2003: VII). This second transformation demonstrates the diminishing of development by the dis-embedding of industrialization from economic development. To be precise, developing countries’ deindustrialization refers to the predicament whereby the relative size of manufacturing activity peaks, stagnates, and declines as a proportion of the total economy. The process commences prematurely in the sense—it is argued by Palma (2005, 2008) and Rodrik (2016) amongst others—that it may occur at much lower levels of income per capita and at lower peaks of manufacturing’s share in employment and value-added than experienced by early industrializing nations. The myth accompanying this second transformation is that economic development has always been, or has become, sector-neutral. As we discuss in this book, manufacturing remains preferable to tertiary-led economic development in the sense of delivering substantial value-added and formal sector employment growth in developing countries.
A third great transformation has taken place in the global economy— noted briefly above—which is the emergence of a new organization of global production. That is an organization of production in global value chains (GVCs). In other words, a ‘GVC world’ has emerged, in which the global production process has shifted from generally nationally or regionally integrated production into internationally fragmented production (Phillips, 2017). Stages of the production process have become dispersed across various countries and are orchestrated rather than necessarily owned by TNCs. This shift has turned developing economies into peripheral suppliers to GVCs with the developed countries remaining home to most of the largest or lead TNCs in each chain. As a direct result, industrialization has been dis-embedded from economic development because the deep economic development of extensive domestic industry and attainment of advanced economic structures achieved by the advanced nations has been abandoned in favour of a diminished or shallow and stunted economic development of a relatively small number of globally competitive national companies slotting into GVCs. The myth accompanying this third transformation that this book challenges is thus: For developing countries, more and more integration into GVC-world will drive and sustain economic development—value-added and employment—in the long term to the level of the advanced countries.
A fourth great transformation is the shift from more equitable forms of economic growth to an immiserizing one. Growth is immiserizing in three
senses in a GVC world: First, growth is accompanied by falling labour shares—to maintain international competitiveness in a GVC world—which is associated with rising national income inequality. Second, growth is immiserizing in the sense that the falling labour share manifests in weak employment growth in the modern sector. Third, growth is immiserizing in the sense that the main labour movement is from a higher wage, more equal and more formalized sector (with relatively better pay and conditions)— formal manufacturing—to less equal, informal manufacturing, or informal services. The myth accompanying this fourth transformation that this book challenges is thus: if developing countries integrate more and more into GVC world, the process will lead to broad-based economic development, not just progress for the top ten per cent or the high skilled part of the population.
The four great transformations have created the new mirage of economic development. This mirage is a consequence of the transformations and their accompanying myths that have led to the dis-embedding of industrialization from the actual idea as well as practice of economic development. The new mirage is—in keeping with Furtado—that most developing countries and poor peoples are on a journey towards some day catching up with advanced countries and rich peoples through the integration into global production. The reality is, as this book argues, that few, if any, developing countries beyond China will ever truly get anywhere close to catching up with the structural characteristics associated with advanced nations and the deep industrialization the advanced nations achieved, meaning the development of a range of industries rather than simply a few internationally competitive companies with a ‘slot’ in a GVC. The economic development achieved by advanced countries is the classic case of industrialization and the benchmark against which the late development of contemporary developing countries is to be compared to in this book. Furthermore, the book argues that the COVID-19 pandemic and aftermath will speed up the trends this book discusses. In fact, it is even possible the pandemic will act as a ‘superaccelerator’ as the processes of stalled industrialization and premature deindustrialization and tertiarization in developing countries become part of the new normal for developing countries post-pandemic (see for discussion, Baldwin, 2020a, 2020b).
This introductory chapter is structured as follows: Section 1.2 discusses the contribution of the book. Section 1.3 gives a brief history of development since the Cold War. Section 1.4 discusses the theses of the book. Section 1.5 covers the methodology and methods of the book. Section 1.6 reviews the existing literature in this area and the gap the book addresses. Section 1.7
outlines the structure of the book, chapter by chapter. Section 1.8 concludes the introduction.
1.2 This Book
This book builds upon previous work by the author on economic development, structural change, and income inequality (see Sumner, 2016, 2018). The core foci of the book at hand are the structural evolution of the global system through the four great transformations and their associated myths of economic development, the dis-embedding of industrialization from economic development, and the consequential processes of stalled industrialization and premature deindustrialization which are creating a new ‘rust belt’. This term, rust belt, has been rarely associated with developing countries to date. In fact, it is commonly associated with deindustrialization in advanced countries and the US in particular. However, such a belt is threatening the middle-income developing world, starting from Brazil and other countries in Latin America, running down across South Africa, and then upwards to Malaysia, Indonesia, Thailand, and the Philippines in South East Asia. Hence, a new rust belt is beginning to encircle the manufacturing of the developing world. Put simply, these trends signal the end of the old school kind of speedster economic development which was manufacturingled and has been most evident in East Asia and China and which generated value-added and substantive employment predicated on the manufacturing sector.
Manufacturing expansion in developing countries is key to reducing both components of global inequality: within and between countries inequality. The link between manufacturing and global inequality is thus: the expansion of manufacturing value-added fuels faster economic growth and hence has the power to reduce between-country inequality. At the same time, manufacturing also has more potential than any other sector to expand wage employment opportunities and thus to decrease the within-country component of global inequality.
The emergence of the new rust belt means that global inequality is likely to ‘boomerang’ in the next decade or so. In short, the declining trend of global inequality from around the mid-2000s to the present—largely driven by a fall in the between-country component of global inequality—is likely to be temporary. This is due to the fact that the catch-up process will slow down as MICs shift from industrialization to deindustrialization. Additionally, national inequality—the within-country component of global inequality—is likely to
increase as economic growth generates fewer better-paid manufacturing jobs and workers move into the low-wage, informal services sector work.
To understand these changes late development is an important concept: when countries try to industrialize, the process of structural change and the context, nature, and rules are shaped by those who industrialized prior. Late development implicitly recognizes the structural disadvantage late developers face as a result of history; and captures the importance to late developers of patterns of global accumulation and their interaction with national accumulation and social structures. Late development thus provides the point of departure in this book for building a productionbased theory of global inequality. This book thus emphasizes the renewed relevance of late development to understanding contemporary economic development and the dominance of the global capitalist economy in the late economic development of developing countries. It is argued that late development is particularly crucial to comprehend the processes of stalled industrialization, premature deindustrialization, and tertiarization in developing countries.
In the following section a brief history of late development since 1990 is provided in order to set the scene for the main theses of the book which are outlined in the section that follows after.
1.3 A Brief History of Late Development since 1990
Since the end of the Cold War, global income inequality overall has fallen. This has been driven by a fall in the between-country component of global inequality in particular. At the same time, the within-country component of global inequality has risen in some countries such as China and Indonesia while falling in others, notably in Latin America.
Some developing economies have been catching up to some extent, although even those developing countries are a long way from OECD countries in terms of GDP per capita, let alone the economic structure associated with advanced countries. Moreover, the decline in global inequality is almost entirely attributable to the economic development of China. In short, any claims of a ‘great convergence’ are largely due to one country, albeit one that comprises a fifth of the world’s population. Other developing economies beyond China have experienced economic growth, especially so during the commodity boom years of the 2000s, which has hidden to some extent the less benign processes of stalled industrialization, deindustrialization, and tertiarization.
The economic development model promoted since the Cold War by international agencies (e.g. UNCTAD, 2013; UNIDO, 2018; World Bank, 2019b) albeit with caveats has been that developing countries should expand their manufacturing output—as manufacturing provides a host of social and economic benefits—through assimilation into global production networks and specifically, into the GVCs that form those networks, whereby the different stages of the production process are dispersed across different countries and, in some cases, many different countries.
Without a doubt, it is true that export-led manufacturing has been a significant catalyst for economic development and job creation in many countries in the past, notably East Asia from the 1970s to the early-tomid-1990s (see discussion of Southeast Asia in Sumner, 2018). Furthermore, in middle-income developing countries, productivity is generally higher in the formal manufacturing sector—or what Furtado called the ‘nucleus’ sector and Lewis (1954) referred to as the ‘modern’ sector in which modern technology is utilized; and which sits in contrast to what Furtado called the ‘backward’ or Lewis the ‘traditional’ sector, which is often taken to mean low-productivity subsistence agriculture. Consequently, industrialization has historically brought about impressive economic growth opportunities for developing countries through the expansion of the modern manufacturing sector. In fact, the modern manufacturing sector has been considered ‘special’ in terms of fostering broad-based economic development since at least post-WWII development economics (see, for example, Lewis, 1954, 1979; Kaldor, 1957, 1966, 1967); and more broadly what can be called the classical school of economic development.
Empirical support for the manufacturing and economic growth link is abundant (see, for example, Duarte and Restuccia, 2010; Herrendorf et al., 2014; McMillan et al., 2014). Developing countries that have experienced industrialization to date have reaped those social and economic benefits from the advancement of the sector. However, the nature of structural transformation—namely industrialization—has changed post-1990 and diminished in meaning from a ‘deep’ industrialization of building entire major industries to a ‘shallow’ industrialization of slotting into specific points of global production as a result of the fragmentation of global production into GVCs. In short, industrialization has come to be sought without the building of entire domestic industries and instead as a diminished form of industrialization based on GVC participation via domestic suppliers, often just a few internationally competitive domestic companies.
To optimists (e.g. Baldwin, 2016), this is good news, as in the past a country had to master the production of a whole manufactured product in
order to begin exporting it. GVCs, it is argued, make industrialization easier since GVCs allow countries to specialize in manufacturing activities or tasks that can readily be developed within the domestic economy and it is no longer necessary to develop entire industries. Developing countries can specialize in particular stages of, or inputs into, global production and simply slot into GVCs where they have, or can develop, domestic supplier firms who are internationally competitive in costs, standards, and logistics.
The less optimistic perspective for developing countries is well illustrated in Shih’s (1996), misleadingly named for developing countries, ‘smile curve’. The smile curve is represented in a graph format with the vertical axis as value-added and the horizontal axis showing the sequence of activities in the value chain from beginning (i.e. design) to end (i.e. marketing). Shih (1996) argued, using the personal computer industry as an example, that the highervalue-added activities take place at the beginning and at the end of the value chain. In contrast, the actual assembly of the computer in the middle of the value chain is a relatively lower-value-added activity.4 Much developing country activity focuses on assembly tasks in the middle of GVCs and adds less value than activities as the beginning and end stages of GVCs (Mudambi, 2008; Shin et al., 2012).
There are also bigger questions regarding the relationship between the creation and distribution of value across the chain between developing and developed countries, the extent to which developing countries are ‘locked’ in lower-value-added parts of GVCs, and what developing countries can do in terms of ‘upgrading’. Upgrading in GVCs—for example, from assembly to product design or marketing—is far from easy (Gereffi, 1999). Higher-valueadded activities remain dominated by lead TNCs in each value chain and such activities are likely to be situated in OECD countries. Thus, GVC participation may help developing countries initially with shallow industrialization through some growth in productivity and exports, but long-term or deep economic development may be stunted, especially so if technology reduces the demand for low-skilled labour abundant in developing countries. Furthermore, while GVC participation may benefit a small group of firms who have the capabilities to enter global markets, there is only limited job creation or a bias towards higher-skilled or non-routine labour. In sum, the benefits from GVC participation are non-linear and accrue at lower income
4 Furthermore, there is evidence that smile curves are deepening, which would entail even lower relative value-added activities in the assembly stage vis-à-vis the beginning or end of the GVC. For example, Ye et al. (2015) find, using World Input-Output Database (WIOD) data for 1995–2011, evidence that ‘smile curves’ have been deepening and widening over time. They focus on Chinese and Mexican electrical products and German and Japanese auto value chains.
