Quick link: Manufacturing delaborization and development strategy (with notes on Argentina)

2023-12-18

Brad DeLong — a professor of Economics at Berkeley and, among other things, the author of "Slouching Towards Utopia," probably not just among the most important books on the economic history of the 20th century but one of the most important books on the 20th century, period — recently wrote on his Substack about the fact that low wages are no longer an structural competitive advantage for export manufacturing, and that in any case manufacturing is no longer labor-intensive enough to absorb large numbers of unskilled workers from lower to higher productivity activities, which is really bad news in that it was the best (only?) way in which poor or middle-income countries managed to develop during the 20th century, and we don't really know another way to do it.

I'm vastly oversimplifying the analysis and its implications — it's more than worth the time to read it — but I wanted to add some specific notes about the Argentinean case in the current context and moving forward.

The main thing to note is that we cannot expect that lowering of USD-denominated labor costs through exchange rate depreciation and the inflation+recession combo will lead to a systemic improvement in the competitiveness of export manufacturing. On the margin, yes, of course — existing companies might get a boost — but as labor costs aren't a competitive advantage in modern, capital-intensive manufacturing, this boost will be rather limited. Even worse, modern manufacturing isn't labor-intensive, so the link between any growth in manufacturing exports and employment is going to be weak. There will be exceptions and success stories, but by and large even (or perhaps specially) highly successful export manufacturing doesn't hire a lot of people in relative terms — which implies both a low impact on overall formal unemployment and low bargaining power for employed workers.

And this is assuming that there will be a systemic growth, rather than a passive rebound, of export manufacturing as wages fall. To DeLong's point, this is no longer what we can expect.

As an aside, what does drive export manufacturing competitiveness? On a cursory look, my bets are, to a larger degree than wage costs, a highly educated workforce, deep and effective integration with global value chains, and rich and sophisticated local ecosystems of expertise and infrastructure. Again, there are exceptions and success stories, but on a structural level, and compared with the global competitiveness threshold, Argentina fares poorly on all of those metrics. You can improve on them — after all, countries like Japan, South Korea, and China did — but it takes lots of capital and lots of time, both of which they acquired through... well... low wage-driven manufacturing competitiveness at the low end of the value chain.

You see the problem: it worked for them then — and it took effort, planning, and some luck — but it doesn't work anymore.

This doesn't mean pursuing growth in export manufacturing isn't worth it (ideally, though, not through long-term near-poverty wages). But it's much harder than it used to be, and its overall impact is much lower. It's no longer what DeLong calls "the Royal Road to successful economic development."

What works now?

We don't know. If there's a high-productivity economic activity that, in 2024, can effectively tap into overseas demand without requiring expensive long-term investments in human, physical, and institutional capital and absorb a large enough number of people to have a noticeable impact on aggregated productivity and wages, I don't know of it.

The situation in Argentina isn't entirely dire: its overall productivity is about average, it has some pockets of highly competitive export-led activity, and of course there's its agricultural exports sector — its GDP per capita is usually more or less the global average. However, it also has high rates of poverty and informal employment, and even accounting for inflation, its economy has been essentially stuck for years — more so if you set aside agricultural exports.

To say that we don't know how to put the Argentinean economy in a long-term development path isn't a criticism: we don't know how to do that for anybody, not anymore. But, if the drivers of manufacturing competitiveness are somewhat the same across sectors, we can be fairly certain that this will involve at the very least large improvements in education, healthcare, physical infrastructure, institutional effectiveness, and technological capital. What those should be, how they'll be implemented, who will finance them, and what high-productivity, labor-intensive, globally tradable sectors you can deploy all of those capabilities on are the questions that developing economies will have to figure out solutions to, some of them with faster deadlines than others. (The Argentinian economy is fragile enough that a bad drought was enough — not on its own, but I'm betting on at least being a strong causal factor — to push the rightmost end of the political spectrum way further. It's not quite at the level of a petro-state-like single-commodity export economy, but we have already bought the tickets for at least a few decades of increasingly frequent droughts and floods, so the timeframe to at least partially decouple sociopolitical stability from short-term agricultural production is, as these things go, vanishingly short.)

Addendum: Because this is still 2023, I'm bound to answer the unspoken "What about AI?" The answer is that AI makes all of this worse. It's best at (partially) replacing the low-end sort of white collar work that is the closest we have to an entry point to a high-productivity economic path, so it blocks the early 2000s equivalent of the entry-level manufacturing job that was so economically and socially important during the 20th century. To put it in concrete terms, India bootstrapped its IT sector through global exports of low-cost customer support: now that we have nearly functional enough chatbots no country is doing to do that again.