Opinions Fri, 10 Aug 2012

Industrialisation is now within easy reach of Ghana

If industrialisation is now within easy reach of every nation, why is Ghana where we

are still at? Is it not a question of leadership?

Chains of gold

Modern supply chains are making it easier for economies to industrialise

Aug 4th 2012 | from the print edition

GETTING rich used to be tough. For most of the past two centuries, few countries

managed it. Lant Pritchett, an economist now at Harvard’s Kennedy School of

Government, wrote in 1997 that “divergence, big time” between the rich and the rest

was “the dominant feature of modern economic history.” But those stubborn gaps have

begun to close. Industrialisation is suddenly everywhere. Since the mid-1980s,

emerging markets have grown faster than advanced economies (see chart).

Liberal reforms and sound macroeconomic management surely helped. Yet recent

research by Richard Baldwin of the Graduate Institute in Geneva suggests it is not

so much the developing world that has changed as development itself. Today’s

emerging markets face a different sort of globalisation than their predecessors 50

or 100 years ago.


Most advanced economies industrialised as part of what Mr Baldwin calls

globalisation’s first great unbundling: the geographical separation of producers and

consumers. Early in the industrial era, high transport costs restricted trade.

Expensive shipping limited most manufacturers to sales within the same city or

country. But as the industrial revolution progressed, steamships and railways

slashed transport costs, exposing firms to foreign competition for the first time.

The most productive firms were those best able to take advantage of economies of

scale. A single large plant could produce goods at a lower unit cost than lots of

smaller factories, and a cluster of large suppliers at lower cost still. Production

clustered in massive cities in a few economies.

Catching the leaders meant building an entire supply chain from the ground up—and in

the teeth of competition. Development was slow, laborious and rare. Japan and South

Korea grew industries from modest beginnings. They entered global markets with

inferior but cheap products, often supported by state aid, then slowly improved

their technical competence. Painstaking accumulation of technological skill

eventually enabled innovative multinational firms to emerge. Japanese and South

Korean incomes converged with those in western Europe. Other emerging economies

tried gamely to duplicate this success, to little avail. Aggressive industrial

policies often strained government resources without delivering a critical mass in

industry or the human capital needed for development.

A new model began to emerge in the 1980s. Lower transport costs were a catalyst. Yet

more important, reckons Mr Baldwin, was a budding revolution in information and

communication technology (ICT). Cheaper communications allowed firms to manage

supply chains over ever greater distances. Companies discovered they could build

plants in cheap locations, ship components there to be assembled and export the

finished product around the world. While the first unbundling separated producing

markets from consuming markets, the second broke up production entirely across long,

multinational supply chains.

That made industrialisation a cakewalk compared with earlier times. A

business-friendly government and cheap workers were often sufficient to get started;

foreign firms provided technology and management. Emerging markets quickly signed

on. Trade data analysed by Robert Johnson of Dartmouth College and Guillermo Noguera

of Columbia University track the shift. Along multinational supply chains, they

note, a single component may be exported several times, adding to tallies of gross

trade but not to measures of value added. A fall in the ratio of the two measures

(which they call the VAX) signifies an increase in supply-chain fragmentation. On

this score, 1990 seems a critical point, after which the VAX sinks while trade

volumes soar (see chart). Emerging-market growth surged at roughly that time.

Faster growth may be fickle growth, says Mr Baldwin. Whereas previous tigers built a

deep technological capacity, many emerging markets now merely “borrow” technology

from rich-world firms. Multinationals have an incentive to limit technology

transfer, the better to preserve the bargaining power that comes with a credible

threat to leave. Learning can still occur. China uses its size as leverage to

extract concessions, often confining direct inward investment to joint ventures

between foreign and domestic firms, for instance. Smaller markets lack that option.

The limited spillovers from supply-chain industrialisation may leave them stuck in

middle-income status. And there is always the risk that chains may shift again,

leaving them high and dry.

Some worry that sprawling supply chains may allow ill winds from abroad to blow in

more easily. But evidence suggests that supply-chain trade may have declined less

and recovered faster than overall trade during the financial crisis. Japan’s 2011

earthquake echoed across the world but also demonstrated the system’s capacity for

quick recovery. The more tenuous nature of supply-chain industrialisation may

encourage governments to work harder to support trade and recovery in response to a


Ships and chips

The second unbundling has yet to banish distance. In a different paper, Messrs

Johnson and Noguera find that supply-chain fragmentation has been greatest among

neighbours. This has given rise to regional industrial clusters. Regional trade

agreements are partly responsible, but time costs may be more important. ICT

improvements have also made production more nimble, capable of just-in-time

manufacturing and frequent design changes. Timely shipments of components are

indispensable. Indeed, an analysis by David Hummels of Purdue University and Georg

Schaur of the University of Tennessee estimates that a day in transit is equivalent

to a tariff of between 0.6% and 2.3%, with the largest effects for parts and

components trade. Industrialisation is now within easy reach of poor countries,

provided they’re within easy reach of industrialisation.



Richard Baldwin, “Trade And Industrialisation After Globalisation's 2nd Unbundling:

How Building And Joining A Supply Chain Are Different And Why It Matters”, NBER

Working Paper No. 17716, December 2011

Robert C. Johnson, Guillermo Noguera, “Fragmentation and Trade in Value Added over

Four Decades”, NBER Working Paper No. 18186, June 2012

Robert C. Johnson and Guillermo Noguera, “Proximity and Production Fragmentation”,

American Economic Review, Vol. 102, No. 3, May 2012

David Hummels, Georg Schaur, “Time as a Trade Barrier”, NBER Working Paper No.

17758, January 2012

Columnist: Addo, Kofi