A Question: Does the real (sustainable) GDP of an economy include its ability to manufacture goods domestically?
That is the question - please allow me to fill out the context for posing it.
Point 1: Manufacturing represents tangible goods, so when it comes down to it we can barter for its value. Plus it has the ability to employ blue-collar labor which is an important constituent / segment in pretty much any population. And provides for middle class jobs.
Point 2: The western economies changed from agriculture to industrial economies in the early 1900s. That does not mean we GAVE UP agriculture. Rather we use less human capital to generate more agriculture produce!
Point 3: These same economies transitioned from industrial economies to information and service economies in the late 1900s. But in this transition, shrunk the manufacturing labor pool and also shrunk domestic manufacturing (unlike the transition from agriculture). This is conventional wisdon. Some of my friends argue that manufacturing output has NOT shrunk in the western economies - but rather share of Asia / China manufacturing has increased. But I don't know what the facts here are. I do know that the Carolinas have lost textiles. And many many cities in the US have shuttered down manufacturing including Philadelphia.
Point 4: Now these economies are poised to transition from service economies to knowledge economies.
So, the context of my question - is this sustainable? Does every country need a core base of manufacturing, a core base of agriculture, and a core base of service and knowledge for the society to thrive and grow in a sustainable way?
Just askin'
Hope you enjoy the conversation in the comments section below . . . . (including a list of reference links from people who have given this topic serious consideration).
ps - a follow-up silly question perhaps, but what is the GDP of a communist country?!
That is the question - please allow me to fill out the context for posing it.
Point 1: Manufacturing represents tangible goods, so when it comes down to it we can barter for its value. Plus it has the ability to employ blue-collar labor which is an important constituent / segment in pretty much any population. And provides for middle class jobs.
Point 2: The western economies changed from agriculture to industrial economies in the early 1900s. That does not mean we GAVE UP agriculture. Rather we use less human capital to generate more agriculture produce!
Point 3: These same economies transitioned from industrial economies to information and service economies in the late 1900s. But in this transition, shrunk the manufacturing labor pool and also shrunk domestic manufacturing (unlike the transition from agriculture). This is conventional wisdon. Some of my friends argue that manufacturing output has NOT shrunk in the western economies - but rather share of Asia / China manufacturing has increased. But I don't know what the facts here are. I do know that the Carolinas have lost textiles. And many many cities in the US have shuttered down manufacturing including Philadelphia.
Point 4: Now these economies are poised to transition from service economies to knowledge economies.
So, the context of my question - is this sustainable? Does every country need a core base of manufacturing, a core base of agriculture, and a core base of service and knowledge for the society to thrive and grow in a sustainable way?
Just askin'
Hope you enjoy the conversation in the comments section below . . . . (including a list of reference links from people who have given this topic serious consideration).
ps - a follow-up silly question perhaps, but what is the GDP of a communist country?!
17 comments:
The transition to a knowledge economy does not rule out manufacturing;
ironically it may end up strengthening the case. Take the case of 3D
printer-based manufacturing. Tha transition from an industrial to a
knowledge economy may well mean that the industrial workers could be
retrained to do program for 3D manufacturing (in factories not just in
the US but anywhere in the world).
The edge that the US lost in manufacturing in the previous eras, thanks to high labour and low productivity (compared with the Japanese specifically) may both be licked in the knowledge economy, never mind where the physical production assets are located. The knowledge economy has to manifest as services and goods ultimately which lead to consumption. The only exception is philosophical knowledge that is an end in itself. For all practical purposes that won't be a significant part of any paid economy.
If you refer to Ricardo's principle of comparative advantage (in
classical economics), there is no need for every country to have its
own manufacturing, services and agricultural economy. The fact that
Singapore is quite prosperous with a predominantly trading economy
(even if small) is evidence of this principle. However, economics
perilously ignores political compulsions. In a theoretical free
market, Ricardo's principle works. However every country, in the most
perfectly globalized state, will dance between free market and
protectionism. A reasonable representation of all three sectors in
every country may become a practial necessity to protect against
unilateral protectionism by countries or blocs though the mix could
vary vastly based on the economic advantages of the region.
My feeling is that in the next 10 years, if America didn't error with its
politics, it could return as a manufacturing superpower albeit with
dramatically different notions of manufacturing.
To your point #3, I was speaking with a friend and he described the same thing – that many of the textile companies moved their operations overseas – primarily China. However, he mentioned that they are starting to come back state-side as labor costs are increasing and interestingly, if there is an issue with the manufacturing, there is not the necessary skill-sets locally to the factory to resolve the issue. They have to send teams over to fix the problems, thus impacting productivity.
I say yes. From an economic standpoint it may be antiquated thinking, but from a strategic military standpoint I think it’s dangerous for a country to not be able to fall back on its own manufacturing and agriculture in times of war / strife.
I’ve read in several places that manufacturing in the US isn’t declining it just employs far fewer people because of technological advances, not unlike your 2nd point about farming. This doesn’t mean that your 3rd point about Asia isn’t true. They are obviously manufacturing more, but in an increasingly modernizing gadget / tech savvy global market place with ever more consumers is it possible that the west is just now providing a segment of the global manufacturing capacity needed.
By the way has anyone seen any of that multi-part series on PBS called “Civilization: The West and the Rest?” I’m generally not a big fan of PBS, but Niall Fergusson is pretty brilliant. It’s all about how and why the west has dominated the world for the last 500+ years. His thesis – democracy, competition, science, medicine, consumerism and work ethic has set the west apart, but through globalization that is beginning to change.
I feel that all types of sectors ( like agricluture , industrial manufacturing, service, knowledge etc ) have to go side by side. Mechanization of every field up to one level is ok , it should not be so much that most of the people are left without jobs . It may be from Blue collar or white collar sector. If one sector is down ( down sized ) the employment in that sector will leave a gap in the vicious circle of economy and that effects the buying power of the people who are in the sector which is effected.
Your question is some what like this " IS CHICKEN FIRST OR THE EGG"
Economist say that unless you export and import your economy will not go grow fast. Export is ok you can manufacture/ produce, but when it comes to imports your domestic market either takes a beating or prospers , if the imports are cheaper that what you produce here than people will go for them and your domestic production will get effected. There by that particular goods, manufacturing will get effected .
Most of this things are happening in many countries because of WHO recommendations, and also China which is dumping the world with its cheap goods..... even that mass producing country is in dole drums today.. even its economy has come down. Because there are fewer jobs in the other countries and which is effecting China's exports.
Most of the economies have become volatile because of this.
Frankly, I am least bothered about the figures which each country's finance ministries give, in fact all are false figures. In reality it is totally different.
I think GDP is a much overused term and perhaps the only reason it is so popular is becuase of the absence of any other suitable metric.
My rationale; GDP is supposed to measure economic output. However, not all economic output is productive and something like "rework' is also economic output. Lets take the example of a new road that is laid under the following two circumstances.
a. A slightly higher upfront cost but high quality road that requires very
little maintenance over its life span of, say 5 years.
b. A lower upfront cost road, with compromise in quality resulting from the corruption / scandals that we are all so used to. There is obviously a great deal of rework that happens over the its life span - all of which contributes to the "GDP" of the economy to which it belongs.
This concept can also be extended to the service sector. If we did not have bugs / systems crashes / errors, in the first place, maybe we do not need as many "help desks and call centres" across the world - all of which contribute to the GDP.
So the equation is Reported GDP = Real GDP + GDW (Gross Domestic Waste).
So when we hear of higher GDP, we need to wonder whether it is "Growth" or "Waste" that is contributing to the higher GDP.
Some further thoughts to the above comments:
Measurement:
Much as with the Sufi joke where the man searches for his key where the light is, we discuss what we measure. The unemployment in the US is reported as ~8%. Anyone who follows this stuff knows that it is a lot higher, since the measurement does not take into account those who are unemployed and are no longer eligible for unemployment compensation! (Really?!!) Similarly, GDP is accounted for through measured means. Child rearing and home making are not measured as value and not added to the GDP. Which leads me to a related question.
Free Markets:
This following is not firm conclusion of mine, but I have been mulling a hypothesis that a country is not like a company (or even a non-profit). What a country is good at, is maybe, not a good question. Also, the competitive model between nations, that Michael Porter talks about, also makes me increasingly unsure.
The reason is that there is intra-national activity and inter-national activity. And 'intra' is not monolithic. The U.S. in any case is anything but. Detroit might be good at manufacturing and Dallas at construction. Again within greater New York - there might be a subsection that is good in manufacturing and another suburb in biotech.
Within a family, one might be good at being a Doctor, another an entrepreneur and another a lawyer.
So I posit that Free Markets is not between countries - but really for individuals to practice free markets and the job of the city, the state, the country or a trading block, is to set rules of the game, monitor the rules of the game - and otherwise generally get out of the way.
Value:
You say - when we say a country is an agricultural economy or a manufacturing economy, it is typically based on inputs. i.e. what % of the labor force is in that sector. It is often not discussed in terms of output. And not even close to measuring it in terms of value of the output. I agree with this.
If we take the ubiquitous Apple iPad. If it is patented, designed, packaged and distributed in the U.S., but manufactured in China. How is the contribution of the sales of the iPad disaggregated, if at all, between the U.S. and China - especially if manufacturing costs are, say 20% of total sale price of the iPad?
Policy:
Much of this is a question of policy and good governance. What is a leader of a society to do? An example of good and bad governance from my experience. In the 80s, when manufacturing was leaving the U.S. (I caught the tail end of it at General Electric, before I jumped ship myself!), Philadelphia and Boston were hubs of manufacturing activity. GE, Boeing, Westinghouse, shipyards were full of blue-collar workers that supported a vibrant middle class.
Then manufacturing started leaving (spearheaded by GE's Jack Welch. I was at GE at that time - and he was called 'neutron Jack'). Boston, started providing incentives to bio-tech, and hi-tech companies anticipating the next wave. And encouraged companies in the Financial Sector as well (Fidelity, Putnam and so on). So much so that Boston is currently listed by The Economist as one of the Top 5 'economic cities' in the world alongside London and New York. Quite an achievement if you think about it.
Philadelphia on the other hand, kept its tax structure high to 'preserve' its revenues and kept electing officials who would want to preserve subsidies to the unions and other interests that were weaned on entitlements and could not attract new industries. It took the dot-com boom of the late 90s, a full decade later (with a reformist mayor in Ed Rendell) for the city to begin to move. Philadelphia is much cleaned up now. But its new tech sectors is nowhere close to Boston.
Policy is not picking winners and losers, but knowing when one wave is done and the next one starts. Easier said than done, I am sure.
Closely watching the business related scenario across the world. just 6 months ago, we were telling India and China are growing neck to neck to become no2 superpower and all.
We were same like Philippines peso of 40 per USD. But today rupee has fallen to historic low of 55-56 against dollar, where as vietnam dong is stable at 20800 for the past six months. the petrol price in vn is reduced with oil prices cooling internationally. In India petrol price was increased last week by 7 rupees up to reduce 2 rupees down from there.
What is happening to manufacturing sector in India, not clear. It is told the growth rate is going to be 5 years low at 5%. If my understanding is correct, what applies to individual applies to country too. End of the year, if we get 10% increase in salary and inflation becomes 20%, eventually we end up 10% poorer than last year, right?
I think a country should look at this like a corporation would. What is
our core competency and focus on this. So, it is my belief we do not need to do everything, but a few and do it well. The key is to outsource what we cannot do well. If we can buy sugar or rice cheaper and better from another country and I can afford this, why not?
In a country like India, for example assume the entire country can write software" so it would seem possible that we are a service provider and become the software for the world. But with a Billion
people, it might not be possible to have everyone write software because
the market for software does not require that many people. So then it
becomes necessary we develop another core competency or two depending on the market we share.
The point being, the world of 7 billion people collectively can raise
the entire GDP of the world by 10-20%. While this sounds good on paper, due to political and egos will not work. So as a country, we have this belief we have to have all facets of the economy cooking and this as we know leads to jack of all trades and with the mess we have in Europe, it is possible NAFTA and CAFTA etc will also fail. The theory of combing efforts will unfortunately fail and lead to individual country survival. The next decade will be interesting to say the least and will answer your questions. I feel, US will put a lot of effort in getting back it manufacturing base on several areas. I am starting to see this in my industry.
Some additional reading on this topic by some experts in this field:
1. The case for a national manufacturing strategy:
http://www.itif.org/files/2011-national-manufacturing-strategy.pdf
2. The Economist: How important is it to make things?
http://www.economist.com/blogs/freeexchange/2011/08/manufacturing#comments
3. The Manufacturing Imperative
http://www.project-syndicate.org/commentary/the-manufacturing-imperative
4. HBR Insight Center
http://www.project-syndicate.org/commentary/the-manufacturing-imperative
Firstly, the idea of West leading and East following has stopped if not actually reversed in my opinion. This is because the dynamics of the three components of any business, the cost of making, cost of delivering and the profit have changed. The cost of the first two has definitely reversed.
So, products are produced cheaper and equally well in the East. So with the mind set that they have a right to higher wages, the west has more or less given up the ground to the East. That leaves the knowledge and skill to produce non manufacturing or high value goods. We have seen that companies like Apple and Google could do it.
But my main concern is that the volume of such products may not be sufficient to sustain the lead over the East. The second issue is the legislation, regulations and the lobbiests. Everybody knows but no one acts and what is needed to be done. Some regulation but not excess, some compromise but not bitter fight and a little lobbying and not iron grip on the legislative process is essential for the success of the countries economy. As is stands now, it is any thing but that in the present set up of most of the Western nations and most particularly in United States.
The classic example is the Bush Tax cuts. If they are not kept alive, at the end of the year ( after the election is over), the tax burden on all will increase and spending will decrease. This will lead to higher unemployment and further shrinking of the economy. But neither side wants to concede an inch to have a compromise.
So, the Utopian concept of manufacturing and marketing are superseded by the political gridlock. No matter who wins, the congress will still be divided and no legislation with compromise will pass. This, is a non business issue corrupting the business model of an ideal advanced country. This is not to say that less advanced countries do not have similar problems. Greece ans Spain are classical examples. So, my take is that the wealth, economy and politics are all inter mingled such that it is not possible to have a simple answer to your question
I’ve always believed that manufacturing is the core of economic stability, even given the economic shifts you describe below. Go back even further through many centuries – the countries that make stuff are the countries that dominate the world stage. We can provide all the knowledge and services we want, but with the exception of agriculture, it’s manufactured goods that the world needs and consumes, and the countries that are exporting such goods are the ones that gather wealth.
To your question about US manufacturing declining or growing; what matters more is the market share of manufacturing activity, or overall percentage of global output. In this sense, the US clearly has been in decline relative to the emerging economies.
To gauge economic health, people tend look at unemployment as an absolute number, which is short sighted. Look at the components of employment – namely the employment rates college educated vs. non-college educated. The number of jobs available for the lesser educated is in steep decline, presumably going to emerging economies. This will put a serious drag on our “service economy” for years to come. Probably a generation of getting people educated enough to take better jobs in the US. Meanwhile, the US manufacturing base continues to erode, leaving that function to other economies who will come to dominate. Can you say Japan? Can you say UK? France? Italy? Can you say Roman empire?
All things revert to the mean over the long run, and the US has been above the worldwide mean in terms of standard of living for quite some time. That will equalize. The only hope is that the standard of living in the rest of the world can rise quickly enough so that Americans don’t have to take too much of a step back. Because that is what’s going to be required to get this country competitive again.
My two bits:
Consider this:
step 1: 10 isolated software units in the East create isolated bits of genetic code (IP modules) developed using specs and software provided by the West.
Step 2: The 10 units upload them to a central facility in the west
step3: Code is stitched, scrambled, and sent to a 3D printing facility in the east.
Local Raw materials: amino acids and enzymes, carbon dioxide, water (and whatever else it takes) are used to print out a hamburger/steak dirt cheap, and are marketed there.
Knowledge on one end, manufacturing on the other. Food for all, wealth for some. Not bad in itself as a business proposition. The Knowledge Economy model is based on a globally distributed production model, leveraging regional core competencies. But just add a liberal dose of disruptive international politics to this, and the entire economic advantage is lost.
One of the most important factor for most of the problems is wrong decisions taken by the policy makers in every country ( not thinking in longer perspective ) and also 'POPULATION EXPLOSION" in the world........ which is eating away all the development...... from different angles....... more people more unemployment, more food etc and which makes mockery of GDP
Well, my answer to your question is basically a yes, but it also depends on the country's size, population, type of government, available resources, people skill sets, etc. So, if we are willing to rule out some exceptions (for example Singapore which cant do everything, especially agriculture because there is no land here. But, they can afford to import all the food stuff because the population is small. Small countries like Singapore can just do few things right, and still keep moving ahead because of their small size and population), then the answer to your question is รข yes. I certainly believe managing the supply and demand within the country domestically for each core areas of the economy is good for big countries (whether they are under-developed or developing or developed countries). This will provide a solid and stable base for the economy to sustain growth. This will also protect each country's economy from the external factors. But, how we keep pace with the technological advancement and competitiveness in each sector when bench-marked globally is a challenge for the government and the economic policy makes to manage.
I am sure we can continue more on this subject, especially on the areas of import and export, etc. But, I guess I will stop here due to my limited knowledge on this subject. More than a particular model, I believe a stable policy from a government that is good in proactively planning the economic growth is very important. This has been very much possible in countries like China. The government should be free from internal and domestic issues and distractions in order to plan and execute long-term proactive economic growth plans. I don't think every country is blessed with such a political set-up, social environment and leadership.
As the world keeps shrinking to a global village, and as the global economic balance is slowly but steadily happening step by step, this challenge will continue to exist for each country to sustain a stable growth. How can the manufacturing cost of an automobile in US compete with that of China or India? This may be difficult, but the difference in that value has to be created somewhere else in order to still make manufacturing of automobiles in US viable. How we do it is the challenge for the government, corporate leaders, Engineers and economist to work out and manage. Hence, the governments policies and their interaction with every core sectors (Industry, Agriculture, Research & Development, etc.) in forming policies become very important
Here’s how I understand things re economic designation and where we rate:
The designation of whether we’re in an agricultural, manufacturing, services or whatever economy has nothing to do with the economic value of the output but rather the amount of the workforce (in this case, > 50%) engaged in it.
Accordingly, we were an agricultural economy up until roughly the end of the 19th century or beginning of the 20th century when for the first time < 50% of the workforce was engaged in agriculture. We became a manufacturing economy when > 50% of our workforce was engaged in manufacturing-related industries. And this lasted until sometime around the middle of the 50s, I think it was, when > 50% of the workforce was engaged in whatever went into the category of “services” at the time (not sure if, for instance, it included retail and financial services). Well, we no longer have > 50% of the workforce engaged in the ‘service economy’ and instead they say that > 50% of the workforce is engaged in the ‘knowledge economy’ – whatever that means (pretty much everything is a “knowledge” business today, from agriculture to services and soon most especially manufacturing).
Because folks don’t understand that the designation of the economy has nothing to do with output but rather input (in this case, employment) they think that no longer being an agricultural or manufacturing economy means we’ve shrunk in absolute terms (rather than relative terms when compared to fast growing developing economies that are just beginning to clime the economic sector ladder) in these sectors when actually we’ve continued to grow in them. We are still the world’s leading producer of agricultural products and largest manufacturer too.
Perhaps someday the replacement for the distinction ‘developed v undeveloped’ economies will be ‘knowledge v manual labor’ economies. Ours will pretty much be all knowledge and those whose workforce is still , 50% will simply be those who have not yet reached that stage of economic devolopment
I agree entirely with the general gist of your thesis. So I’ll just respond to a few of your points/questions.
My understanding of the change from GNP to GDP was mostly, if not entirely, one of semantics. That is, the label change was intended to clear up the very issue you point out re Apple. One might ask, “Apple’s a U.S. national company, so why are you only including the domestic revenues instead of the global revenues?” To which an economist might respond, “OK, fine, then what I’m talking about is their domestic revenues only and so I’ll call it GDP instead of GNP.”
Which takes us to the free trade / competitive advantage concepts of Michael Porter – and why we remain the predominate economy of the world while Europe is continuing to fade. Apple essentially said, “Hey, our competitive advantage is in technology and marketing. And at this moment (before the U.S.’s anticipated resurgence in manufacturing via advanced manufacturing) China has a competitive advantage in manufacturing from a cost perspective. So the best of both worlds for us is to leverage each country’s competitive advantages to create a unique, must have product that supports “monopoly” pricing. And, in so doing, not only change the world but also create a vibrant ecosystem of firms around our products that offer highly-compensated jobs relative to those being created in China.”
Europe on the other hand doesn’t think in terms of “customers” (markets), they think in terms of “employees” (unions and voters) and so opted not to follow that free trade / competitive advantage strategy – which has greatly contributed to their decline and perhaps eventual demise. Pols do what’s best for them, not for their economies or even the general social welfare – over the long term. Pols are just as short-term in their thinking as are those they berate in the private sector. That’s why, despite the U.S.’s success with this free market / competitive advantage strategy all-too-many pols are looking to bring it to an end through protectionist policies benefiting some companies and all unions ($$$$). They’ll say it’s for the worker’s benefit – but just ask Greeks how they’ve benefited from their job protection policies. Germany on the other hand, after they began stagnating, opened up their labor market allowing German companies to ‘right size’ more nimbly and as a result have become an export powerhouse and by far the most successful economy in Europe. Not that the Greeks will listen… and it must be added, just as the left didn’t listen in Wisconsin.
It’s a bit like the old debate in corporate strategy/governance. What’s the better policy, focusing on customers, shareholders or employees? My belief is that it isn’t even close. You focus on customers first (the others are important too, but their interests must not be allowed to conflict with what’s good for customers). If you get that right the other two will do very well. It won’t go well for the ‘wrong’ employees (not a good fit) and the ‘wrong’ shareholders (short-term traders). They will have to go. But the point is that you can’t say the same if you pick either of the other two for your strategic focus. The corporate (and national economies) graveyard is filled with companies that focused on what’s best of employees (all employees, regardless of fit) and shareholders (managing for quarterly results).
I think the answer to your question is ‘yes’ and ‘no’
‘Yes’ because manufacturing real, valuable stuff can certainly be one engine of overall GDP growth, as many vibrant economies have demonstrated over time. Manufacturing is still alive and kicking in the US, as global wage gaps close, transportation costs increase, and US industries focus on higher value added products (aircraft, power generation equipment, medical devices, etc.). The monetary value of US manufacturing as a percent of total has certainly declined quite a bit from WWII days, but the quantity and utility of the output has increased dramatically, I would guess (in line with your reasoning about agriculture).
‘No’ because sustained growth does not depend on manufacturing, in a world where currencies are relatively stable and trade is relatively free. Singapore can grow just as well as Taiwan, from a different mix of goods, services, and agriculture. Take away currency and free trade to any significant extent, and I agree that economies fall back to a more primitive state, where notions of value tilt back towards tangible goods and services that provide immediate and obvious utility. In that world, it’s entirely possible that strategy consultants become migrant agricultural laborers!
A balance between goods, services, and agriculture seems appealing, as a hedge against international disruptions. But I don’t think it’s necessary for growth (in between disruptions).
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