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Tuesday, August 21, 2012

The widget illusion


The role of manufactures

I agree with a small element of Dani Rodrik's argument, but mostly for different reasons. Rodrik says:




This illustrates the limitations of manufacturing-focused thinking, which seems a bit out of date in today's world economy where most output is services. Agriculture and manufacturing have wilted away in the consumption of the global representative agent: to succeed in the world economy today requires prime attention upon services.

Rodrik says:




A paragraph earlier, Rodrik says:


I would point out the contradiction: "A poor country can easily compete with Sweden in .. manufactures" but earlier it was asserted that the gaps in Indian skills inhibited India's ability to compete with Sweden in manufactures.

Doing things that push skills and institutional capabilities






Foxconn has not disclosed how many workers will be displaced or when. But its chairman, Terry Gou, has publicly endorsed a growing use of robots. Speaking of his more than one million employees worldwide, he said in January, according to the official Xinhua news agency: ``As human beings are also animals, to manage one million animals gives me a headache.''


The new world of manufacturing


  • The rapid improvements in capabilities and declining costs of robots.
  • The rise of open source design coupled with 3-d printers. If a 3-d printer in the US fabricates a part close to its usage in an assembly line, while the labour-intensive design work ("services") that controls the 3-d printer is done in India, does this entail manufacturing or services work in India?


Things that might `go wrong'




In summary, I would argue that we should avoid a `widget illusion'. There is nothing special about manufacturing or industrialisation: as long as people in India get high wage jobs, this is good. Getting there requries deep integration into the world economy, which includes policy battlefronts such as:

  • Openness to the Internet
  • Use of English
  • Inbound and outbound FDI
  • Globalisation-compatible tax policy on both trade and finance
  • The absence of either protectionism or mercantalism
  • Fostering high quality human skills, and
  • Infrastructure.




  1. As someone who has worked 30 years in manufacturing and seen his own manufacturing-based industry outsourced (>80% is in Asia now), I get the impression that you don't really understand anything about how manufacturing contributes to broader economic, what the US has lost or what would be required to recover it.

    3D printing WILL NOT magically solve anything - it has no economies of scale for volume production. It CAN speed prototyping but that's not the primary problem at all!

    It's this total disconnect from reality and fact that led me to move to Asia. They "get it"; Americans do not and apparently CAN NOT. Still have my US citizen... for now.. just a matter of time IMO.

    1. Anon, I understand your points except when you say that prototyping is not the primary problem. Could you please elaborate? I thought design and prototyping is the primary problem and then assembly lines can be relatively easily created? You can probably tell that I don't belong to the manufacturing industry, but it would be nice if you would educate us on this point.

      Secondly, I found a very interesting stat on how people with less than a college diploma have faced the brunt of the recession and jobs for people with a bachelor's degree have actually increased since the start of the recession until now, in the middle of recovery. I remember that during the depths of unemployment in the last few years, unemployment in the US for those with a bachelor's degree was a not bad 4% as opposed to over 15% for those without a college diploma. As a whole, wouldn't you agree that this shift is good for the US economy in the long run? Ofcourse, there's then the issue of exploding student debt, but hopefully that can be thought of as good investment.

      The Value of a College Degree

  2. Smoot Hawley was implemented by the US, who I think had themselves the most to lose from implementing it vs Europe in the 1930s. The parallel concern should be a reversion to protectionist policies by China and India, not by the West? We do know how much of a political case can be made in India for protectionism of our own industries.

    I would request you to write more about mercantilism as well. Its unclear where the fine line is and if there are any such issues in the Indian economy (as opposed to the China). While China's exchange rate is pegged, I wonder if India's disastrous self-selected economic policies which lead to a depreciation in the rupee can be termed a perverse type of mercantilism as well. Keep the domestic economy so screwed up, that there is always a favorable labor arbitrage vs other countries.

  3. I think you are essentially arguing that people can be treated as widgets. While manufacturing looks for the cheapest, best quality widget, services looks for the cheapest, best quality people. We can discard widgets, move on to other types of widgets, but the question is, to what extent can that be done with people?

  4. India's lack of manufacturing focus and faculties reflects amply not only in its crippled and inefficient mfg segment, but also in its inability to build a decent road network or power plants to meet the electricity needs or its ability to build high-rise residential and commercial real estate or its poor waste management capacities etc. We know the outcome of CWG games after spending thousands of crores of rupees. It's not just about corruption, it is also about the skill set to build, maintain, and operate physical assets efficiently that is utterly lacking as India aspires to grow at over 7% pace. A certain amount of skilled labor and wage arbitrage powering the outsourcing market cannot be confused to an overwhelming sign of strength or success in services either. The quality of government services or IT sophistication in the domestic private sector is a case in point.

    1. Interestingly, a lot of the technology and expertise for the CWG was outsourced to foreign companies (many of them Australian), which we came to know after they complained about delays in payment. While India may claim national pride in hosting CWG, one needs to be aware of how much skilled labor is brought in from outside. IPL's production team is Australian. From what I can make out, we Indians are great at marketing and selling, but not so good at developing deep expertise and innovation - I guess the craze for MBAs points to the same hypothesis. I guess, gradually things will get picked up by us and then we'll re-export it back cheaply when the technology has been commoditized, but that by definition also means that whatever we do is not going to be high-tech but commoditized tech, just like IT services isn't necessarily high tech anymore. Even Microsoft is like a utility now. For true innovation, etc we need a critical mass of research labs, funding, vision, etc. That's unlikely to happen for another generation or two. When the leader of the country has to go outside the country for her treatment, it tells you all there is to know about "services" and skill level within the country.

  5. Good article. One think which appears to be missing from discussion is need for external payments balance.

    Any geographical region or state or country should balance its sources and use of funds – for new investments as well as for expenses. Most countries will have some need for large scale import – e.g Japan for most energy and raw materials, India for most energy, Electronic components etc. The country needs to have inflow of funds from some others sources to support the payments for imports.
    It is believed that mass scale or high quality/precision manufacturing on expertise provides net export surplus which in turn allows imports (of goods and possibly services). Conversely it is believed, that lack of good manufacturing base leads to need for substantial imports of goods, thus requiring need to generate funds from some other sources.
    Services are believed to have less capability to generate funds from outside, as most services tend to be consumed locally by local people. This is obviously untrue of IT/ITES and Tourism & Travel services. India generates huge surplus inflow from IT/ITES, Thailand generates massive surplus from Tourism and Travel. Of course, the internally consumed services are a great distributor of wealth as it employs so many, who in turn become consumers. The internal service industry in India is very huge and well developed due to local entrepreneurship though probably not very efficient.
    Agriculture produce can be another source of such surplus, provided the country can afford to export the surplus in an organized and predictable manner. Most countries find this difficult to do, due to vagaries of weather, Government policies for agriculture and agriculture produce pricing. India, with tropical background and huge production of variety of foods, can actually do a far better job in agricultural exports, if it is able reduce wastage and follow rational agriculture policies.
    Capital inflows is another way in which countries support their needs for external payments. It is assumed that capital has to be paid back, but this is not necessarily true in all scenarios. E.g. A country with excellent living and working environment, or massive growth prospects, can draw capital inflows from people and companies who want to base part of their their wealth in that country – even if they want flexibility to take it out if needed.(e.g. US ). Such near permanent inflows, if they occur for large period and in large volume, can help leverage country up on development path. In Indian context, capital inflows will almost always come with expectations of payback whether as dividends, interest, principal repatriation etc., as we have yet to establish conditions for the near permanent type of inflows (though they do occur to some extent in case of NRIs).
    A very large country like India requires both manufacturing and services. Lack of efficient manufacturing will mean (i) loosing employment opportunity in manufacturing and (ii) substantial import needs. As we have seen so far (in terms of massive current account deficits), export of services alone does not appear sufficient to meet our needs of imports (goods, energy etc.), nor employment needs.
    Smaller countries may be able to do well by having one predominant over other (e.g. East Asian countries in Manufacturing, Singapore or Israel in services), because they can orient their smaller population base for success through one of the activity to meet needs of the nation and society.
    For India, increase in efficiency and innovation is also key in both sectors (and also in agriculture), as that will generate much needed employment, which in turn helps increase the velocity of money and sustain a virtuous economic cycle.
    So it is not a question of comparing which is better from manufacturing or services, but need to lubricate the internal economic cycle and balance the external payments.
    Paresh Vora /

  6. indias lack of manufacturing focus and faculties reflects amply not just in its crippled and inefficient mfg segment, but in addition in its inability out to build a decent road network or power plants out to fulfill the electricity wants or its ability out to build high-rise residential and industrial real estate or its poor waste management capacities etc. we grasp the outcome of cwg games once spending lots and lots of crores of rupees. its not merely concerning corruption, additionally it is in regards to the talent set out to build, maintain, and operate physical assets efficiently that's utterly lacking as india aspires out to grow at over 7% pace. a definite quantity of skilled labor and wage arbitrage powering the outsourcing market can't be confused out to an overwhelming sign of strength or success in services either. the quality of government services or it sophistication within the whole domestic private sector may be a living proof. Finance BLog


