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Levelling out the lumps

Written by Simon Maxwell

Manufacturing offers the possibility of explosive growth and rapid reductions in poverty – but is lumpy in products, space and time, and therefore a difficult option for the poorest countries. These are the main messages of the new Industrial Development Report, ‘Breaking In and Moving Up’, launched in London by the United Nations Industrial Development Organization (UNIDO) on 23 February.

What does ‘lumpy’ mean? That manufacturing is increasingly broken down into different tasks, rather than being vertically integrated, so that different components are made in different places (lumpy in products). That manufacturing enterprises are attracted into clusters, which offer firms external economies (lumpy in space). And that manufacturing is difficult for late-comers who cannot immediately capture the benefits of existing agglomerations and clusters (lumpy in time). This poses a challenge to the ‘bottom billion’ countries who find it hard to overcome barriers to entry in manufacturing; and a challenge to middle income countries, who need constantly to upgrade.

Solutions? Special Economic Zones to provide a boost to industrial clusters, aid for trade, investment in education and skills, support for technology, and, perhaps surprisingly, rapid urbanisation to benefit from the lower transaction costs and higher productivity characteristic of large agglomerations.

Most of this makes sense. This IDR is strategic, analytical, research-based and well written. It carries the hall-mark of its principal author, the noted academic and noted communicator, Paul Collier, author of the Bottom Billion. Like the best of its kind, UNDP’s first Human Development Reports or the World Bank’s World Development Reports on poverty, the IDR offers its host agency a transformative vision and mission, which can inspire profound organisational change. UNIDO’s Director General, Kandeh Yumkellah, shows every intention of using the Report in this way.
Good. But there are some issues to think about. In my comments at the launch, I made four points.

First, advocating more support for manufacturing necessarily implies less support for something else. Presumably that means less for agriculture – a brave position when last year’s food price crisis is still fresh in people’s minds, and when scientists and policy-makers are asking how 9 million people can be fed by 2050. Rural development specialists normally argue that agricultural growth has a larger impact on poverty than industrial growth. Does UNIDO think that higher rates of growth in manufacturing outweigh stronger poverty linkages in agriculture? Or can they be persuaded that balanced growth is desirable?

Second, there is strong evidence that manufacturing growth can be of greater or lesser benefit to the poor, depending on linkages to the rest of the economy, the strength of labour law, the quality of health and safety legislation, and the behaviour of businesses in terms of corporate social responsibility, partnerships with local communities, and supply chain management. Critics like Naomi Klein or Noreena Hertz have made an eloquent case against sweat shops and battery farm call centres. The UN’s Global Compact lays down basic principles on how to do better. The ILO has a ‘decent work’ agenda. ODI has contributed a wealth of ideas on business partnerships, supply chain management and growth with equity. Put these together, and it becomes clear that it is the right sort of manufacturing and business enterprise that needs to be fostered.

Third, manufacturing in general and clusters in particular are attractive but risky. Exposure to sudden falls in demand or price can put jobs, firms and entire local economies at risk. In the UK, for example, the industrial clusters which drove prosperity from the mid-nineteenth to the mid-twentieth centuries disappeared rapidly during the deindustrialisation period after World War II. The current crisis has thrown up similar challenges, from China to the OECD. Schumpeter talked of ‘creative destruction’, a two-edged sword. Climate change may further sharpen the blade. What price manufacturing on a global scale when carbon is priced at £100 or £150 per ton? And what measures should be put in place to mitigate the welfare consequences of downside risks?

Finally, making it happen remains a challenge, not least in the poorest countries. The Report speaks warmly of Special Economic Zones and tax incentives, and of trade access to developed country markets, but has little to say about a debate which concerns many in this field, namely the value of infant industry protection. Hae Joon Chang is one outspoken and controversial analyst who has made the point that a strong industrial policy, often behind tariff barriers, has been a notable feature of manufacturing growth in countries from Finland to Japan. ODI has a strong programme on industrial policy. The IDR appears shy of taking sides on this issue.

Flagship Reports inevitably simplify. In so doing, they choose between competing narratives. In this case, UNIDO has declared in favour of globalisation and trade, against economic nationalism and local self-sufficiency. It has made the case for industry, possibly at the expense of agriculture. And it has chosen to focus on policies which promote growth, rather than, say, on policies which improve the fairness of labour markets or which encourage social enterprise. A transformative narrative, to be sure, and one which will stand UNIDO in good stead; but also one with potential for further development in the years ahead.