What The Hell America!

Ha-Joon Chang

The decline of US manufacturing since World War II, when America had an absolutely dominant position in the world, is quite striking. In 1950, the United States accounted for 60 percent of the manufacturing output in the world. Now it’s only 16 percent. Naturally America is concerned. But I think it’s too late to turn this around in any major way.

In direct response to your question, there are countries that have managed to reindustrialize. There are two types of deindustrialization. One is deindustrialization that happens because manufacturing productivity has grown, and manufacturing goods have become cheap in relative terms.

Twenty years ago, with the money that you can buy a small efficient smartphone with today, what kind of computer could you have bought? One that was very basic. Twenty years ago, you would have had to pay, I don’t know, $2,000 to buy a decent laptop computer. These days you can get quite good ones for $300. So we are actually producing and consuming more and more manufacturing outputs, even in the advanced countries. But manufactured goods have become so much cheaper because that sector has enjoyed very significant growth in productivity.

That’s what you could call positive deindustrialization. Countries like Sweden and Finland in the 1990s and 2000 have experienced a shrinkage in manufacturing as a share of GDP. But if you recalculate using the old prices, you find that the manufacturing output has increased quite a lot.

There are also negative types of industrialization, which is what countries like Britain first and then the United States have experienced. This is where manufacturing sector declines are due to lack of investment, because of an inability to cope with the foreign competition, and so on.

This distinction is important because there are countries that have seen their share of manufacturing output decline in current prices. If you calculate it on a constant price basis, it appears as if in the 1990s and 2000s the manufacturing sector expanded and shrank by about 5 to 10 percent in the Sweden and Finland. But it actually grew by 50 percent, if you recalculate it in the old prices.

You ask whether there is a precedent of the countries regaining their manufacturing sector. And actually Sweden and Finland have just done that. For a variety of reasons in the early 1990s, these two countries experienced quite a significant decline in the share of manufacturing in their economies. In Finland, manufacturing accounted for 24 percent of GDP. By 1991, it had declined to 17. In Sweden, manufacturing as a share of GDP declined from 21 to 16 percent during the same period. But by the early 2000, Finland brought its manufacturing share of GDP back up to 24 percent, and Sweden raised its manufacturing share of GDP to 20 percent.

The same trend can be observed in Singapore. Singapore experienced quite a significant decline in manufacturing in the mid-1980s, from 27 percent to 20 percent. But by the mid-2000s, it had recovered back to 27 percent. By the way, Singapore, despite what people think, is one of the most industrialized countries in the world: in terms of per capita manufacturing output, it ranks in the top five globally. There’s an interesting myth about it being a service economy.

The most industrialized country in the world is Switzerland. You think that the Swiss are dealing in the black money from Third World dictators and selling cow bells and cuckoo clocks to American and Japanese tourists. Actually, it is literally the most industrialized country in the world, if you count in terms of manufacturing output per person.

These countries have managed to revive their manufacturing industry, and since then they have declined a bit. But the lesson here is that these countries could do that only because they had a deliberate policy to revive manufacturing. What Donald Trump is trying to do is wishful thinking. Countries that have successfully increased their manufacturing output have deliberate policies to support manufacturing. In the Swedish and Finnish case, it also extended to retraining the workers made redundant because of the decline in traditional manufacturing sectors and then turning them into workers for new industries.

Finland is the best example. It used to specialize in making pulp paper as well as metals like steel and iron. But in the 1980s and ’90s, the government had a deliberate policy to promote the electronics industry. During that period, the government made a concerted effort to restructure the economy, which involved a lot of industrial policy, a lot of retraining of workers, and so on.