WHY INDUSTRIALIZATION

Most countries underwent a phase of industrialization on their road towards high-income status.

Some see today’s global economic environment as more challenging for industrialization, and many developing countries have deindustrialized in the past decades.

Others see rising labour costs in China as an opportunity for today’s low-income countries to attract labour intensive manufacturing. In our view, both are true, but the ability to industrialize depends to a large extent on the quality of government and of its interventions.

In our framework, we see the acquisition of new productive capabilities as the guiding principle of government intervention. Following John Sutton[1], we can subdivide capabilities into ‘technological know-how’ and ‘working practices’. Together, these capabilities allow a firm to achieve greater quality and productivity.

Examples of activities in a same classification that require very different capabilities

Industrial policy has traditionally been concerned with promoting certain sectors, often classified according to goods’ end use. However, such a classification is not straightforwardly linked to the capabilities required for producing each good. For instance, Peter Schott[1]  notes that the 3-digit ISIC category ‘Electrical Machinery’ includes both portable radios and communication satellites, two goods that obviously require very different capabilities. He finds that even within the same sectoral classification, richer countries specialize in goods embodying a higher amount of capital and technology. On a similar note, John Sutton and Daniel Trefler[2] (find that differences in quality within the same industrial category persist at the highest level of disaggregation.

But it might be misleading to link capabilities purely to technological know-how. It is likely that for the simplest manufacturing industries, such as textiles and garments, the biggest challenge for poor countries is acquiring relevant ‘working practices’, such as knowledge of the market and of how to run a mid-sized business[3]. In their Enterprise Map of Ghana, Sutton and Bennet Kpentey[4] show how Aquafresh, a Ghanaian company that originally manufactured towels and textiles, managed to mutate into a soft drink producer thanks to their well-developed working practices.

As industry develops, working practices lose relative importance in the capabilities space, and technological know-how becomes more and more predominant. Accordingly, industrial development can be seen as a process through which a country develops scarcer capabilities, which allow it to reap higher incomes[5].

[1] Peter K. Schott (2003) – “One Size Fits All? Heckscher-Ohlin Specialization in Global Production”, American Economic Review, 93(3): 686-708

[2] John Sutton and Daniel Trefler (2016) – “Capabilities, Wealth, and Trade”, Journal of Political Economy, 124(3): 826-878

[3] John Sutton (2012) – Competing in Capabilities: The Globalization Process, Oxford: Oxford University Press

[4] John Sutton and Bennet Kpentey (2012) – An Enterprise Map of Ghana, London: International Growth Centre

[5] Sutton and Trefler (2016)

Industrial policy has traditionally been concerned with targeting particular sectors, often guided by considerations on forms of complementarity between different industries such as backward and forward linkages. A capability-based approach sees the matter from a different angle: the central challenge of industrial policy is to produce goods of higher quality and at a lower cost, which necessarily embody more advanced capabilities. This involves both movements into new sectors and improvements within existing sectors.

It follows that it is in a country’s best interests to try to move into industries with longer quality ladders. In this respect, as well as in terms of the opportunities for diversification that it offers, manufacturing tends to be preferable to many primary goods industries, although by no means should a country restrict itself to just investing in manufacturing.

[1] John Sutton (2012) – Competing in Capabilities: the Globalization Process. Oxford: Oxford University Press