Great post, thanks for taking the time to put this together.
One thing I would add on to your argument in Section 4 is the work of Gollin, Jedwab, and Vollrath (blog, paper) on “urbanization without industrialization.” What they document is that there are essentially two types of urbanization—resource-led and industrialization-led. In the former, you see a higher share of the population going into low value-added services, what they call “consumption cities”. This is especially true in much of Sub-Saharan Africa, with the result being rapidly growing cities without the historically observed rise in living standards or productivity. There’s also a related story here with work by Gelb, Meyer, Ramachandran, and Wadhwa on African labor costs and manufacturing, which argues that there’s been limited manufacturing in the continent, outside of Ethiopia, in part because labor costs are already too high to compete with SE Asia and elsewhere.
You mention India and China—I think comparing the two provides about as close as you can get to a natural experiment comparing manufacturing-led growth and services-led growth. Starting from a similar baseline in 1990 (which itself is instructive in just how bad the License Raj was given the Great Leap Forward and Cultural Revolution, but that’s a separate point), the divergence in GDP per capita is stunning. Bangladesh overtaking India and Pakistan over the past decade is also I think an instructive case in the value of an effective manufacturing-led growth strategy.
This low growth urbanisation is heartbreaking to see first hand. Here in gulu city, Northern Uganda crime is skyrocketing as young men flood into the city without job or educational opportunities
Don’t have much productive to offer, but this is a fantastic article Karthik she a great comment Jeffery!
Interesting stuff, thanks for adding. I never know what to do with natural resources in the economic development story, so I usually just leave them out, but of course they can have negative effects like this. And yes, labor costs are important.
Yeah, I think trying to account for the dynamic effects of a significant natural resource endowment is not always easy, and neither is successfully making the transition from exporting unprocessed resources to doing more processing and other activities further up the value chain domestically.
That being said, I do think the China-West decoupling is an opportunity for some countries to start making that transition, especially places rich in critical minerals. And the same can be said with regard to the nearshoring/friendlyshoring trend in manufacturing.
Another note on the struggle to industrialise in Africa is this paper (2023) - suggesting that manufacturing firms fail to scale due to lack of labour specialisation which appears to be driven by demand for more personalised goods. In other words, the goods demanded hinder economies of scale and talent leveraging. I haven’t read the whole paper and I’m not sure why Africa (Uganda was the country studied) in particular is different, but it seems interesting.
This is a whole topic in the next post! I think the authors’ interpretation is probably wrong. There’s no clear reason why demand for more personalized goods would be different in Uganda, you’re right—my suspicion is that the root cause is the small size of the output market. The authors document that each firm sells to a very small output market, and one possible consequence of that is that firms don’t see any benefit to task specialization, because the benefits of specialization increase with the scale of goods you are selling. If you can only sell to a small number of people, then selling them personalized goods could be a way to get the maximum revenue out of this small market. Thus, firms would choose not to specialize even if there were no barriers to specialization.
The main evidence they provide for why personalized demand is the cause is that specialization is larger in grain milling, where grain is a homogeneous product. But grain is also more easily traded, so the output market is larger, which means their evidence is totally consistent with small output markets as the cause of low specialization and firm growth.
Small output markets are a problem everywhere but especially in Africa because transportation costs are higher than in other developing countries (this is something I’ve heard dev economists say casually a lot, but I’ve never seen an explicit citation).
Great post, thanks for taking the time to put this together.
One thing I would add on to your argument in Section 4 is the work of Gollin, Jedwab, and Vollrath (blog, paper) on “urbanization without industrialization.” What they document is that there are essentially two types of urbanization—resource-led and industrialization-led. In the former, you see a higher share of the population going into low value-added services, what they call “consumption cities”. This is especially true in much of Sub-Saharan Africa, with the result being rapidly growing cities without the historically observed rise in living standards or productivity. There’s also a related story here with work by Gelb, Meyer, Ramachandran, and Wadhwa on African labor costs and manufacturing, which argues that there’s been limited manufacturing in the continent, outside of Ethiopia, in part because labor costs are already too high to compete with SE Asia and elsewhere.
You mention India and China—I think comparing the two provides about as close as you can get to a natural experiment comparing manufacturing-led growth and services-led growth. Starting from a similar baseline in 1990 (which itself is instructive in just how bad the License Raj was given the Great Leap Forward and Cultural Revolution, but that’s a separate point), the divergence in GDP per capita is stunning. Bangladesh overtaking India and Pakistan over the past decade is also I think an instructive case in the value of an effective manufacturing-led growth strategy.
This low growth urbanisation is heartbreaking to see first hand. Here in gulu city, Northern Uganda crime is skyrocketing as young men flood into the city without job or educational opportunities
Don’t have much productive to offer, but this is a fantastic article Karthik she a great comment Jeffery!
That’s sobering, I’m glad to hear the human side of it.
Interesting stuff, thanks for adding. I never know what to do with natural resources in the economic development story, so I usually just leave them out, but of course they can have negative effects like this. And yes, labor costs are important.
Yeah, I think trying to account for the dynamic effects of a significant natural resource endowment is not always easy, and neither is successfully making the transition from exporting unprocessed resources to doing more processing and other activities further up the value chain domestically.
That being said, I do think the China-West decoupling is an opportunity for some countries to start making that transition, especially places rich in critical minerals. And the same can be said with regard to the nearshoring/friendlyshoring trend in manufacturing.
Another note on the struggle to industrialise in Africa is this paper (2023) - suggesting that manufacturing firms fail to scale due to lack of labour specialisation which appears to be driven by demand for more personalised goods. In other words, the goods demanded hinder economies of scale and talent leveraging. I haven’t read the whole paper and I’m not sure why Africa (Uganda was the country studied) in particular is different, but it seems interesting.
This is a whole topic in the next post! I think the authors’ interpretation is probably wrong. There’s no clear reason why demand for more personalized goods would be different in Uganda, you’re right—my suspicion is that the root cause is the small size of the output market. The authors document that each firm sells to a very small output market, and one possible consequence of that is that firms don’t see any benefit to task specialization, because the benefits of specialization increase with the scale of goods you are selling. If you can only sell to a small number of people, then selling them personalized goods could be a way to get the maximum revenue out of this small market. Thus, firms would choose not to specialize even if there were no barriers to specialization.
The main evidence they provide for why personalized demand is the cause is that specialization is larger in grain milling, where grain is a homogeneous product. But grain is also more easily traded, so the output market is larger, which means their evidence is totally consistent with small output markets as the cause of low specialization and firm growth.
Small output markets are a problem everywhere but especially in Africa because transportation costs are higher than in other developing countries (this is something I’ve heard dev economists say casually a lot, but I’ve never seen an explicit citation).