Industrial Shift: The Structure of the New World Economy

The Structure of the New World Economy

J. Atikian

• Publisher: Palgrave Pivot
• Year: 2013
• Print ISBN: 9781137342263
• eBook ISBN: 9781137340313
• Topic: Business
• Subtopic: Business General
• Index: Business

In a turbulent global economy, the popular idea of declining farms and factories is largely unfounded. UN and World Bank data show growing output everywhere, but it remains hidden by the faster-growing service sector. Engineers, programmers, surgeons, and pilots make up an increasing share of what is actually the service sector, showing that this sector is not in decline. There is no doubt that industries are shifting, but how does it all add up?Quantifying these technology-driven shifts is fundamental, yet such publication has lagged for years, with stale ideas about what makes a healthy economy persisting since the 1940s. In this new work, Atikian gives us a freshly updated overview countering our tired assumptions about off-shoring, low wages, and industrial decline and providing us with...some fact based confidence in the economy.

1

Introduction

Abstract: Are food and goods “no longer made here”? Increased trade makes it seem so: India 1960s, Japan 1970s, China 1980s, Russia 1990s. Globalization and employment shifts bring fear of Western decline. The shift from farms to factories reinforces the fear, although economic data showing their growth seem to be ignored. The service sector grows much quicker and gives the illusion of decline in the other sectors.

The most advanced economies have the smallest share of GDP in agriculture, even while they grow ever more food. They also have the highest incomes.

Countries with less advanced technologies grow by shifting to manufacturing. Wealth grows slowly at first, but increases rapidly as they shift further from agriculture. The same pattern takes place in most countries around the world.

Key words: industrial shift; industrial structure; manufacturing sector; productivity; service sector

Atikian, Joe. Industrial Shift: The Structure of the New World Economy, New York: Palgrave Macmillan, 2013.
DOI: 10.1057/9781137340313.

The entire world economy seems to be undergoing another rapid, fundamental shift. A recent series of monumental changes within some of the world’s largest nations has heightened the attention on the structure of their economies. India’s green revolution of the 1960s turned the country from a dependence on food imports to a net exporter. In 1980 China regained America’s Most Favored Nation (MFN) status in trade, and has since vaulted toward superpower status. The Soviet Union collapsed in 1990 and turned its closed trading system outward. Japan’s economy, though nearly stagnant since 1991, has greatly increased foreign investment in a bid to offset the effect of a highly valued yen. Finally, Europe saw a reunified Germany, and built a major currency union.

A defining feature in this cluster of events is an increase in global trade enabled by liberalized treaty regimes—the GATT and WTO. Meanwhile, this trend toward increasing global trade has added to existing worries within some of the major Western economies that they are losing capacity and skills in agriculture, and, especially, in manufacturing. One increasingly popular viewpoint has it that ‘food and goods are no longer made here’. But, is it true?

GDP is certainly growing in most countries, so if food and goods are made elsewhere, then where does growth come from? Only three sectors exist: agriculture, manufacturing, and services, so if manufacturing is in decline, then which sector drives GDP growth? Agriculture never springs to mind as a growth driver, so by elimination, growth must be driven by services. But the services sector supposedly offers low value, low pay, and low productivity growth. So where does growth come from? Contrary to popular perception, neither agriculture nor manufacturing is in decline.

The widely publicized loss of family farms is real, and it reinforces the anxiety about feeding a growing world population. Meanwhile the ongoing loss of manufacturing firms gets extensive media coverage, and creates political pressure to protect affected industries from declining output and employment. But the loss of farms and factories turns out to be only half of the story. Small farms are indeed declining in Western countries, but their operations merge and continue producing. Textile manufacturers close or move overseas, but in their place, makers of aircraft and medical instruments arise. Jobs are lost but they are also gained; the broader issue is how these add up. China stands virtually alone as the emblem of shifting industrial structure, and has become a prime target of American angst about job losses. But, contrary to popular opinion, the general trend in US unemployment has improved as trade with China grew, even with a rising trade deficit. Some of the signs are contradictory, so rather than relying on a loose impression of these important industrial shifts, a fuller view of the economy’s overall condition demands an understanding of both losses and gains.

As the global economy evolves, each country shifts its focus between farms, factories, and offices. These shifts in the composition of GDP have been widely recognized since at least the 19th century. Everyone sensed that manufacturing played an increasingly important role compared to farming, but change was slow and international data were scarce. Policy decisions relied on crude estimates or strictly political judgment. The past 40 years have brought a revolution in data reporting that not only confirms the suspected trends, but reveals several surprising developments. Most countries around the world have continued to decrease their economic concentration on agriculture. Meanwhile the other two sectors and overall economic output continued rising. Today, only the Least Developed Countries still rely heavily on agriculture. Conversely, the most highly developed countries have nearly eliminated agriculture as a significant contributor to GDP. But most surprisingly, manufacturing is no longer the best indicator of growing national wealth.

Further discoveries arise in the patterns underlying this structural shift. Only the most industrially advanced countries have, for the first time in history, stabilized the share of agriculture in their economies at a very low level. For these advanced countries, the relative size of their farming sector tends to fall gradually, and in many cases stops at a mere 2%. Among countries nearer the beginning of their industrial transition, those that shift very quickly away from agriculture achieve the highest GDP per capita growth rates. Of course, this implies that countries with a slower shift in industrial structure are prone to suffer slower growth in GDP per capita. In general, the speed of technological progress is a good indicator of advances in wealth and living standards.

A less obvious feature is that the amounts of agriculture and wealth have a contrary relationship. In a less advanced economy, one that relies heavily on agriculture, wealth at first grows slowly with industrial progress. So, large shifts away from agriculture come with small increases in wealth. Farming may seem like a trap, as the gains from shifting away are small and risky. As the nation’s industry advances though, wealth rises more rapidly with each step away from agriculture. Finally, the agricultural share settles to a low and stable level while wealth continues to rise. At this point, manufacturing may stabilize its share of GDP, or even begin to decline. In this most advanced state, the real output (not the share) of the three major industrial sectors keeps growing and improving.

Notwithstanding the general decline in the agricultural share of GDP, this sector is neither technologically stagnant nor shrinking in absolute output. Productivity remains high and continues to improve. Even as the agricultural share steadily declines, this sector’s total real output continues to grow worldwide, outpacing population growth by a wide margin.

The same transition path applies to economies of all sizes, and closely resembles the path of entire regions, and even the whole global economy. Some aspects of these broadly based patterns suggest that poor but progressing countries are on a similar economic path to that previously experienced by wealthier countries. The recent shift in manufacturing capacity to Asia shows this most clearly. So although the slow rise in wealth can be disappointing in the early phases of development, an increasingly rapid rise seems likely.

In the 1940s economists thought that there were limits to concentration within the three main industrial sectors. It seemed clear that there should be a limit to the share of services in GDP, at least because services were difficult to trade, but also because a country was thought to depend crucially on growing its own food and manufacturing its own tangible products. The ensuing decades of data showed that this was not to be the case. It turned out that services could be as easily traded as hard goods. For example, engineering services can be conducted by overseas firms, and the resulting calculations communicated electronically. Tourism, banking, technical support, and many other services are now routinely traded, facilitated by computers, the internet, and low-cost air travel. These might have been difficult to imagine in the 1940s, and their existence today shows that prediction should be approached only with great caution.

One of the clearest trends over the past four decades is the settling of agricultural concentration to a plateau of about 2% of GDP in the advanced economies. The data are consistent across many countries, tempting observers to declare a natural limit, below which the share of agriculture will not fall. In another clear trend, global manufacturing has remained at a stable share of GDP over the same period, although rising in some regions and falling in others. But just as it was once impossible to foresee the international trading of services, it is now difficult to imagine a successful economy with a declining share of manufacturing. Even though such a change might be unsettling, there is no necessity that an advanced country’s industrial structure keeps shifting along a steady path of rising manufacturing share. That’s because for most countries at most times, their economy is not a closed system. There is usually interaction with other countries through trade. That means that one country’s structure can shift in reaction to changes in other countries. So for example, as China’s manufacturing sector grows, its enormous size will affect other economies. Others can transfer manufacturing to China, and focus increasingly on services. And this can go on for a long time, even to the point where there is near total specialization, such as China focusing on manufacturing, and the US focusing on services.

Eventually though, the logic of industrial shift will see those newly transformed countries change yet again. The process of specialization within a more mature economy followed a path such that it shifted focus from agriculture to manufacturing to services. That was because people do not sit idly and replicate agricultural systems without improvement; nor do they manufacture products in the same way generation after generation. Instead they seek product improvements and process efficiencies, which feed the shifts into other sectors. Likewise, a manufacturing focused China will seek to improve its processes and products, which involves specialization and transferring many activities to its own services sector. This can include transferring several traditional activities out of manufacturing firms and into services firms that specialize in areas such as administration, maintenance, transportation, or warehousing.

As these changes proceed, a backlash can develop against the trend. Currency values may rise in manufacturing economies, driving production back to traditional locations. Transportation costs may rise with oil prices, having a similar effect. In past episodes of rising globalization, the trend had reversed itself due to political pressure. Public opinion often turned against expanded trade, resulting in import restrictions and other actions that were seen to encourage domestic industries. This line of thinking is still held today, and it may grow sufficiently popular to suppress the West’s shift away from manufacturing. Alternatively, it may turn out that China’s economy grows far larger than America’s in the coming decades, providing an outlet for ever rising American services exports. So instead of the grim vision of a declining Western world, a resurgent East can be a new growth opportunity. Over the past twenty years, about 30% of US export activity was made up of services, including R&D testing, engineering, architecture, insurance, finance, and business management.¹ There seems to be no reason that services cannot become a majority of a country’s export economy, especially to the burgeoning population centers such as China, India, and Brazil.

The great industrial shift since about 1900 was the drastic reduction in agriculture as a share of the world’s total output. With new technologies and rising productivity, industry changed its basic character and composition as farms gave way to factories. Even though manufacturing output continues to grow, the new shift is that manufacturing is no longer a rising share of most of the advanced economies; nor is it a rising share of the entire global economy. This constitutes a major step toward the new world economy.

Note

1U.S. Department of Commerce, Bureau of Economic Analysis, International Economic Accounts, Trade in Goods and Services 1992–present. http://www.bea.gov/international/index.htm#trade. Also detailed statistics for cross-border trade: Trade in services 1999–2011. http://www.bea.gov/international/international_services.htm. Accessed January 5, 2013.

2

What Is Industrial Structure?

Abstract: The term “industrial structure” can be used in a few ways. This chapter lays out a straightforward description of the term as a classification of the three main economic activities: the agricultural, manufacturing, and services sectors. A pivotal concept is defined: the share of each sector in GDP. As the services sector grows, the other sectors appear to shrink. This shift is, of course, merely in the relative size of each sector, and not necessarily a decline in real output.

Through this discussion, it becomes apparent that the supposed decline in manufacturing is partly a mere artifact of the data reporting system. This helps to plant the idea that the popular image of decline does not accurately reflect the working economy.

Key words: industrial

Atikian, Joe. Industrial Shift: The Structure of the New World Economy, New York: Palgrave Macmillan, 2013.
DOI: 10.1057/9781137340313.

Extract, transform, deliver

Industry produces many of the goods and services that people in modern societies want and need. Although people also have non-economic needs such as families, social connections, and freedoms, these are not produced, traded, stockpiled, or priced in a systematic way. So economic products are a distinct category that people concern themselves with, the products of an industrial system.

Industrial structure describes the composition of a country’s economic activity, the production of human material provisions. Industries are usually categorized into three basic types according to their stage within the production process, or the type of value being added to a natural resource.

Primary industries are called extractive, as they add value by removing raw materials from the natural setting. This category includes agriculture, fishing, forestry, and hunting; it uses the main biological resources in the natural world. The main resources extracted by these industries are continually cycled through plants and animals, including carbon from the air, all forms of water, and minerals from the soil. Some people view agriculture as a major exporter of water, as well as a consumer of soil, which confirms the extractive aspect of the category.

Some confusion exists about the relation of farming and food in this category. Because farms can supply many other industries as well as consumers, their products are most often tallied before being processed. Apples sold to consumers count as farm produce, but apple pies count as a manufactured product. In a related example, a farm can grow cotton, which is used to produce t-shirts, but only the cotton is counted as a farm product. The end result is that in the US for example, farm output is about 2% of GDP, whereas the ‘food and fiber’ sector that uses farm products makes up about 16% of GDP.

Secondary industries involve transforming raw materials into usable products. These are the manufacturers, many of which are classified as intermediate industries if they make products for other industries. For instance, steel makers never sell their products directly to consumers, so they fall into this intermediate class. Within the handful of systems used to categori...

Table of contents

• Cover
• Title
• 1  Introduction
• 2  What Is Industrial Structure?
• 3  Global Status Quo
• 4  Speeding Up, Slowing Down
• 5  Power Shift: East and West
• 6  Power Shift: North and South
• 7  Isolated Islands
• 8  Farms and Factories
• 9  Where the Jobs Are
• Appendix A
• Appendix B
• Appendix C
• Bibliography
• Index