Manufacturing increases income status but when income status peaks, manufacturing takes a dive. Why?
The decline of manufacturing causes concern in many developed countries, from Japan to Singapore to Canada to France. Australia’s former prime minister, Kevin Rudd, famously declared that he didn’t want to live in a country which didn’t make things.
The latest manufacturing data from the World Bank puts these worries into perspective. As a proportion of GDP, manufacturing output is falling in almost every developed country. As the Brookings Institution’s Barry Bosworth put it in 2013: “Once your income reaches a certain level, you’re going to see your manufacturing share go down.”
The reason? “… productivity in the manufacturing sector is faster than it is in the rest of the economy, so to produce the same share of GDP, you need a smaller share of the workforce.”
The past decade’s figures show a new manufacturing decline in parts of South-East Asia. Manufacturing’s share has fallen in both Malaysia and Indonesia, and plummeted to below 20 per cent of the Singaporean economy as plants have moved to China.
Yet Chinese manufacturing peaked as a share of its GDP back in 1980, more than 30 years ago. It has fallen for most of the time since then. Manufactured goods keep getting cheaper and, with rising incomes, the Chinese have started consuming services, too.
“Chinese manufacturing peaked as a share of GDP back in 1980.”
Australian manufacturing’s share of GDP also peaked some time well before 1990, and in the past 20 years or so its manufacturing value-added as a share of GDP has dropped from about 15 per cent to just over 7 per cent. But that decline is of the same order as other developed economies, although Australia started from a lower base.
It’s not that the world is making less stuff; it’s that we can make more stuff more cheaply than ever before.
A few countries have bucked the trend. German manufacturing has contributed about 22 per cent of the German economy for two decades now. And South Korea’s manufacturing sector has actually grown faster than the national GDP for five decades straight, fuelled most recently by technology successes such as Samsung.
The biggest manufacturing surge of all, though, has come from lower-income nations, from Thailand to Bangladesh to Nicaragua. So doing more manufacturing is a great way to get from low- to middle-income status. It’s just not a very common way to stay rich.
This article is from the June issue of INTHEBLACK.