Dani Rodrik is Ford Foundation Professor of International Political Economy at Harvard Kennedy School. Speaking with Srijana Mitra Das in ET Evoke, Rodrik outlines crucial new ways the global economy will now develop — which don't involve 'hyperglobalisation' or export-focused manufacturing:
Q. In your new book, ‘Shared Prosperity in a Fractured World’, why do you see ending poverty, boosting the middle class globally and tackling climate change as three interlinked challenges?
A. They are related because many of the policies we undertake at one front have important spillovers into the other agendas. For instance, advanced countries trying to protect their middle classes through trade restrictions have an effect on poverty reduction in developing countries that may be trying to export. Similarly, policies to decarbonise may have adverse implications for prospects of industrialisation in low and middle-income countries. So, an important objective of my book is to present an agenda where we can avoid such cruel trade-offs and pursue policies that can mutually benefit all three of these very important goals.
Q. Why do you emphasise services — and not manufacturing — will be the new motor of the global economic system?
A. That is just an acknowledgement of reality. A lot of my research focused on the advantages of industrialisation and how the promotion of manufacturing was critical historically to all important instances seen of growth and development. However, it has become clear, looking at the evidence from the last couple of decades, that the nature of manufacturing industries has changed significantly today — manufacturing is no longer a labour-absorbing sector for even low-income countries, especially the kind of work that could propel you into middle-income and higher levels because that requires participation in global value chains and building up technological and infrastructural capabilities many low-income countries do not have.
So, even when countries are successful in plugging into certain segments of value chains, we see how they tend to get stuck there and this does not diffuse or create broader linkages and upgrading which earlier generations of industrialisers experienced. The data tells me no countries going for-ward will be able to produce the kind of manufacturing jobs in the numbers and quantities that countries in East Asia or older advanced economies did. Hence, when we ask, how can we increase the productivity of workers in the jobs they are going to have, that’s mostly going to be in services — the real challenge of development here onwards will be finding ways of increasing productivity in labour-absorbing services.
Q. These are profitable avenues for capital but what could make services truly equitable for the people who actually work them?
A. The good news is many ser-vices are going through a produc-tivity revolution — that has been enabled, on the one hand, by new digital technologies and platforms that have significantly increased productivity in retail, delivery and personal services. There have also been many organisational innovations here — for example, retail services are delivered through discount chains that can cut overheads and have much better inven-tory management, again, using new digital technologies and reaching larger mass mar-kets at lower prices. When you look closely at grocery stores, food services or retail and delivery, you find measured productivity increas-es that are quite significant — for example, in the United States, productivity growth in the last 15 years in these services outpaced manufacturing. So, the old idea that services are stagnant and don’t experience productivity growth is no longer true. The same process has been taking place in India as well.
Many studies show how produc-tivity growth in local consumer services in India has been rising quite rapidly — these jobs are in fact behind India’s rapid growth in recent decades. India is a case where growth has not been driven by industries or manufac-turing — it has been driven by services and that too, not very high-value, skill-intensive services like IT, BPOs, finance or banking. Those face constraints because they require skilled workerswhereas India has many relatively less educated workers — hence, when there is productivity growth in these middle-class services or local consumer services that can generate a lot of jobs, that’s very good news for development. These nascent trends in technology and organisational innovation suggest pro-ductivity growth is certainly possible in these services — but it will require poli-cies to ensure that these benefits can be reaped and generalised. What we have seen so far, say, in food delivery or retail, is platform companies essentially reap-ing the majority of the gains on profits from innovation. Therefore, it’s very important for countervailing forces, whether that is government regulation, competition policy or the voice of workers and bargaining power, to ensure produc-tivity gains are distributed widely.
Also, we need a version of industrial policy that is much more geared towards services. Often, government officials ask manufacturing companies — what do you need to invest or expand? We need the same kind of collaboration now with retail chains, platforms, local companies and entrepreneurs in services to provide them with the public inputs they need to expand and generate more productive employment.
Q. Are you hope-ful about the prospects of AI in a services-based economy?
A. A I has an advantage which is unlike earlier waves of technological innovation, such as auto-mation, robots and computing — it need not
directly replace workers. When you install robots in a factory, they’re basically meant to displace workers, so they are directly labour-displacing. In contrast, AI essential-ly enables all workers to take advantage of its accumulated knowledge and experience of the frontier. So, in principle, it can greatly benefit less skilled, less experienced, less educated workers. That’s the upside — but I don’t think it’s automatically the way AI is used and will be deployed for the benefit of society at large. Maintaining a certain degree of social and political control over the direction of AI and how it is deployed is very important — and there, we have a lot of question marks.
Q. It’s commonly thought China’s economic success relies most heavily on manufacturing — what would an enormous shift to services imply for it?
A. Even in China, we now have a significant shift taking place — China has been losing employment in manu-facturing now for more than a decade. We have tens of mil-lions of fewer workers in manu-facturing in China compared to two decades ago. China was an outstanding example in his-tory though, the most signi-ficant instance of growth dri-ven through industrialisa-tion, particularly export-ori-ented — I just don’t think any
other country in the future will be able to replicate anything like that. The most imp-ortant lesson to derive from China is that you need its judicious combination of market forces and state guidance to ensure you’re positioning your economy for productive upgrading. If you look at China and take the lesson that you should pour all your resources into industrial-isation and promote manufacturing towards exports, that is the wrong lesson going foward.
Q. Are you hopeful for India, given its services revolution today?
A. India’s services revolution is very important. It’s a very inspiring example for other nations.
Q. Can you also share your argument on the middle class globally boosting democracy?
A. It’s an idea that goes back to the ancient Greeks — you cannot have a broadly participatory and democratic society without a large middle
class. Both common sense and historical evidence point in that direction — when incomes and wealth get polarised between the very rich and very poor, the very rich don’t have any interest in sharing power and the very poor are not interested in main-taining any rules of the game. So, you have political instability, polarisation and many of the ills that our societies and polities are facing today.
The erosion of our democracies, cer-tainly as seen in the West over the last few decades, is the result of the decline of the middle class — and the much heightened economic insecurity the middle class is facing because of the results of globalisation, automation and technological change, policies of austerity and so forth.
There are similar problems in middle-income countries as well, where there isn’t necessarily have a long history of democratisation but very economically insecure lower-middle classes. It’s much easier for strongmen or demagogues to appeal to them and point to supposed ‘enemies of the people’ to mobilise mass political support.
Q. Your earlier work became known for your idea of the ‘trilemma’ of the world economy, starting in the heyday of globalisation. How do you see that in today’s Trumpian world?
A. The trilemma was a useful framework to understand how we got here. I think our current crisis is, in many ways, the result of not having recognised the trade-offs the trilemma posed, namely that if you’re simultaneously trying to push for deeper integration and hyperglobalisation, without significantly strengthening the democracy of global institutions and their governance, then ultimately, that democracy will suffer at home. That’s what we see today. Now, essentially, different countries are going very different ways. China is pushing on its globalisation strategy without particularly caring about democracy at home. Democracy is suffering very badly in the United States and in parts of Europe. It’s not just that we pushed back on hyperglobalisation — democracy has taken a hit as well and that’s the tragedy of not having paid attention to the trade-offs implied by that trilemma.
Views expressed are personal
