You	could	say	that	Equatorial	Guinea	has	been	destined	for	obscurity.	It	is	the	smallest	country	in
mainland	Africa	in	terms	of	population,	with	just	over	700,000	people.	It	is	also	a	minnow	in	terms	of
landmass	–	the	sixth	smallest.1	Who	is	going	to	notice	such	a	small	country?	To	add	insult	to	injury,
there	are	no	less	than	five	other	countries	with	very	similar	names	–	not	just	Guinea	and	Guinea
Bissau	in	its	neighbourhood	but	also	Papua	New	Guinea	in	the	Pacific	and	Guyana	and	French
Guiana	in	South	America.
However,	if	Equatorial	Guinea	remains	one	of	the	most	obscure	countries	in	the	world,	it	is	not	for
lack	of	trying.	It	is	the	richest	country	in	Africa,	with	a	per	capita	GDP	of	$20,703,	as	of	2010.	Over
the	last	couple	of	decades,	it	has	been	one	of	the	fastest-growing	economies	in	the	world.	Between
1995	and	2010,	its	per	capita	GDP	grew	at	the	rate	of	18.6	per	cent	per	year	–	more	than	double	the
rate	in	China,	the	international	growth	superstar,	which	grew	at	‘only’	9.1	per	cent	per	year.
Honestly,	what	more	can	a	country	do	to	get	some	attention?	Invade	the	US?	Make	Scarlett
Johansson	the	president?	Paint	the	whole	country	pink?	The	world	is	really	unfair.
Economic	Growth	and	Economic	Development
Economic	development	as	the	development	of	productive	capabilities
If	Equatorial	Guinea	has	grown	so	much	faster	than	China,	why	have	we	not	heard	of	the	‘Equatorial
Guinean	economic	miracle’,	when	we	hear	about	the	‘Chinese	economic	miracle’	all	the	time?
The	difference	in	size	is	one	reason	–	it	is	possible	to	ignore	very	small	countries,	even	if	they	are
doing	very	well.	But	most	people	do	not	take	Equatorial	Guinea’s	phenomenal	income	growth	seriously
mainly	because	it	is	due	to	a	resource	bonanza.	Nothing	about	the	country’s	economy	changed	other	than
finding	a	very	large	oil	reserve	in	1996.	Without	oil,	the	country	would	be	reduced	to	one	of	the	poorest
in	the	world	once	again,	which	it	used	to	be,	as	it	cannot	produce	much	else.2
I	am	not	saying	that	all	growth	experiences	based	on	natural	resources,	such	as	oil,	minerals	and
agricultural	products,	are	like	that	of	Equatorial	Guinea.	The	economic	growth	of	the	US	in	the	nineteenth
century	benefited	hugely	from	abundant	natural	resources,	such	as	agricultural	products	and	minerals.
Finland,	exploiting	its	position	as	a	country	with	one	of	the	world’s	most	abundant	forestry	resources,
relied	heavily	on	logging	for	its	exports	well	into	the	twentieth	century.	Australia’s	growth	still	depends
critically	on	mineral	exports.
What	makes	Equatorial	Guinea	different	from	those	other	cases	is	that	its	growth	has	not	been	achieved
through	an	increase	in	its	ability	to	produce.	The	US	provides	the	best	contrast.3	In	the	late	nineteenth
century,	the	US	was	not	only	rapidly	becoming	the	most	powerful	industrial	nation	in	the	world	but	was
also	the	world’s	leading	producer	of	almost	all	commercially	relevant	minerals.	But	this	status	had	not
been	achieved	simply	because	the	US	was	in	possession	of	a	lot	of	mineral	deposits.	It	was	in	large	part
because	the	country	had	developed	impressive	capabilities	to	locate,	extract	and	process	minerals
efficiently;	until	the	mid-nineteenth	century,	it	had	not	been	a	world-leading	producer	of	any	mineral.	In
contrast,	Equatorial	Guinea	not	only	cannot	produce	much	else	than	oil,	it	does	not	even	possess	the
ability	to	produce	oil	itself	–	its	oil	is	all	pumped	out	by	American	oil	companies.
While	it	is	an	extreme	example,	Equatorial	Guinea’s	experience	powerfully	illustrates	how	economic
growth,	that	is,	the	expansion	in	the	output	(or	income)	of	the	economy,	is	not	the	same	as	economic
development.
There	is	no	universally	agreed	definition	of	economic	development.	But	I	define	it	as	a	process	of
economic	growth	that	is	based	on	the	increase	in	an	economy’s	productive	capabilities:	its	capabilities	to
organize	–	and,	more	importantly,	transform	–	its	production	activities.
An	economy	with	low	productive	capabilities	cannot	even	be	sure	of	the	value	of	what	it	produces
When	an	economy	has	low	productive	capabilities	and	relies	on	natural	resources	or	on	products	that
are	made	with	cheap	labour	(say,	cheap	T-shirts),	it	does	not	just	earn	low	income.	It	cannot	even	be	sure
that	in	the	long	run	what	it	produces	will	be	as	valuable	as	it	is	now.
Machines	wiping	out	entire	professions	is	such	a	recurring	theme	in	economic	development	that	it	does
not	need	further	discussion.	Just	think	of	the	professions	that	have	disappeared	except	in	name	today,	such
as	weavers,	smiths,	wheelwrights	and	so	on.
More	importantly,	countries	with	superior	productive	capabilities	can	even	develop	substitutes	for
natural	resources,	vastly	reducing	the	incomes	of	countries	that	rely	on	exporting	them.	After	Germany	and
Britain	developed	technologies	to	synthesize	natural	chemicals	in	the	mid-nineteenth	century,	some
countries	saw	dramatic	falls	in	their	incomes.	Guatemala	used	to	earn	quite	a	lot	of	money	by	being	the
main	producer	of	cochineal	(cochinilla),	the	crimson	dye	favoured	by	the	Pope	and	the	European
royalties	for	their	robes,	until	the	invention	of	the	artificial	dye	alizarin	crimson.	The	Chilean	economy
was	plunged	into	years	of	crisis	when	the	Haber–Bosch	process	was	developed	in	the	early	twentieth
century	to	manufacture	chemical	substitutes	for	saltpetre	(nitrate),	the	country’s	main	export	at	the	time.
Changes	in	technologies	are	at	the	root	of	economic	development
Not	so	long	ago,	if	someone	could	command	a	thousand	horses	at	the	same	time,	carry	hundreds	of
books	in	his	pocket,	generate	intense	heat	without	any	flame,	turn	thousands	of	litres	of	seawater	into
freshwater	or	make	clothes	out	of	stone,	people	would	have	said	he	was	a	magician.	We	are	not	talking
about	those	witch-burning	folks	of	medieval	Europe.	Even	in	the	early	twentieth	century,	when	the	world
was	not	totally	dissimilar	to	today’s,	all	of	those	things	would	have	been	considered	impossible.	Today,
they	are	done	routinely	in	many	countries.	Most	of	you	will	have	guessed	how,	except	for	the	last	one,
which	is,	unbeknown	to	most	people,	done	in	North	Korea,	where	they	make	a	synthetic	fibre	called
vinalon,	or	vinylon,	out	of	limestone.*
All	these	‘magical’	developments	have	been	possible	only	because	we	have	constantly	invented	better
technologies,	namely,	better	machines	and	better	chemical	processes.	Starting	from	Abraham	Darby’s
coke-smelting	technique	in	steel-making	and	John	Kay’s	flying	shuttle	for	textile	weaving	in	the	early
eighteenth	century,	an	endless	stream	of	technologies	has	emerged	to	change	the	world.	We	discussed
some	of	these	in	Chapter	3.	The	steam	engine,	the	internal	combustion	engine,	electricity,	organic
chemistry,	steel	ships,	(wired	and	wireless)	telegraphy,	aeroplanes,	computers,	nuclear	fission,
semiconductors	and	fibre	optics	are	only	the	most	important	examples.	Today,	genetic	engineering,
renewable	energy,	‘advanced’	materials	(e.g.,	graphene)	and	nano-technologies	are	emerging	to	transform
the	world	yet	again.
In	the	early	days	of	the	Industrial	Revolution,	new	technologies	were	often	developed	by	individual
visionaries.	As	a	result,	until	the	late	nineteenth	and	early	twentieth	centuries,	many	technologies	were
known	by	their	inventors’	names	–	Kay’s	flying	shuttle,	Watt’s	steam	engine,	the	Haber–Bosch	process
and	so	on.
From	the	late	nineteenth	century,	with	technologies	becoming	increasingly	complex,	fewer	and	fewer	of
them	have	been	invented	by	individuals.	Companies	started	developing	the	capability	to	generate	new
technologies	through	R&D	in	their	corporate	labs.	Around	this	time,	governments	also	started	investing
actively	in	developing	new	technologies	by	either	establishing	public	research	labs	(especially	in
agriculture)	or	subsidizing	private-sector	R&D	activities.
Today,	technological	developments	are	the	result	of	organized,	collective	efforts	inside	and	outside
productive	enterprises,	rather	than	of	individual	inspiration.	The	fact	that	few	new	technologies	these
days	have	their	inventors’	names	attached	to	them	is	a	testimony	to	the	collectivization	of	the	innovation
process.
Technologies	do	not	tell	the	whole	story:	the	importance	of	work	organization
Not	all	increases	in	our	productive	capabilities	have	come	from	technological	development	in	the
narrow	sense:	machines	and	chemicals.	A	lot	of	them	are	due	to	improvements	in	organizational	skills	–
or,	if	you	like,	management	techniques.
In	the	early	nineteenth	century,	factory	productivity	was	further	raised	by	lining	up	the	workers	in
accordance	with	the	order	of	their	tasks	within	the	production	process.	The	assembly	line	was	born.	In
the	late	nineteenth	century,	the	assembly	line	was	put	on	a	conveyor	belt.	The	moving	assembly	line	made
it	possible	for	capitalists	to	increase	the	pace	of	work	simply	by	turning	up	the	speed	of	the	conveyor	belt.
Outside	industries	like	the	automobile	industry,	in	which	one	continuous	assembly	line	basically
decides	who	does	what	at	which	speed,	improvements	in	the	design	of	work	flow	have	been	an	important
source	of	productivity	growth	–	how	different	machines	are	arranged,	how	different	tasks	are	assigned	to
different	workers,	where	parts	and	half-finished	products	are	stored	and	so	on.	These	things	are	taken	for
granted	by	economists,	but	they	are	still	something	that	not	every	producer	gets	right,	especially	in
developing	countries.
The	rise	of	Fordism,	or	the	mass	production	system
In	addition	to	organizing	the	flow	of	work	more	efficiently,	attempts	have	been	made	to	make	workers
themselves	more	efficient.	The	most	important	in	this	regard	was	Taylorism,	named	after	Frederick
Winslow	Taylor	(1856–1915),	the	American	engineer	and	later	management	guru.	Taylor	argued	that	the
production	process	should	be	divided	up	into	the	simplest	possible	tasks	and	that	workers	should	be
taught	the	most	effective	ways	to	perform	them,	established	through	scientific	analyses	of	the	work
process.	It	is	also	known	as	scientific	management	for	this	reason.
Combining	the	moving	assembly	line	with	the	Taylorist	principle,	the	mass	production	system	was
born	in	the	early	years	of	the	twentieth	century.	It	is	often	called	Fordism	because	it	was	first	perfected	–
but	not	‘invented’,	as	the	folklore	goes	–	by	Henry	Ford	in	his	Model-T	car	factory	in	1908.	The	idea	is
that	production	costs	can	be	cut	by	producing	a	large	volume	of	standardized	products,	using	standardized
parts,	dedicated	machinery	and	a	moving	assembly	line.	This	would	also	make	workers	more	easily
replaceable	and	thus	easier	to	control,	because,	performing	standardized	tasks,	they	need	to	have
relatively	few	skills.
Despite	making	them	more	easily	replaceable,	Ford	paid	his	workers	well	because	he	realized	that	his
production	method	would	not	work	unless	there	was	a	‘mass’	market	with	a	lot	of	people	with	decent
incomes	who	could	buy	the	large	‘mass’	of	output	produced.	When	the	mass	production	system	was
widely	adopted	in	the	US	and	Europe	after	the	Second	World	War,	rising	wages	expanded	markets,	which
then	enabled	production	at	a	higher	volume,	which	then	increased	productivity	further	by	spreading	the
fixed	costs	(of	installing	the	production	facilities)	over	a	larger	volume.
The	mass	production	system	was	so	effective	that	even	the	Soviet	Union	was	attracted	to	it.	In	the
beginning,	there	was	a	huge	debate	there	about	its	adoption	because	of	its	obvious	‘anti-worker’
implications.	It	destroys	the	intrinsic	value	of	work	by	making	it	simplistic	and	repetitive,	while	vastly
reducing	the	worker’s	control	over	his/her	labour	process;	standardized	tasks	make	the	monitoring	of
workers	easier	while	the	intensity	of	work	can	be	easily	increased	by	accelerating	the	assembly	line.	In
the	end,	the	efficiency	of	the	system	was	so	overwhelming	that	the	Soviet	planners	decided	to	import	it.
Modifications	to	the	mass	production	system:	the	lean	production	system
The	mass	production	system,	a	century	after	its	invention,	still	forms	the	backbone	of	our	production
system.	But	since	the	1980s	it	has	been	taken	to	another	level	by	the	so-called	lean	production	system,
first	developed	in	Japan.
The	system,	most	famously	practised	by	Toyota,	has	its	parts	delivered	‘just	in	time’	for	the	production,
eliminating	inventory	costs.	By	working	with	the	suppliers	to	raise	the	quality	of	the	parts	they	deliver
(the	so-called	‘zero	defect	movement’),	it	vastly	reduces	the	need	for	rework	and	fine-tuning	at	the	end	of
the	assembly	line	which	had	plagued	Fordist	factories.	It	also	uses	machines	that	allow	quick	change-
overs	between	different	models	(e.g.,	by	allowing	a	quick	exchange	of	dies)	and	thus	can	offer	a	much
greater	variety	of	products	than	the	Fordist	system	does.
Unlike	the	Fordist	system,	the	Toyota	system	does	not	treat	workers	as	interchangeable	parts.	It	equips
workers	with	multiple	skills	and	allows	them	to	exercise	a	lot	of	initiative	in	deciding	work	arrangements
and	suggesting	minor	technological	improvements.	Improvements	thus	generated	are	believed	to	have
been	crucial	in	establishing	Japanese	technological	superiority	in	industries	in	which	quality	is	important.
Productive	capabilities	beyond	the	firm	level	are	also	very	important
Important	as	they	are,	improved	technologies	and	better	organizational	skills	at	the	firm	level	are	not
the	only	things	that	determine	an	economy’s	productive	capabilities.
An	economy’s	productive	capabilities	also	include	capabilities	that	non-enterprise	actors	–	such	as	the
government,	universities,	research	institutes	or	training	institutes	–	have	in	facilitating	production	and
improving	productivity.	These	they	do	by	supplying	productive	inputs:	infrastructure	(e.g.,	roads,	fibre
optic	network),	new	technological	ideas	and	skilled	workers.
Economy-wide	productive	capabilities	are	also	determined	by	the	effectiveness	of	economic
institutions.	The	institutions	of	corporate	ownership	and	financial	transactions	determine	the	incentives
for	long-term	investments	in	productivity-enhancing	machinery,	worker	training	and	R&D.	Also	important
are	institutions	that	affect	economic	actors’	willingness	to	bear	risk	and	accept	change,	such	as	bankruptcy
law	and	the	welfare	state,	as	discussed	in	Chapter	3.	Institutions	that	encourage	socially	productive
cooperation	matter	too;	industry	associations	to	promote	joint	export	marketing	or	government	research
institutes	providing	R&D	for	small	farms	or	small	firms	are	examples.
Also	relevant	are	institutions	that	determine	the	effectiveness	of	dialogue	between	different	economic
actors	–	government,	business,	unions,	CSOs	(civil	society	organizations),	such	as	poverty	action	groups
or	consumer	watchdog	groups,	and	universities	and	other	educational	institutions.	Examples	include
formal	and	informal	channels	of	government-business	dialogue,	government-CSO	consultation,	employer-
union	negotiation,	and	industry-university	cooperation.
REAL-LIFE	NUMBERS
Failing	to	check	whether	growth	rates	are	overall	or	per	capita	can	distort	your	perspective
When	you	encounter	growth	rate	figures,	you	need	to	check	whether	they	are	overall	or	per	capita	rates.
This	may	sound	like	an	obvious	thing	to	do,	but	failure	to	do	so	can	give	you	a	rather	distorted	view	of	the
world.
If	you	are	monitoring	a	single	economy’s	growth	performance	over	a	relatively	short	period	of	time,
say	several	quarters	or	a	few	years,	it	may	not	be	critical	that	you	are	using	overall,	rather	than	per	capita,
growth	rate.	But,	if	you	are	comparing	different	economies	over	a	relatively	long	period	of	time,	it	is
important	that	you	use	per	capita	growth	rates.	Between	2000	and	2010,	GDP	grew	at	the	rate	of	1.6	per
cent	in	the	US	and	1.0	per	cent	in	Germany.	With	these	figures,	you	may	think	that	the	US	has	done
substantially	better	than	Germany.	However,	during	the	same	period	population	grew	at	the	rate	of	0.9	per
cent	in	the	US	and	-0.1	per	cent	in	Germany.	This	means	that	Germany	has	actually	done	better	in	per
capita	terms	–	1.1	per	cent	per	year	growth	rate	as	opposed	to	0.7	per	cent	in	the	US.4
Why	a	6	per	cent	growth	rate	is	a	‘miracle’
In	theory,	there	is	no	upper	bound	to	the	rate	at	which	an	economy	can	grow.	In	practice,	it	is	not	easy
for	it	to	grow	at	all.
In	Chapter	3,	we	have	seen	that	per	capita	yearly	output	growth	rate	used	to	be	close	to	zero
everywhere	until	the	end	of	the	eighteenth	century.	The	Industrial	Revolution	saw	it	going	up	to	around	1
per	cent	per	year,	the	‘Golden	Age	of	capitalism’	saw	it	going	up	to	3–4	per	cent	per	year.	The	East	Asian
economies	have	seen	growth	rates	of	8–10	per	cent	per	year	during	their	growth	peaks	during	their
‘miracle’	periods	of	three	or	four	decades.
All	in	all,	the	rule	of	thumb	is	that	per	capita	output	growth	rate	above	3	per	cent	is	good,	while
anything	above	6	per	cent	is	entering	the	‘miracle’	territory.	Anything	substantially	above	10	per	cent	for
an	extended	period	(say,	more	than	a	decade)	is	possible	only	through	either	resource	bonanza,	as	in	the
case	of	Equatorial	Guinea	discussed	above,	or	recovery	from	a	war,	as	has	been	the	case	with	Bosnia	and
Herzegovina	in	the	last	decade	and	a	half.
The	power	of	compound	rates
The	growth	rates	we	use	are	compound	rates	(or	exponential	rates),	meaning	that	the	increased	output
of	every	year	(or	quarter	or	whatever	period	is	the	unit	of	measurement)	is	added	to	the	existing	output.	If
an	economy	of	$100	billion	is	growing	at	the	average	rate	of	10	per	cent	over	ten	years,	it	does	not	mean
that	its	output	increases	by	$10	billion	every	year	and	the	size	of	the	economy	increases	to	$200	billion
after	ten	years.	10	per	cent	growth	rate	in	the	first	year	increases	the	output	to	$110	billion,	but	the	second
year’s	10	per	cent	growth	is	over	$110	billion,	not	$100	billion,	so	the	resulting	output	at	the	end	of	the
second	year	is	$121	billion,	rather	than	$120	billion.	Continuing	like	this,	at	the	end	of	the	ten-year
period,	the	economy	will	be	$259	billion,	not	$200	billion.
The	use	of	compound	rate	means	that	what	may	seem	to	be	a	relatively	small	difference	in	growth	rates
can	create	a	large	gap,	if	sustained	over	a	sufficiently	long	period	of	time.	If	a	country	grows	at	3	per	cent
per	year	and	another	grows	at	6	per	cent	for	one	year,	it	is	no	big	deal.	If,	however,	this	difference
persists	for	forty	years,	the	faster-growing	economy	will	have	become	10.3	times	richer,	while	the
slower-growing	one	will	have	increased	its	income	only	by	3.3	times.	Before	they	know	it,	the	citizens	of
these	two	countries	will	be	living	in	worlds	of	entirely	different	levels	of	comfort	and	opportunity.
It	is	useful	to	have	a	rule	of	thumb	that	enables	you	to	project	the	future	on	the	basis	of	today’s	growth
rate.	If	you	have	a	growth	rate	of	a	country	and	want	to	know	how	much	time	it	will	take	for	the	size	of	its
economy	to	double,	divide	seventy	by	the	growth	rate.	So,	if	a	country	grows	at	1	per	cent	per	year,	it	will
take	it	seventy	years	to	double	its	output,	while	it	will	take	somewhere	between	eleven	and	twelve	years
for	the	size	of	an	economy	growing	at	6	per	cent	to	double.
Unlike	economic	growth,	economic	development	cannot	be	measured	by	a	single	indicator
In	Chapter	6,	we	saw	how	even	the	output	figure	may	not	be	totally	objective.	But,	given	the	output
statistics,	it	is	straightforward	to	calculate	its	growth	rate.	In	contrast,	there	is	no	single	number	that
allows	us	to	measure	economic	development,	defined	as	an	increase	in	productive	capabilities.
There	are	many	different	indexes	of	productive	capabilities	(under	different	names),	published	by
international	organizations,	including	the	UNIDO	(the	United	Nations	Industrial	Development
Organization),	the	OECD,	the	World	Bank	and	the	World	Economic	Forum.	These	indexes	are	made	up	of
dozens	of	different	indicators	that	are	thought	to	reveal	various	aspects	of	a	country’s	productive
capabilities.	Most	frequently	included	are	indicators	regarding	the	structure	of	production	(e.g.,	share	of
hi-technology	industries	in	total	manufacturing	output),	infrastructure	(e.g.,	broadband	connections	per
capita),	skills	(e.g.,	the	share	of	workers	with	a	university	degree)	and	innovation	activities	(e.g.,	R&D
spending	as	a	share	of	GDP	or	number	of	patents	per	capita).
However,	being	made	up	of	such	diverse	elements,	these	indexes	are	difficult	to	interpret.	Therefore,
unless	you	are	a	professional	economist,	you	are	better	off	with	simpler	indicators	that	are	easier	to
interpret.	I	talk	about	two	of	them	below.
Share	of	investment	in	GDP	is	the	key	indicator	of	how	a	country	is	developing
In	order	to	be	used,	most	technologies	have	to	be	embodied	in	fixed	capital,	namely,	machines	and
structures	(e.g.,	buildings,	railways).	So,	without	high	investment	in	fixed	capital,	technically	known	as
gross	fixed	capital	formation	(GFCF),*	an	economy	cannot	develop	its	productive	potential	very	much.
Thus,	the	investment	ratio	(GFCF/GDP)	is	a	good	indicator	of	its	development	potential.	Indeed,	the
positive	relationship	between	a	country’s	investment	ratio	and	its	rate	of	economic	growth	is	one	of	the
few	undisputed	relationships	in	economics.
For	the	world	as	a	whole,	the	investment	ratio	is	around	20–22	per	cent.	But	there	is	a	huge
international	variation.	In	China,	this	share	has	stood	at	a	staggering	45	per	cent	in	the	last	few	years.	At
the	other	extreme,	countries	like	the	Central	African	Republic	or	the	Democratic	Republic	of	Congo	can
have	an	investment	ratio	as	low	as	2	per	cent	in	some	years,	although	typically	they	manage	around	10	per
cent.
No	economy	has	achieved	‘miracle’	rates	of	growth	(that	is,	over	6	per	cent	per	year	in	per	capita
terms)	over	a	period	of	time	without	investing	at	least	25	per	cent	of	GDP.	At	the	heights	of	such	growth,
countries	invest	at	least	30	per	cent	of	GDP.	The	investment	ratio	went	above	35	per	cent	in	Japan	in	the
late	1960s	and	the	early	1970s.	During	its	‘miracle’	growth	period	since	the	1980s,	China’s	investment
rate	has	been	30	per	cent	and	above,	going	above	40	per	cent	in	the	last	decade.
This	is	not	to	say	that	a	higher	investment	ratio	is	necessarily	a	good	thing.	Investment	by	definition
sacrifices	today’s	consumption	and	thus	living	standards,	if	only	in	the	hope	of	achieving	higher
consumption	in	the	future.	So	there	can	be	such	a	thing	as	too	much	investment,	even	though	how	much	is
too	much	would	depend	on	how	much	you	value	your	future	income	against	today’s	income	(this	is	known
as	time	preference).	Nevertheless,	the	investment	ratio	–	and	its	evolution	over	time	–	is	the	best	single
indicator	of	how	a	country	is	developing	its	productive	capabilities	and	thus	its	economy.
The	R&D	figure	is	a	good	indicator	for	the	richer	countries
Another	simple	but	instructive	indicator	of	a	country’s	economic	development,	especially	for	countries
at	higher	levels	of	income,	is	its	R&D	spending	as	a	ratio	of	GDP	–	and	its	evolution	over	time.5
Rich	countries	spend	a	much	higher	proportion	of	their	GDP	on	R&D	than	do	poorer	countries.	The
OECD	average	is	2.3	per	cent,	with	several	countries	spending	over	3	per	cent	of	GDP	on	it.*	Finland
and	South	Korea	top	the	list.	These	two	countries	are	particularly	impressive	in	that	they	have	increased
their	R&D/GDP	ratio	very	rapidly	in	the	last	few	decades	and	achieved	impressive	progress	in	high-
technology	industries.
Most	developing	countries	do	practically	no	R&D.	The	ratio	is	0.1	per	cent	in	Indonesia,	0.2	per	cent
in	Colombia	and	0.5	per	cent	in	Kenya.	China’s	stood	at	1.5	per	cent	in	2009	but	has	been	on	a	fast	rising
trend,	suggesting	that	the	country	is	rapidly	building	up	its	capabilities	to	generate	new	technologies.6
Industrialization	and	Deindustrialization
In	theory,	we	can	achieve	economic	development	by	enhancing	our	productive	capabilities	in	any
economic	activity,	including	agriculture	and	services.	In	practice,	in	the	vast	majority	of	cases,	economic
development	has	been	achieved	through	industrialization,	or,	more	precisely,	the	development	of	the
manufacturing	sector.†	Albert	Einstein	was	definitely	right	in	saying:	‘In	theory,	theory	and	practice	are
the	same.	In	practice,	they	are	not.’
Mechanization	and	chemical	processes	make	it	easier	to	raise	productivity	in	manufacturing
Raising	productivity	is	much	easier	in	manufacturing	than	in	other	economic	activities,	such	as
agriculture	and	services.	Manufacturing	activities	are	much	less	bound	by	nature	and	lend	themselves
much	more	easily	to	mechanization	and	chemical	processing.
Agricultural	productivity	is	very	dependent	on	the	physical	environment,	such	as	land	mass,	climate
and	soil.	It	is	also	very	time-bound.	Impressive	ways	to	overcome	all	these	natural	constraints	have	been
developed,	such	as	irrigation,	selective	breeding	and	even	genetic	engineering,	but	there	is	a	clear	limit	to
them.	No	one	has	developed	a	way	to	grow	wheat	in	six	minutes	instead	of	six	months,	which	is	roughly
what	should	have	happened,	had	the	productivity	in	the	wheat	industry	developed	as	fast	as	in	pin-making
over	the	last	two	and	a	half	centuries.
By	their	very	nature,	many	service	activities	are	inherently	impervious	to	increases	in	productivity.	In
some	cases,	the	very	increase	in	productivity	will	destroy	the	product	itself;	a	string	quartet	cannot	treble
its	productivity	by	trotting	through	a	twenty-seven-minute	piece	in	nine	minutes.	For	some	other	services,
the	apparently	higher	productivity	may	be	due	to	the	debasement	of	the	product.	A	lot	of	the	increases	in
retail	service	productivity	in	countries	like	the	US	and	the	UK	have	been	bought	by	lowering	the	quality
of	the	retail	service	itself	–	fewer	shop	assistants,	longer	drives	to	the	supermarket,	lengthier	waits	for
deliveries	and	so	on.	The	2008	global	financial	crisis	has	revealed	that	much	of	the	recent	productivity
growth	in	finance	had	been	achieved	through	the	debasement	of	the	products	–	that	is,	the	creation	of
overly	complex,	riskier	and	even	fraudulent	products.
The	‘learning	centre’	of	the	economy
The	manufacturing	sector	has	been	the	‘learning	centre’	of	capitalism.	By	supplying	capital	goods	(e.g.,
machines,	transport	equipment),	it	has	spread	higher	productive	capabilities	to	other	sectors	of	the
economy,	whether	they	are	other	manufacturing	activities	producing	consumer	goods	(e.g.,	washing
machines,	breakfast	cereals),	agriculture	or	services.
Many	of	the	organizational	innovations	in	the	manufacturing	sector	have	been	transferred	to	the	other
sectors,	especially	to	the	service	sector,	and	raised	their	productivities.	Fast	food	restaurants,	such	as
McDonald’s,	use	‘factory’	techniques,	turning	cooking	into	an	assembly	job.	Some	even	deliver	food	on	a
conveyor	belt,	as	in	kaiten-zushi	restaurants	(for	people	living	in	Britain,	that’s	Yo!	Sushi).	Large	retail
chains	–	be	they	supermarkets,	clothes	shop	chains	or	online	retailers	–	apply	modern	inventory
management	techniques	developed	in	the	manufacturing	sector.
Even	in	the	agricultural	sector,	productivity	has	been	raised	in	some	countries,	such	as	the	Netherlands
(which	is	the	third-largest	exporter	of	agriculture	in	the	world,	after	the	US	and	France),	through	the
application	of	manufacturing-style	organizational	knowledge,	such	as	computer-controlled	feeding.
The	rise	of	the	post-industrial	society?
It	has	recently	become	fashionable	to	argue	that	the	manufacturing	sector	does	not	matter	very	much	any
more,	as	we	have	entered	the	era	of	post-industrial	society.
In	the	early	days	of	industrialization,	many	assumed	that	the	manufacturing	sector	would	keep	growing.
And	for	a	long	time,	it	looked	to	be	the	case.	The	share	of	manufacturing	both	in	output	and	in	employment
was	almost	constantly	rising	in	most	countries.	However,	from	the	1960s,	some	countries	started
experiencing	deindustrialization	–	a	fall	in	the	share	of	manufacturing,	and	a	corresponding	rise	in	the
share	of	services,	in	both	output	and	employment.	This	prompted	the	talk	of	a	post-industrial	society.
Many	economists	have	argued	that,	with	rising	income,	we	begin	to	demand	services,	such	as	eating	out
and	foreign	holidays,	relatively	more	than	we	demand	manufactured	goods.	The	resulting	fall	in	the
relative	demand	for	manufacturing	leads	to	a	shrinking	role	for	manufacturing,	reflected	in	lower	output
and	employment	shares.
This	view	got	a	boost	in	the	1990s,	with	the	invention	of	the	worldwide	web	and	the	alleged	rise	of	the
‘knowledge	economy’.	Many	argued	that	the	ability	to	produce	knowledge,	rather	than	things,	was	now
critical,	and	high-value	knowledge-based	services,	such	as	finance	and	management	consulting,	would
become	the	leading	sectors	in	the	rich	countries	that	were	experiencing	deindustrialization.	The
manufacturing	industry	–	or	the	‘bricks	and	mortar’	industry	–	was	viewed	as	second-rate	activity	that
could	be	shifted	to	cheap-labour	developing	countries,	such	as	China.
More	recently,	even	some	developing	countries	have	bought	into	the	discourse	of	the	post-industrial
economy.	They	have	started	believing	that,	with	the	rise	of	the	post-industrial	economy,	they	can	more	or
less	skip	industrialization	and	become	rich	through	services.	They	look	to	India,	which	is	supposed	to
have	become	–	through	its	success	in	the	export	of	services	like	software,	accountancy	and	the	reading	of
medical	scanning	images	–	‘the	office	of	the	world’	to	China’s	‘workshop	of	the	world’	(a	title	which	had
originally	been	conferred	on	Britain	after	its	Industrial	Revolution).
Deindustrialization	doesn’t	mean	that	we	are	producing	fewer	manufactured	products
While	many	people,	including	key	policy-makers,	have	been	seduced	by	it,	the	discourse	of	post-
industrial	society	is	highly	misleading.	Most	rich	countries	have	indeed	become	‘post-industrial’	or
‘deindustrialized’	in	terms	of	employment;	a	decreasing	proportion	of	the	labour	force	in	these	countries
is	working	in	factories,	as	opposed	to	shops	and	offices.	In	most,	although	not	all,	countries	this	has	been
accompanied	by	a	fall	in	the	share	of	manufacturing	in	output.
But	this	does	not	necessarily	mean	that	those	countries	are	producing	fewer	manufactured	goods	in
absolute	terms.	Much	of	this	apparent	fall	is	due	to	the	decline	in	the	prices	of	manufactured	goods,
compared	to	the	prices	of	services.	This	is	thanks	to	the	faster	productivity	growth	in	their	production.
Just	think	how	computers	and	mobile	phones	have	become	cheaper	(holding	the	quality	constant),
compared	with	the	costs	of	haircuts	or	eating	out.	When	this	relative	price	effect	is	taken	into	account	and
the	shares	of	different	sectors	are	recalculated	in	constant	prices	(that	is,	applying	the	prices	of	the
starting	year	to	the	quantities	produced	in	subsequent	years),	as	opposed	to	current	prices	(today’s
prices),	the	share	of	manufacturing	has	not	fallen	very	much	in	most	rich	countries.	It	has	even	risen	in
several	countries,	as	I	will	show	later.
Some	deindustrialization	is	due	to	‘optical	illusions’
The	extent	of	deindustrialization	has	also	been	exaggerated	due	to	the	‘optical	illusions’	created	by	the
way	in	which	statistics	are	compiled.	A	lot	of	services	that	used	to	be	provided	in-house	in	manufacturing
firms	(e.g.,	catering,	security	guards,	some	design	and	engineering	activities)	are	now	outsourced,	that	is,
supplied	by	independent	companies	(at	home	or	abroad;	in	the	latter	case	this	is	called	off-shoring).	This
gives	the	illusion	that	services	have	become	more	important	than	they	actually	have.	These	outsourced
services	are	still	the	same	activities.	But	they	are	now	counted	as	part	of	service	output,	rather	than	of
manufacturing	output.
In	addition,	seeing	the	share	of	manufacturing	in	their	output	falling,	some	manufacturing	firms	have
applied	to	be	reclassified	as	service	firms,	even	though	they	still	conduct	some	manufacturing.	A	UK
government	report	estimates	that	up	to	10	per	cent	of	the	fall	in	manufacturing	employment	between	1998
and	2006	in	the	UK	may	be	due	to	this	‘reclassification	effect’.7
Making	things	still	matters
The	view	that	the	world	has	now	entered	a	new	era	of	the	‘knowledge	economy’,	in	which	making
things	does	not	confer	much	value,	is	based	upon	a	fundamental	misreading	of	history.	We	have	always
lived	in	a	knowledge	economy.	It	has	always	been	the	quality	of	knowledge	involved,	rather	than	the
physical	nature	of	the	things	produced	(that	is,	whether	they	are	physical	goods	or	intangible	services),
that	has	made	the	more	industrialized	countries	richer.	This	point	can	be	seen	more	clearly	if	you	recall
that	woollen	manufacturing,	which	used	to	be	one	of	the	most	hi-tech	sectors	until	the	eighteenth	century,
is	now	one	of	the	lower-tech	sectors.	In	this	regard,	it	is	useful	to	remember	that	‘There	are	no	condemned
sectors;	there	are	only	outmoded	technologies,’	as	a	French	minister	of	industry	once	eloquently	put	it.8
Recently,	some	service	activities,	such	as	finance	and	transport,	have	experienced	high	productivity
growths,	which	have	caused	many	people	to	say	that	countries	can	generate	economic	development	on	the
basis	of	such	service	activities.	Like	Britain,	they	can	export	high-value	services	and	use	the	earnings
from	them	to	buy	necessary	manufactured	products	from	abroad.	This	strategy	may	be	viable	for	a	period.
In	the	decade	or	so	up	to	the	2008	financial	crisis,	Britain	indeed	managed	to	generate	a	decent	rate	of
growth	despite	a	rapid	process	of	deindustrialization,	thanks	to	a	booming	financial	industry.	But	the	2008
crisis	was	a	rude	reminder	that	a	lot	of	this	faith	in	services	as	the	new	engine	of	growth	has	been
illusory.
Moreover,	many	of	these	high-productivity	services	are	‘producer	services’,	such	as	engineering,
design	and	management	consulting,	for	which	the	main	customers	are	manufacturing	firms.	So,	a
weakening	manufacturing	base	will	eventually	lead	to	a	decline	in	the	quality	of	those	services,	which
will	make	their	export	more	difficult.
REAL-LIFE	NUMBERS
Agriculture	is	still	surprisingly	important
Until	the	late	nineteenth	century,	agriculture	was	the	mainstay	of	the	economy	in	almost	all	countries.9
Even	in	many	of	today’s	rich	countries,	nearly	three-quarters	of	people	worked	in	agriculture	until	a	few
generations	ago.	In	1870,	72	per	cent	of	the	workforce	was	employed	in	agriculture	in	Sweden.	The
corresponding	figure	was	73	per	cent	in	Japan	in	1885.
Being	a	lower	productivity	sector	than	manufacturing	or	services,	agriculture	has	rarely	accounted	for
more	than	half	of	output,	even	when	most	of	the	people	were	working	there.	In	1870,	agriculture
accounted	for	50	per	cent	of	output	in	Denmark	and	47	per	cent	in	Sweden.	South	Korea’s	agriculture
accounted	for	47	per	cent	of	output	until	as	late	as	1953.
Today,	agriculture	plays	a	very	small	role,	in	terms	of	both	output	and	employment,	in	the	rich
countries.	Only	1–2	per	cent	of	their	GDP	is	produced	in	agriculture,	while	only	2–3	per	cent	of	people
work	there.	This	has	been	possible	because	agricultural	productivity	in	those	countries	has	risen
enormously	in	the	last	century	or	so.	The	fact	that	the	US,	France	and	the	Netherlands	–	and	not	some	large
developing	economies,	such	as	India	or	Indonesia	–	are	the	three	largest	exporters	of	agriculture	in	the
world	is	a	testimony	to	the	height	of	agricultural	productivity	in	the	rich	countries.
In	many	poorer	developing	countries,	agriculture	is	still	very	important.	In	a	handful	of	poorest
countries,	more	than	half	the	output	is	still	produced	in	agriculture.*	Even	in	the	richer	developing
countries,	agriculture	still	accounts	for	20–40	per	cent	of	output.
Agriculture	plays	an	even	more	important	role	when	it	comes	to	employment.	It	employs	80–90	per
cent	of	people	in	some	of	the	poorest	countries,	such	as	Burundi	(92	per	cent),	Burkina	Faso	(85	per	cent)
and	Ethiopia	(79	per	cent).	Despite	the	country’s	impressive	industrialization	in	the	last	three	decades,	37
per	cent	of	people	in	China	still	work	in	agriculture.
Manufacturing	in	the	rich	countries	is	less	important	than	before	…
At	their	peaks	(between	the	1950s	and	the	1970s,	depending	on	the	country),	nearly	40	per	cent	of	the
workforce	in	the	then	industrialized	countries	of	Western	Europe	and	the	US	worked	in	the	manufacturing
sector.	The	number	reached	nearly	50	per	cent	if	you	looked	at	industry	as	a	whole.
Today,	in	most	rich	countries,	less	than	15	per	cent	of	people	work	in	manufacturing.	Exceptions	are
countries	such	as	Taiwan,	Slovenia	and	Germany,	where	upwards	of	20	per	cent	are	still	employed	in
manufacturing.*	In	some	of	them,	such	as	the	UK,	the	Netherlands,	the	US	and	Canada,	the	corresponding
number	is	only	around	9–10	per	cent.
The	fall	in	employment	share	of	manufacturing	has	been	accompanied	by	a	fall	in	output	share.	In	some
countries,	such	as	Austria,	Finland	and	Japan,	the	share	of	manufacturing	in	GDP	used	to	be	around	25	per
cent	until	the	1970s.	Today,	in	none	of	the	richest	countries	does	it	account	for	more	than	20	per	cent.10
…But	it	is	still	far	more	important	than	people	think	it	is
I	have	explained	above	that	much	of	the	apparent	decline	in	the	share	of	manufacturing	in	GDP	is	due	to
the	faster	productivity	growth	in	manufacturing,	which	makes	manufacturing	products	relatively	cheaper
compared	to	other	things	(services	and	agricultural	products).	This	means	that	the	share	of	manufacturing
can	be	very	different,	depending	on	whether	it	is	calculated	in	constant	prices	(to	remind	you,	the	prices	at
the	beginning	of	the	period	we	are	looking	at)	or	current	prices.
During	the	last	two	decades,	in	some	rich	countries,	such	as	Germany,	Italy	and	France,	the	fall	in	the
share	of	manufacturing	in	GDP	has	been	quite	large	in	current	prices	(by	20	per	cent	in	Germany,	30	per
cent	in	Italy	and	40	per	cent	in	France),	but	not	been	so	large	in	constant	prices	(by	less	than	10	per	cent
in	all	three).11	In	several	rich	countries,	the	share	of	manufacturing	has	actually	risen,	if	calculated	in
constant	prices:	in	the	US	and	Switzerland,	its	share	has	risen	by	around	5	per	cent	in	the	last	couple	of
decades;12	in	Finland	and	Sweden,	the	share	has	actually	risen	by	as	much	as	50	per	cent	over	the	last	few
decades.13
An	important	exception	is	the	UK,	in	which	the	share	of	manufacturing	has	fallen	dramatically	in	the
last	couple	of	decades,	even	in	constant	prices.14	This	suggests	that	the	UK’s	deindustrialization	has
largely	been	the	result	of	the	absolute	decline	of	its	manufacturing	industry	due	to	loss	of	competitiveness,
rather	than	the	relative	price	effect	due	to	differential	productivity	growth	rates.
‘Premature’	deindustrialization	in	developing	countries
In	the	last	three	decades,	many	developing	countries	have	experienced	‘premature’	deindustrialization.
That	is,	the	share	of	manufacturing	(and	industry	in	general)	in	their	outputs	and	employments	started
falling	at	a	much	earlier	stage	of	economic	development	than	had	been	the	case	for	the	rich	countries.
Latin	America’s	share	of	manufacturing	in	GDP	rose	from	25	per	cent	in	the	mid-1960s	to	27	per	cent
in	the	late	1980s	but	has	fallen	dramatically	since	then.	It	stands	at	only	17	per	cent	today.	In	Brazil,	the
industrial	powerhouse	of	the	continent,	deindustrialization	has	been	even	more	dramatic.	The	share	of
manufacturing	in	GDP	has	fallen	from	34	per	cent	in	the	mid-1980s	to	15	per	cent	today.	In	Sub-Saharan
Africa,	the	share	has	fallen	from	17–18	per	cent	during	the	1970s	and	much	of	the	1980s	to	12	per	cent
today.15
This	premature	deindustrialization	is	largely	the	result	of	neo-liberal	economic	policies	implemented
in	these	countries	since	the	1980s	(see	Chapter	3).16	Sudden	trade	liberalization	has	destroyed	swathes	of
manufacturing	industries	in	those	countries.	Financial	liberalization	has	allowed	banks	to	redirect	their
loans	to	(more	lucrative)	consumers,	away	from	producers.	Policies	geared	towards	inflation	control,
such	as	high	interest	rates	and	over-valued	currencies,	have	added	to	the	agony	of	manufacturing	firms	by
making	loans	expensive	and	exports	more	difficult.
Service-based	success	stories?:	Switzerland,	Singapore	and	India
When	talking	about	the	post-industrial	economy,	people	frequently	cite	Switzerland	and	Singapore	as
the	examples	of	service-based	success	stories.	Haven’t	these	two	countries	shown,	they	say,	that	you	can
become	rich	–	very	rich	–	through	services	such	as	finance,	tourism	and	trading?
Actually	these	two	countries	show	the	exact	opposite.	According	to	the	UNIDO	data,	in	2002,
Switzerland	had	the	highest	per	capita	manufacturing	value	added	(MVA)	in	the	world	–	24	per	cent	more
than	that	of	Japan.	In	2005,	it	ranked	the	second,	after	Japan.	Singapore	ranked	the	third	in	that	year.	In
2010,	Singapore	ranked	the	first,	producing	48	per	cent	more	MVA	per	capita	than	the	US.	Switzerland
ranked	the	third,	after	Japan.	Switzerland	produced	30	per	cent	more	MVA	than	the	US	in	that	year.
As	for	the	claim	that	India	has	shown	how	countries	can	skip	industrialization	and	achieve	prosperity
through	services,	it	is	very	much	exaggerated.	Before	2004,	India	had	a	trade	deficit	in	services	(namely,
it	imported	more	services	than	it	exported).	Between	2004	and	2011,	it	did	run	a	trade	surplus	(opposite
of	trade	deficit)	in	services,	but	that	was	equivalent	only	to	0.9	per	cent	of	GDP,	covering	only	17	per
cent	of	its	trade	deficit	in	goods	(5.1	per	cent	of	GDP).	It	is	hardly	a	service-based	success	story.
Running	Out	of	the	Planet?:	Taking	Environmental	Sustainability	Seriously
We	need	to	take	environmental	constraints	extremely	seriously
Before	we	leave	the	world	of	production,	we	must	address	the	looming	question	of	the	environmental
limits	to	economic	growth.	There	is	no	doubt	that	climate	change,	mainly	caused	by	our	material
production	and	consumption	activities,	threatens	human	existence.	Moreover,	many	non-renewable
resources	(such	as	oil	and	minerals)	are	rapidly	being	depleted.	Even	the	earth’s	capacity	to	produce
renewable	resources,	such	as	agricultural	products	or	forestry	products,	may	be	outpaced	by	the	increase
in	demand	for	those	resources.	Given	all	of	this,	we	are	going	to	run	out	of	the	planet,	so	to	speak,	if	we
do	not	find	ways	to	control	the	impacts	of	our	economic	activities	on	the	environment.
But	doesn’t	this	mean	that	we	should	stop	economic	development,	which	I	have	defined	as	the	increase
in	our	capabilities	to	produce?	If	so,	doesn’t	that	negate	a	lot	of	things	I	have	said	so	far	in	the	chapter?
Technological	developments	can	be	solutions,	as	well	as	causes,	of	environmental	problems	…
It	must	have	been	1975	or	1976,	as	I	think	I	was	twelve	or	thirteen.	I	came	across	this	book,	The	Limits
to	Growth,	by	a	curiously	named	author,	the	Club	of	Rome.	Flicking	through	the	book,	even	though	I
couldn’t	fully	understand	it,	I	became	very	depressed.	It	said	that	the	world	will	run	out	of	oil	in	1992	or
thereabouts.	So,	even	before	I	turn	thirty,	I	thought,	I	am	supposed	to	start	riding	around	in	bullock	carts
and	burn	wood	for	heating?	That	seemed	mightily	unfair,	especially	when	my	family	had	moved	to	a	house
with	oil-burning	central	heating	system	only	five	or	six	years	earlier.
The	prediction	by	the	Club	turned	out	to	be	right.	We	have	run	out	of	oil	–	that	is,	the	oil	that	was
accessible	with	the	technologies	of	the	1970s.	But	we	are	still	burning	oil	in	huge	quantities	because	we
have	become	much	more	efficient	in	locating	and	extracting	oil	from	places	that	were	just	not	accessible
forty	years	ago,	especially	the	deep	sea.
Technology	does	not	only	give	us	access	to	formerly	inaccessible	resources	but	it	expands	the
definition	of	what	is	a	resource.	Sea	wave,	formerly	only	a	destructive	force	to	be	overcome,	has	become
a	major	energy	resource,	thanks	to	technological	development.	Coltan	used	to	be	a	rare	mineral	of
relatively	little	value	until	the	1980s.	Today,	it	is	one	of	the	most	valuable	minerals	in	the	world	–	to	the
extent	that	many	rebel	groups	in	the	Democratic	Republic	of	Congo	are	said	to	finance	their	wars	with
slave	labour	in	coltan	mines.	Tantalum,	one	of	the	component	elements	of	coltan,	is	a	key	ingredient	in	the
making	of	parts	used	for	mobile	phones	and	other	electronic	goods.
At	a	less	dramatic	level,	technological	development	allows	us	to	produce	renewable	resources	with
greater	efficiency.	As	I	pointed	out	earlier	in	the	chapter,	over	the	last	century,	humanity’s	ability	to
produce	food	–	and	other	natural	raw	materials	(e.g.,	cotton)	–	has	been	enormously	increased	by
mechanization,	use	of	chemicals,	selective	breeding	and	genetic	engineering.	We	have	also	become	more
efficient	in	the	use	of	given	resources.	Car	and	aircraft	engines	and	power	stations	use	less	oil	and	coal	to
get	the	same	amount	of	energy.	We	recycle	an	increasingly	higher	proportion	of	our	materials.
…	but	there	are	limits	to	technological	solutions
However	fast	our	technologies	develop,	there	are	still	definite	limits	to	the	availability	of	non-
renewable	resources,	even	including	those	natural	substances	that	are	yet	to	become	resources.
We	won’t	completely	run	out	of	any	of	the	major	resources	in	the	near	future.	But	their	declining
availability	can	make	them	unaffordable	to	poorer	people,	threatening	their	welfare	or	even	existence.
The	rising	price	of	water	is	already	hurting	poor	people	by	increasing	waterborne	diseases	and	reducing
their	agricultural	yields.	Higher	food	prices	would	increase	hunger	and	malnutrition.	More	expensive	fuel
would	cause	extra	deaths	of	poor	elderly	people	in	winter	even	in	the	rich	countries.	As	in	the	world	of
Neal	Stephenson’s	science-fiction	novel	The	Diamond	Age,	poor	people	may	be	forced	to	cope	with
flimsy	synthetic	substitutes	made	with	nano-technology,	rather	than	real	natural	materials.
Far	more	urgent,	of	course,	is	the	challenge	of	climate	change,	whose	consequences	are	already	being
felt	and	certain	to	become	extremely	serious,	if	not	necessarily	catastrophic,	within	the	next	generation	or
two.	And	given	this,	it	is	extremely	unlikely,	if	not	logically	impossible,	that	humanity	will	be	able	to
come	up	with	a	purely	technological	solution	to	climate	change	in	time	that	does	not	require	any
significant	change	in	the	way	in	which	we	live.
Developing	countries	still	need	more	economic	development	in	order	to	raise	their	living	standards	and	to	better	adapt	to	climate
change
All	of	this	does	not	mean	that	we	need	to	stop	economic	development,	especially	for	developing
countries.	To	begin	with,	developing	countries	still	need	more	output	–	that	is,	economic	growth	–
provided	that	it	is	not	totally	appropriated	by	a	tiny	minority.	Higher	income	for	these	countries	doesn’t
just	mean	another	TV	but	working	in	less	back-breaking	and	dangerous	conditions,	not	having	to	see	your
children	die	as	babies,	living	longer,	falling	ill	less	often	and	so	on.	Such	changes	would	be	more
sustainable	if	they	came	from	economic	development	(that	is,	increase	in	their	productive	capabilities)
rather	than	simple	growth,	but	even	growth	coming	from	a	resource	bonanza	would	be	valuable	for	these
countries.
Developing	countries	also	need	to	increase	their	productive	capabilities	to	be	able	to	deal	with	the
consequences	of	climate	change	(climate	adaptation	is	the	technical	term).	Due	to	their	climate,	locations
and	geography,	many	developing	countries	are	going	to	bear	the	brunt	of	the	impacts	of	global	warming,
despite	having	very	little,	if	not	necessarily	minimal,	responsibility	for	causing	it.	Despite	this,	these	are
exactly	the	countries	with	the	least	capability	to	deal	with	those	impacts.*	In	order	to	better	deal	with	the
consequences	of	climate	change,	poor	countries	need	to	equip	themselves	with	better	technologies	and
organizational	capabilities,	which	can	only	be	acquired	through	economic	development.
The	case	for	having	more	economic	growth	and	development	in	the	least-developed	countries	is
overwhelming,	as	growing	their	income	to	a	certain	level	(say,	where	China	is	today)	would	make	at	most
a	marginal	difference	to	climate	change,	as,	for	example,	discussed	in	the	Greenhouse	Development
Rights	(GDR)	framework,	developed	by	two	think	tanks,	Eco-Equity	and	the	Stockholm	Environmental
Institute.17
Rich	countries	should	continue	to	develop	their	economies	but	radically	change	their	production	and	consumption	priorities
Given	that	they	are	already	consuming	the	vast	bulk	of	the	world’s	resources	and	they	have	far	fewer
needs	to	increase	consumption,	the	rich	countries	need	to	reduce	their	consumption,	if	we	are	to	dampen
the	extent	of	climate	change.	But	even	with	lower	aggregate	consumption,	human	welfare	need	not	go
down.	In	highly	unequal	countries	like	the	US,	Britain	and	Portugal,	reduction	in	inequality	will	allow
more	consumption	for	more	people.	Even	in	relatively	equal	societies,	welfare	can	be	increased	without
increase	in	consumption	by	consuming	differently,	rather	than	consuming	more.18	Increase	in	the
consumption	of	collective	services,	especially	public	transport	and	leisure	facilities,	can	improve
welfare	by	reducing	the	resources	wasted	in	fragmented	individualistic	consumption:	time	wasted	in
sitting	in	a	car	in	a	traffic	jam	or	duplication	of	services	between	small	private	libraries	that	are	popular
in	countries	like	Korea.
In	addition	to	reducing	the	amount	of	consumption,	its	energy	intensity	can	be	reduced.	Stricter	energy
efficiency	requirements	on	buildings,	cars	and	electrical	equipment	may	be	imposed.	Out-of-town
shopping	centres	and	suburban	developments	could	be	discouraged,	while	investments	in	better	public
transport	are	made,	so	that	people	drive	less.	Cultural	shifts	may	also	be	needed	if	people	are	to	find
more	joy	in	having	quality	time	with	family	and	friends	than	buying	things.	Continued,	or	even	increased,
use	of	nuclear	power	should	be	contemplated	outside	major	earthquake	areas	(such	as	Japan,	parts	of	the
US	and	Chile)	as	a	transitional	measure	before	we	completely	shift	to	renewable	energy	sources.19
But	all	of	this	does	not	mean	that	the	rich	countries	should	stop	economic	development,	at	least	in	the
sense	in	which	I	have	defined	it	in	this	chapter.	They	can	still	increase	their	productive	capabilities	but
use	them	not	to	increase	material	consumption	but	to	reduce	working	hours	while	producing	the	same
amount	as,	or	even	more	than,	before.	They	can	develop	–	and	transfer	to	developing	countries	at
affordable	prices	–	their	productive	capabilities	in	activities	that	combat	climate	change	and	other
environmental	problems,	such	as	better	renewable	energy	technologies,	more	efficient	but
environmentally	friendly	agriculture	and	more	affordable	desalination	technology.
Concluding	Remarks:	Why	We	Need	to	Pay	More	Attention	to	Production
Production	has	been	seriously	neglected	in	the	mainstream	of	economics,	which	is	dominated	by	the
Neoclassical	school.	For	most	economists,	economics	ends	at	the	factory	gate	(or	increasingly	the
entrance	of	an	office	block),	so	to	speak.	The	production	process	is	treated	as	a	predictable	process,	pre-
determined	by	a	‘production	function’,	clearly	specifying	the	amounts	of	capital	and	labour	that	need	to	be
combined	in	order	to	produce	a	particular	product.
Insofar	as	there	is	interest	in	production,	it	is	at	the	most	aggregate	level	–	that	of	the	growth	in	the	size
of	the	economy.	The	most	famous	refrain	along	this	line,	coming	from	the	debate	on	US	competitiveness	in
the	1980s,	is	that	it	does	not	matter	whether	a	country	produces	potato	chips	or	micro-chips.	There	is
little	recognition	that	different	types	of	economic	activity	may	bring	different	outcomes	–	not	just	in	terms
of	how	much	they	produce	but	more	importantly	in	terms	of	how	they	affect	the	development	of	the
country’s	ability	to	produce,	or	productive	capabilities.	And	in	terms	of	the	latter	effect,	the	importance	of
the	manufacturing	sector	cannot	be	over-emphasized,	as	it	has	been	the	main	source	of	new	technological
and	organizational	capabilities	over	the	last	two	centuries.
Unfortunately,	with	the	rise	of	the	discourse	of	post-industrial	society	in	the	realm	of	ideas	and	the
increasing	dominance	of	the	financial	sector	in	the	real	world,	indifference	to	manufacturing	has
positively	turned	into	contempt.	Manufacturing,	it	is	often	argued,	is,	in	the	new	‘knowledge	economy’,	a
low-grade	activity	that	only	low-wage	developing	countries	do.
But	factories	are	where	the	modern	world	has	been	made,	so	to	speak,	and	will	keep	being	remade.
Moreover,	even	in	our	supposed	post-industrial	world,	services,	the	supposed	new	economic	engine,
cannot	thrive	without	a	vibrant	manufacturing	sector.	The	fact	that	Switzerland	and	Singapore,	which
many	people	consider	to	be	the	ultimate	examples	of	successful	service-led	prosperity,	are	actually	two
of	the	three	most	industrialized	countries	in	the	world	(together	with	Japan)	is	a	testimony	to	this.
Contrary	to	conventional	wisdom,	development	of	productive	capabilities,	especially	in	the
manufacturing	sector,	is	crucial	if	we	are	to	deal	with	the	greatest	challenge	of	our	time	–	climate	change.
In	addition	to	changing	their	consumption	patterns,	the	rich	countries	need	to	further	develop	their
productive	capabilities	in	the	area	of	green	technologies.	Even	just	to	cope	with	the	adverse
consequences	of	climate	change,	developing	countries	need	to	further	develop	technological	and
organizational	capabilities,	many	of	which	can	only	be	acquired	through	industrialization.
Further	Reading
M.	ABRAMOVITZ
Thinking	about	Growth	(Cambridge:	Cambridge	University	Press,	1989).
F.	ACKERMAN
Can	We	Afford	the	Future?:	The	Economics	of	a	Warming	World	(London:	Zed	Books,	2009).
H.-J.	CHANG
23	Things	They	Don’t	Tell	You	about	Capitalism	(London:	Allen	Lane,	2010).
T.	JACKSON
Prosperity	without	Growth:	Economics	for	a	Finite	Planet	(London:	Earthscan,	2009).
S.	KUZNETS
Modern	Economic	Growth:	Rate,	Structure	and	Speed	(New	Haven	and	London:	Yale	University	Press,
1966).
N.	ROSENBERG
Inside	the	Black	Box:	Technology	and	Economics	(Cambridge:	Cambridge	University	Press,	1982).
R.	ROWTHORN	AND	J.	WELLS
De-industrialization	and	Foreign	Trade	(Cambridge:	Cambridge	University	Press,	1987).
J.	SCHUMPETER
Capitalism,	Socialism	and	Democracy	(London:	Routledge,	2010).