http://worldbank.einnews.com/article/298687121/1W1TN4aYGHIz9bOm?continued=1
By Raymond Zhong
RAJKOT, India—For nearly half a century, Laljibhai Gajjar ran factories making diesel engines and parts in and around this sleepy industrial city. But after Chinese products began swallowing up the market, he found another calling. He laid off 100 workers and started selling Hyundais.
Behind his bustling car showroom stands all that remains of his manufacturing operations: a crumbling workshop in which two dozen employees now assemble metal-stamping machines. Orders are dwindling. One of these days, Mr. Gajjar said, he’ll shut that down, too.
Mr. Gajjar’s downsizing is part of a phenomenon in India and other poor countries, where the world’s population is growing most quickly, that is alarming many economists.
The U.S. and Europe—and East Asia more recently—first got rich because of their factories. Over time, as incomes rose and their economies became more sophisticated, they shifted into modern services like health care and finance.
But today, parts of South Asia, Africa and Latin America are failing to create thriving manufacturing sectors even though their wages remain low. Manufacturing employment and output are peaking and declining at vastly lower levels of income and development than they did in the West.
Economists’ worry is that the factory-led model of advancement—which, for more than a century, has offered the quickest route out of poverty—is simply no longer available to today’s poorest nations.
Jobs needed
That poses a huge challenge for places like India that are still brimming with young people in need of good jobs. The South Asian giant, whose population today is around 1.3 billion, is expected to overtake China as the world’s most populous country by 2022 and have 1.7 billion people by 2050. Its working-age population is growing by a million people every month.
Having lots of young people working, earning and spending should yield a demographic boost that turbocharges growth for decades. But it can turn into a disaster if jobs don’t materialize.
Harvard economist Dani Rodrik, who began compiling data on manufacturing world-wide a few years ago, says he is seeing growing evidence of what he calls “premature deindustrialization”—the idling or shrinking of manufacturing sectors as a share of the economy in poor countries like India that never industrialized much in the first place.
In the early 1960s, when Mr. Gajjar opened his engine factory in Rajkot, manufacturing output in India was around 12% of the economy. The share peaked at 19% in the 1990s, and has since fallen to around 17%.
South Korea’s manufacturing sector, by contrast, grew to 36% of the economy by 2010 from 3% in the early 1960s. The path was similar in China, where manufacturing also accounts for around a third of the economy.
Africa looks more like India. In South Africa, manufacturing was 15% of output in 1962 and peaked at 25%—in 1981. By 2011, the share was closer to 18%. Factory activity in fast-modernizing Ethiopia hasn’t managed to grow beyond 6% of the economy. In Tanzania, it peaked at 13% in 1976 and dropped since to around 10%.
There are ample reasons these countries have struggled. Their roads and electricity systems are poor. Business regulations can be onerous, and their enforcement plagued by corruption.
But experts including Mr. Rodrik say there are also deeper forces at work.
Factory automation and robotics are reducing the need for unskilled workers from the countryside to staff assembly lines.
Industrial latecomers now have to compete against China, whose massive, integrated manufacturing machine has made it the world’s factory floor and created a huge barrier to entry. Tariffs are falling and trade is becoming freer, making it tougher for developing countries to shelter their producers from foreign competition.
And, as developed countries age, there are signs that global demand for everything from cars to furniture is plateauing. Since the 2007-2008 financial crisis, world exports and imports have been expanding more slowly than world economic growth for the first time in decades.
“The room for newcomers is getting narrower,” Mr. Rodrik said. “I doubt that we’re going to see a repeat of history.”
Not all are so despairing. Some economists argue service industries, such as real estate, back-office business and tourism, can be as much of a jobs-and-growth engine for developing countries as they have been for the postindustrial West.
Others contend the old, manufacturing-led model still works fine. They say that as long as there are nations where workers will sew, weld and assemble more inexpensively than elsewhere, industries will spread there eventually. With China aging and wages there rising, India can still pick up manufacturing that flees, in the time-tested manner, for lower-cost shores.
“The scope for growing by using cheap labor and attracting capital and technology has not gone away,” said Arvind Subramanian, the Indian Finance Ministry’s chief economic adviser.
Yet data Mr. Rodrik has marshaled suggests something has changed since the U.S., Europe and Japan used their factory might, decades ago, to drive big gains in prosperity before manufacturing migrated overseas.
When manufacturing peaked as a source of jobs in the U.S. in 1953, it employed 26% of American workers, and overall per capita income was around $17,700 in today’s dollars. By 2010, manufacturing accounted for around 9% of U.S. jobs.
Factory employment topped out later in the U.K., France, Italy and Japan, but at around the same income level or higher.
In places that started the process later, manufacturing yielded less. By the time manufacturing in South Korea accounted for its highest proportion of jobs, in 1988, incomes there were around $12,700, after adjusting for differences in purchasing power. Brazil peaked in 1986, at $8,700.
In India, factory employment started to decline as a share of employment when income was around $3,300. And for Nigeria, Kenya and Ghana, the figure was closer to $2,000.
In many of these countries, manufacturing’s share of economic output continued rising even after the employment share peaked. As plants become more productive, they make more with fewer workers.
Indian Prime Minister Narendra Modi is hoping this grim trend can be defied. He has vowed to build better roads, clear red tape and take other steps to vault India into the leagues of Asia’s industrial powerhouses, creating 100 million jobs in the process.
Between 2005 and 2012, the most recent year for which comprehensive data are available, India created only six million new jobs in manufacturing and 21 million in services. The total workforce expanded, during that period, by around 55 million.
In Mr. Modi’s first 18 months in office, global manufacturers like Ford Motor Co. , Foxconn Technology Group and General Electric Co. have announced expansions to their India operations, potentially creating thousands of jobs.
Facing limits
But his “Make in India” campaign may face limits that didn’t exist for other countries during their industrialization. When China’s factory sector took off, demand world-wide was buoyant and multinationals hadn’t yet moved as much of their production offshore. Also, China’s authoritarian political system means it had a far easier time building highways and clearing land for industry.
“No matter how hard India tries to do what it does, it’s just going to face much stronger global headwinds than what China faced,” said Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management.
One headwind is China itself. Bargain-price Chinese goods, produced at titanic scale, mean that even with India’s factory labor costs at around $5 an hour versus almost three times that in China, manufacturers have to work harder to compete than they would have a decade ago.
In the packed lanes of New Delhi’s Chandni Chowk market, merchants say clothing, electrical switches and even colorful lights for Hindu festivals all come, nowadays, from just one place: China.
The invasion was swift, Vikas Pandey remembers. His light-fixture business began losing customers to China around 15 years ago. Within months, he had to close his factory and start importing, he said. “I simply couldn’t go on.”
India’s annual trade deficit with China has ballooned to $48 billion, or 2.5% of India’s gross domestic product. Electronics, machinery and parts account for nearly half of India’s imports from China. A decade ago, the gap was less than $1.5 billion.
Technological shifts suggest that even if India manages to attract more manufacturing, it won’t be on a China-like scale.
Lower trade barriers and better communication have made it easier for supply chains to be spread over farther-flung locales, bringing more countries into direct competition for factory investment. India must joust more often with other cut-rate producers like Bangladesh or Vietnam for slices of the manufacturing process—a component or an assembly here, some product development there—rather than for “start-to-finish industry,” as Chidu Narayanan, an economist atStandard Chartered, calls it.
“It’s more of a ‘Made in the World’ kind of thing rather than ‘Made in India’ or ‘Made in China,’ ” Mr. Narayanan said.
Work for robots
More factories also might not translate into as many jobs, at least not for humans. According to the International Federation of Robotics, sales of industrial robots shot up by 29% last year to a record of nearly 230,000 units and are expected to keep climbing, especially in Asia.
At Hero MotoCorp Ltd. ’s spotless, year-old motorcycle factory in India’s Rajasthan desert, robotic arms mill engine parts and weld and paint fuel tanks. Nearby, a skeleton crew runs the cavernous spare-parts warehouse, whose three-story-high shelves are stocked and maintained by computers.
Pawan Munjal, Hero’s chief executive, said the company automated to deliver greater precision and keep workers safe—not, primarily, to save on labor costs.
If anywhere in India might be shielded from deindustrialization, it is Gujarat, with its perch on the Arabian Sea and long tradition of entrepreneurship.
Some of the country’s biggest business houses have Gujarati origins. Mr. Modi governed the state for more than a decade before he became prime minister, luring factories with promises of reliable electricity and smooth bureaucracy.
Gujarat, home to Rajkot and Mr. Gajjar’s factory, is the only Indian state where manufacturing’s share of the economy has even approached East Asian levels, according to an analysis by Mr. Subramanian and economist Amrit Amirapu. Factories contributed 22.7% to Gujarat’s output in 2011, compared with a third in some East Asian countries.
Yet here, too, job growth isn’t keeping up with the explosion of young people training for factory work. Manufacturing’s share of employment peaked in 1984 at 5.4%.
After making good grades at an engineering college near Ahmedabad, Gujarat’s largest city, Vishal Makwana didn’t expect to be living at home, helping his parents with errands, and praying, at the local temple, for a job.
But in the two years since he graduated, Mr. Makwana, 23 years old, has handed out résumé after résumé at nearby plants.
Some engineering graduates have found jobs in Web design and marketing. Others want something stabler, if less remunerative. Recently, Gujarat’s government sought to hire 35,000 clerks, accountants and other low-level officers at salaries as low as $120 a month. The state received 700,000 applications.
Sudhir Kad ’s company in Ahmedabad rolls stainless steel into sheets that are used to make kitchenware and utensils. But with more customers turning to higher-quality Chinese sheets, Mr. Kad has been running only six of his 10 steel-rolling mills for the past year.
Nearby, in the same industrial park, Pradeep Lodha closed one of his steel-rolling units in 2012. A hundred workers lost their jobs. Today, Mr. Lodha is running just eight of his 10 remaining mills.
“This is the time when people should start thinking of alternatives,” he said.
Some of those alternatives, software development and business outsourcing in particular, have already helped deliver 15 years of brisk growth for India. Some economists believe that as the world economy changes, skipping the manufacturing phase of development doesn’t have to spell doom.
“Growth drivers go beyond manufacturing in today’s world,” said Ejaz Ghani, an economist at the World Bank. He points to the rapid growth of services exported from places like Kenya, whose accountants serve clients in neighboring countries.
Such high-skilled work can only be taken up, however, by a privileged sliver of the population. Economists say traditional services jobs like security guards, drivers and bank tellers are less likely to bring in advanced technology, spur innovation or cultivate expertise to create future entrepreneurs.
And India’s experience shows that relying on services carries its own risks. The country’s famed outsourcing industry, a crucial escalator into the middle class, is no longer hiring like it used to. Big companies are shifting toward cloud storage and off-the-shelf software, reducing the need for Indian technicians and coders to maintain in-house data centers and write bespoke programs.
In manufacturing, too, India has done better at using skilled workers—but not necessarily many of them—to make sophisticated products. Baba Kalyani says his company, Bharat Forge Ltd. , became a heavyweight auto-parts exporter through technological innovation, not low-cost labor. It is too late, he said, for India to try to beat China at its own game.
“We are past that time,” Mr. Kalyani said. “If we try moving in that direction, we will just simply fail.”
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