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In defence of manufacturing

LiveMint logoLiveMint 25-09-2017 Livemint

Jack Ma knows what he is talking about when it comes to entrepreneurship. The Alibaba Group founder and executive chairman got in at the ground floor of the internet revolution in 1995 with a handful of borrowed cash and rode the elevator all the way to the top. He is now one of the world’s richest men and most influential businessmen. So when he says that the days of manufacturing driving growth are over and small, networked businesses and entrepreneurs will drive growth this century, it’s worth paying attention. Is he correct?

There is more to back up Ma’s statement than just the Alibaba experience, which has proved the potential of monetizing small-scale entrepreneurship. Economic research has consistently shown that innovation drives economic growth. It boosts allocative efficiency of resources, fosters competition, boosts trade through product diversity and helps provide low-cost solutions to human development challenges. Start-ups and small businesses are some of the strongest repositories of the entrepreneurship that drives innovation. Certainly, big manufacturing enterprises can drive innovation—think automobile giants feeling their way towards an electric vehicle future—but even here, it has been former start-up Tesla, which has retained its agility and disruptiveness as it has grown exponentially, that has goaded them. In general, much of the vital churn comes from start-ups and small businesses that are snapped up by larger companies to acquire patents.

This has been a global experience. In the US as much as in India, small firms are the main creators of jobs. China’s ascent might have been built on the back of its becoming the world’s factory, but that is changing gradually. Beijing is increasingly looking to the services sector—as elsewhere, a hotbed of entrepreneurship and innovation—to drive growth and attract foreign investment. This is integral to its attempt to rebalance towards a consumption-led economy. For two years running now, the share of services in its gross domestic product has been over 50%; the ultimate goal is 70-80%, the average for advanced economies.

All of which goes to show that Ma is on the money, surely? Not quite.

If political developments in the US and Europe over the past few years have shown anything, it’s that headline numbers alone paint an incomplete picture. There is a very real social and political cost for paying insufficient attention to accessible low-skill manufacturing jobs. The opioid crisis that has swept the US Rust Belt points to the consequences of economic alienation among blue-collar manufacturing workers on a micro level no matter what the macro numbers say. These consequences are earning increasing attention. For instance, Hillbilly Elegy by J.D. Vance paints a troubling portrait of the manner in which economic alienation can deplete the social and cultural capital that goes into building nationhood. The unhealthy rise of the far right in Europe at the expense of the postwar left-of-centre social democratic consensus—seen yet again in the German election last weekend—is another pointer.

The problems are somewhat different in developing economies but no less pertinent. For instance, entrepreneurship in India is more of the “push” variety than the “pull” variety: people often become entrepreneurs not because of entrepreneurial drive or innovative ideas but because of a lack of organized jobs. And small businesses in India feed into the predominantly informal nature of the economy. On the other hand, large enterprises have several advantages. They have the resources to work around the state’s failure to provide enough infrastructure of adequate quality. This allows them, among other things, to build supply chains across states—or simplify matters even more by making those chains intra-firm. They are consequently able to achieve economies of scale that boost productivity. Lacking similar resources, small enterprises inevitably have lower productivity and lower wages.

As Roshan Kishore has written in Mint, this problem is worsening. The sixth economic census, conducted between January 2013 and April 2014, shows that the average employment size of an economic establishment in India is 2.24—the fourth consecutive census of decline. In such a scenario, focusing on low-skill manufacturing jobs in large enterprises becomes more important than ever.

This newspaper has spoken against the job alarmism caused by the rise of automation and artificial intelligence. This continues to hold true. And Ma is correct in pointing to the shift in growth models; this is inevitable over the medium to long term. Where he is wrong is in positioning this as a zero-sum situation. Large-scale manufacturing may see a decline over this century but, as he himself admitted earlier this year, this will cause decades of economic and social pain. That is why governments cannot afford to lose focus on large-scale manufacturing. Improving human capital to meet the demands of the transforming economy is a generational challenge—and in the interim, those vanishing low-skill jobs are imperative for providing a soft landing to the economic shift.

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