By Sam Volkers
The Covid-19 pandemic proved to be a turning point in political and economic thinking in the West. Not only did we realize that neoliberalism and hyper-globalization are failed projects and that the state should step in more often to help solve problems in the economy, but we also realized that our economies are unbalanced. Rich and developed nations in the West* proved to be unable to produce even the most basic items needed to fight the pandemic (e.g. masks) and had to import them from countries like China. The reason for this?: our countries have been de-industrialized.
Only now are we realizing what a big mistake this has been and that something needs to be done. It is time to re-evaluate our manufacturing sector and its importance to our economy and national security.
The new economic paradigm: the knowledge economy vs the industrial economy
40 years of neoliberal economics and globalization have put our manufacturing sectors under immense pressure. Many companies either outsourced their production or collapsed. And for the longest time economists, politicians, and pundits actually believed this was a good thing. South Korean economist Ha-Joon Chang describes their way of thinking as follows (Chang 2010: 108):
“Our economy has been fundamentally transformed during the last few decades. Especially in the rich countries, manufacturing industry, once the driving force of capitalism, is not important anymore. With the natural tendency for the (relative) demand for services to rise with prosperity and with the rise of high-productivity knowledge-based services (such as banking and management consulting), manufacturing industries have gone into decline in all rich countries. These countries have entered the ‘post-industrial’ age, where most people work in services and most outputs are services. The decline of manufacturing is not only something natural that we needn’t worry about but something that we should really celebrate.”
The basic idea here is that our manufacturing industries have become irrelevant for us and that we should instead move towards a knowledge- and service-based post-industrial economy in which everyone works cosy middle-class jobs in sectors such as services, finance, tourism, and academia.
Although this all sounds fantastic, reality tells a different story.
De-industrialization and the outsourcing of production to other countries have caused companies to become “dumber” (for the lack of a better term). Companies in western developed countries have shifted their focus from manufacturing products to simply just selling them (and maybe doing some marketing). This shift has caused these companies to have less knowledge about their products, it has caused them to be less innovative, and it has caused them to lose their competitive edge over their foreign competitors. Dutch entrepreneur and scientist Bert Hubert warned about the dangers of this shift in a recent interview with de Correspondent, comparing the process of outsourcing manufacturing and operating processes to other countries with the turning of a gear (Martijn 2021):
“It’s like a gear that only turns in one direction, every time you say we’re not doing this ourselves anymore — click! — you go a step further and your company has become a bit dumber again. Gradually you lose all your practical skills one by one. Is there something wrong with the computer network? Click, we outsource the computer network. Those coffee machines? Click. But what turns out? Even outsourcing something as silly as the coffee machines will cost you agility points as a company. Because you learn a lot from managing coffee machines yourself. For example, what it’s like to order supplies. Or how the health and safety rules work.”
This shift from a focus on manufacturing to a focus on services has also caused problems for our economy in general. Our increasing reliance on services is one reason why many economies in the West have seen lower economic growth rates or even stagnation. Services provide only limited room for productivity growth, which makes them a poor engine of economic growth in general (Chang 2010: 108–109). The existence of manufacturing industries — and the subsequent need to stay ahead of the competition — also forms one of the main drivers of innovation and has historically been the foundation of many important developments (Bade 2004). It’s not the knowledge- and service sectors that create demand for manufacturing, but the other way around: manufacturing industries create demand for knowledge and services
And what about all those new, cosy middle-class service jobs that everyone was promised? This too turned out to be a fantasy.
Most workers who have lost their jobs due to de-industrialization and outsourcing have had a hard time finding new jobs. Those that did find new jobs often ended up with lower-paid, part-time service jobs. Others did not find new work at all and ended up in despair, with some even giving up on the search to find work altogether (Stiglitz 2014).
To solve these problems we need to reassess our economy and address the imbalance between the knowledge- and service sectors and the manufacturing sector. To do this it is important to re-affirm why our manufacturing industries are still relevant and look at how our economies benefit from them.
Why manufacturing industry is still relevant: two arguments
When discussing why our manufacturing industries are still relevant and how our economies benefit from them, we need to realize that the importance of our manufacturing industries is two-fold: our manufacturing industries are not just important for our economy, they have a strategic importance as well.
1. The economic argument
Manufacturing industries are important drivers of economic growth and innovation. There is a strong correlation between industrialization and economic development because the manufacturing sector is the driver of productivity growth. This in turn stimulates technological development and the creation of advanced technologies in an effort to achieve better and more efficient production methods (Hauge 2018). The economist Nicholas Kaldor emphasized the positive correlation between economic growth (in GDP) and the growth of the manufacturing sector in his growth laws (Mazzarol 2012):
“Kaldor proposed that economic growth and enhanced standards of living were positively correlated with national industrial activity. He suggested that growth in GDP was positively related to growth in the nation’s manufacturing sector. Productivity in the manufacturing industries was also positively related to growth in this sector. He also suggested that the productivity of the non-manufacturing sector was associated with growth in manufacturing.”
This positive correlation between economic growth and the manufacturing sector — and in particular the positive correlation between growth in the manufacturing sector and growth in non-manufacturing sectors — can further be explained by looking at what Albert O. Hirschman (another famous economist) wrote about this in his famous theory about economic linkages (Yülek 2018: 126–127):
“Along the value chain, a firm (or a sector) receives raw or intermediate inputs from other firms (and sectors). Forward linkages refer to the firms (or sectors) receiving inputs from the firm (or sector) in question; backward linkages are firms/sectors that supply inputs to the firm.”
The idea behind this theory is that the manufacturing sector creates spill-over effects into other sectors of the economy (e.g. services). Factories need suppliers to buy their materials from, and workers need stores and other places to spend their hard-earned money. As a result of this, the other non-manufacturing sectors of the economy will grow, which creates more jobs and stimulates overall economic growth.
A recent study has confirmed this theory, by showing that — in this case in the United States — one advanced industrial job supports around two jobs in other sectors (Brookings Institution 2015).
Tata Steel IJmuiden (one of the largest factories in the Netherlands) is a good example of this principle. Besides the 10.000 people working at the factory, Tata Steel IJmuiden also supports 35.000 other non-manufacturing jobs — e.g. stores, services, supply companies etc. — in the region (FNV 2021). The factory is at the heart of the local economy. If it were to close it could have a devastating impact on the whole region. Workers would lose their jobs and thus have less income, which would cause local businesses to have less income as well. The suppliers of the factory would also be put in a bad position, with some of them possibly even going bankrupt.
This is why developed nations should not give up on their manufacturing sectors. If the process of de-industrialization is not stopped it will be at the expense of our economic growth, jobs, and potential inventions.
2. The strategic argument
Economics can never be separated from politics (even though some economists like to pretend otherwise). Because of this, economic problems should not just be looked at from an economic perspective but also from a political and strategic one. For too long, politicians and economists from developed nations (particularly those in the West) have failed to recognize the strategic importance (e.g. national security) of our manufacturing industries.
Their failure to recognize this would come to haunt them — and thus subsequently also normal people like you and me — during the recent Covid-19 pandemic when most developed countries proved to be unable to produce the goods needed to fight this pandemic. From simple masks to high-tech breathing machines, we could not make anything ourselves. Instead, we relied on countries such as China and India to produce these things for us (Scheffer 2020).
And this is a big problem.
Our reliance on other countries for the production of important goods such as medical supplies, military equipment, and crucial infrastructures (e.g. telecommunications) gives them leverage over us that they can use for their own political ends. We have seen this with the West’s weak and slow response to the genocide that China is currently committing against the country’s Uyghur population. Most western countries are worried that speaking up about it will harm their relations with China and thus endanger the supply of these important products.
This reliance also means that, if we were to ever get into an armed conflict with one of these countries (for whatever reason that may be), we would be at a severe disadvantage because it is hard to fight those who make the bullets you shoot and control the communication infrastructure you use to receive and give orders (Martijn 2021).
Added to this is the problem that — unlike (consumer) products made by manufacturing industries — services are less suited to be traded and thus a service-oriented economy will inevitably have a weaker export base, which prevents the acquisition of advanced technologies, stifles innovation, and creates slower economic growth (Chang 2010: 109). Prioritizing services causes a nation to lag behind technologically and weakens its export sector, which in the long run will leave it dependent on — and thus at the mercy of — stronger industrialized states (e.g. China) who will use the de-industrialized states as dependencies to extract resources from and sell their goods to (not unlike what Great-Britain did to the Thirteen Colonies before the American Revolution).
Towards a new synthesis?
If western countries want to prevent becoming dependencies of the now rising superpowers (e.g. China) and address the current predicament we find ourselves in, it is important that we change the way we think about our economies and re-balance them. We need to create well-balanced economies with strong manufacturing industries supported by services, finance, and other sectors. Strategic production chains need to be re-shored and protected. This would create new jobs, get the economy back on track, and strengthen our position on the world stage.
For this to be successful we need to be creative and open to new methods of production. For example, smaller countries like the Netherlands could compensate for their smaller industrial workforce by investing more in smart industry and automating certain tasks. This way a (relatively) small industrial workforce can still be highly productive. We also need to ensure that the production methods used are sustainable and do not harm our environment. This can be done by investing in environment-friendly materials such as green steel and clean energy resources (e.g. nuclear energy and renewables).
Although it has recently become clear to everyone how important our manufacturing industries are, it is still a very broad topic that could never be fit into one article. I do hope that this article can add to the discussion and possibly inspire others to re-think the way they look at manufacturing industries and come up with new ideas on the matter so that maybe one day our children will inherit a strong economy with a reliable manufacturing base that will create jobs and growth for the benefit our families, communities, and countries.
*: This article focusses on rich and developed nations in the West because the rich and developed nations outside of the West (e.g. those in Asia) have not neglected their manufacturing industries (as much) like the West did.