From Ricardo to China, sectoral choices, scale economies, and globalization reveal why industrial structure still shapes prosperity in unexpected ways.
The probably most funny (although somewhat implicit) assumption in Ricardo’s model of comparative advantage is the supposition that all sectors are essentially equivalent in terms of development: as specialization is determined by short-run costs, the long-run consequences of sectoral lock-ins are bracketed out. It is, hence, not without irony that Ricardo’s original example relies on comparing cloth and wine, where the former lies at the roots of industrialization, while specializing in wine is surely a tasty, but nonetheless somewhat stagnant development strategy ;-) In a similar vein, standard mainstream approaches to international trade do treat sectors as intrinsically equivalent and thereby overlook how some sectors are more conducive to economic development than others.
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Therefore, a key reason why sectoral heterogeneity matters is that some sectors are more conducive to economies of scale than others and contribute more to overall productivity.* As already noted by Adam Smith, a key constraint for exploiting such economics of scale is the „size of the market“, that is, effective (global) demand for manufactured goods. These indications explain why global competition is, in large parts, a competition for (global) market shares in industrial sectors as the latter allow for reaping the benefits of associated productivity increases. And it is for these reasons that I regularly tell my students that until the 1980s or so no country ever became rich without industrial development (which is also key to understanding what is called the Great Divergence).
However, the opening-up of global economy, that goes back to the implosion of the Bretton Woods System in the 1970s, climaxed with the foundation of the WTO in the 1990s and is now seemingly at crossroads, intensified global competition in a way that both, reaffirms as well as challenges, heterodox analysis and policy advice in several contexts.
For one, in a globally integrated economy being strong on industrial production can no longer be considered a necessary condition for being rich. Rather, increased international integration led to a more nuanced division of labor between countries, which coincided with the emergence of more heterogenous development models (see, e.g., here and here for some related applications). While these development models still reflect the traditional dichotomy between an industrialized core and a periphery focusing on providing primary products, corresponding analyses also indicate how specific development models – especially those focusing fossil resource provisioning, tax evasion & profit shifting as well as financial sector services – can be associated with significant increases in real GDP. The key reason for this emerging pattern is, probably, that these countries provide inputs and services that are highly complementary to a capitalist economy, that is in large parts based on fossil energy sources and dominated by multinational corporations.
For another, the rise of China seems paradoxical for many mainstream observers – as China was quite successful in its stated attempt to become the (main) industrial workbench of the global economy by deviating from mainstream policy prescriptions. The success of China came with many notions – like the use of subsidies, the selective opening of markets or restriction on foreign investments – that are close to heterodox trade policy advice that starts from arguments on economies of scale and the size of the market to better understand how capturing single sectors or industries might translate into cumulative advantage in the medium-run (see, e.g., here or here)
Finally, heterodox analyses of international trade will become even more informative should current scenarios of a fragmentation of global value chains and a corresponding reorganization of international trade truly materialize. In such an environment of economic fragmentation parallel to geo-political cleavages, mercantilist notions of dominance via trade, finance and ownership would become more important. Also, and as discussed in some past editorials (see, e.g., here & here), trade & industrial policy would become much more entangled with concerns for structural autonomy and military capacities.
In my view the practical real-world focus on production processes encapsulated by heterodox economics, will be instrumental for understanding new economic configurations. At the same time, heterodox alternatives for a global economic policy that endows all countries with realistic prospects for beneficial socio-economic development, while fostering peace, stability and international exchange, will probably not be in high demand in such a context. Nonetheless, and somewhat paradoxically, such alternatives will still highly be needed.
In short, while the world might change, what remains constant is that the capacity of heterodox ideas and approaches to illuminate society – and, especially, how&why it changes ;-)
All the best and keep up the good work!
* In my humble view, this lesson is also at the heart of a Baumol’s argument on ‚cost disease‘.
