Losing manufacturing is what rich countries do

Now that Holden is to stop making cars in Australia, we’re already hearing about the impending death of Australian manufacturing.

Before you descend into gloom, take a look at this manufacturing data from the World Bank. It sets out how manufacturing value-added has been moving, as a share of GDP, for most of the countries on the planet.

Summary: If present trends continue, eventually the only country making stuff will be South Korea. Plus maybe Bangladesh and Nicaragua.

Slightly smarter summary: The richer you get, the less manufacturing you have.

Australian manufacturing’s share of GDP peaked some time well before 1990, and in the past 20 years or so its manufacturing value-added as a share of GDP has dropped from around 15 per cent to around 9 per cent.

Sounds pretty bad? Maybe not. That decline is of the same order as other developed economies, although it started from a lower base than most. Canada’s manufacturing decline is very similar to ours, right down to the media fretting.

But surely it’s a very different story for places like China? Let’s look at the data. When did Chinese manufacturing peak as a share of GDP? Ooh. 1980. They’ve been going downhill ever since, if you want to see manufacturing as all-important.

How about Germany? That same year of 1980 is also the peak in the German manufacturing-share data, at least in this series. (But then, 1980 is the first year for which we have data in this series, so the true peak was probably earlier). Back in 1980, manufacturing was 30 per cent of the German economy; now it’s barely 20 per cent.

It’s the same for almost any country you can think of. Norway peaked in 1974, India in 1979, South Africa in 1981, Turkey in 1998, Ireland in 1999, Tajikistan in 2002, Malaysia and Singapore in 2004.

Here, have a graph. (Update: Now with Canada and Luxembourg! Update 2: Plus Japan!! Sorry Vietnam, no room for you now.)

Manufacturing share of GDP

Japan peaked in 1984, looked unstoppable, and 30 years on, worrying about the hollowing-out of Japanese industry is a national pastime in that country.

In the next two years South Korea will become the exception to this rule, for a little while at least, due to its growing capability in cars and electronics. History suggest its exceptionality will not last long.

It’s in the low-income economies that manufacturing is growing, the places just starting the industrialisation cycle. Nicaragua. Bangladesh. Uzbekistan (starting again, post-USSR).

Reckon this is cherry-picking? Download the data yourself and have a play in Excel.

Most of us think manufacturing matters to an economy more than it does; we underestimate the importance of services, especially in a relatively self-contained economy like Australia. (“Australia, trading nation” is a myth; we’re among the least trade-exposed nations on earth.) The obvious comparison is with agriculture: 120 years ago, more than 30 per cent of people worked in agriculture, and people would have laughed at a claim you could run an economy with a farm workforce less than two per cent of the total. But here we are, not noticeably starving to death.

What is almost certainly true is that the loss of manufacturing jobs has a distributional effect. In particular, less manufacturing means less employment destination for males without a good tertiary qualification. We need to keep addressing that distributional issue, because it’s not going away anytime soon as far as anyone can see. But we should avoid confusing the income distribution issue with the aggregate income issue. They’re very different.

Manufacturing is not as big in Australia as it used to be. But manufacturing is not as big as it used to be almost anywhere in what we used to call “the developed world”. For the old “developed” nations, it reached its peak between 1970 and 1990, and it looms larger in the thinking of people who came to maturity in those years. (People, perhaps, like Kevin Rudd, who famously declared that he didn’t want to live in a country which didn’t make things.)

If you think that manufacturing is the key to prosperity, the historical record should give you pause.

Note: Never mind Excel. Google has our manufacturing-data-fiddling needs covered. Naturally.

About David Walker

David Walker runs publishing consultancy Shorewalker DMS (shorewalker.net) and is commissioning editor of Acuity magazine. David has previously edited the award-winning INTHEBLACK business magazine, been chief operating officer of online publisher WorkDay Media, held policy and communications roles at the Committee for Economic Development of Australia and the Business Council of Australia, and run the website for online finance start-up eChoice. He has written professionally on economics, business and public policy since 1987 and spent three years in the Canberra Press Gallery for News Limited and The Age.
This entry was posted in Economics and public policy, Interesting Graphs, Politics - national. Bookmark the permalink.

14 Responses to Losing manufacturing is what rich countries do

  1. Patrick says:

    Is this really the case? Isn’t manufacturing moving steadily back to the US as robots become more prevalent?

  2. David Walker says:

    Patrick, if so, it isn’t in the figures yet.

  3. rog says:

    Even the iconic Volvo is being made in China.

    With yacht sails the sailmaker will come out to your boat, measure up, download data to a design pc then email design to their Chinese loft where many hands make tiny neat stitches.

  4. Mike says:

    So if there’s a downturn in manufacturing, where on Earth is all the stuff crammed in people’s houses coming from?

    • David Walker says:

      Mike, the stuff is still being made.

      Depending on how you measure it, the value of Australian manufactured goods is just about at its peak. Manufacturing is just growing more slowly than the rest of the economy, while manufacturing employment is dropping.

      The same is true for most other countries. It just takes less of the world’s people and capital to make those manufactures – hence less value-added as a share of global GDP.

      In this, manufacturing is following precisely the same path as agriculture before it. Australia produces a greater value of food today than ever before, with less people than ever before.

      It seems possible that there really is a limit to how much stuff people want in their homes. What people really want as their income grows is more experiences. Overseas travel, TV series, home-delivered beef rogan josh. Services are more than 70 per cent of the economy, and still growing their share.

      This means that the real economic challenge is to grind productivity out of our services sector(s). As DD and CC point out below in their different ways, this is an interesting challenge.

  5. derrida derider says:

    Of course its not just, or even mainly, globalisation – that is, going where the “males without a good tertiary qualification” are currently cheapest.

    It’s mainly a manifestation of differing rates of productivity growth. As we can make ever more of the widgets we want with ever less human effort, we devote an ever smaller share of our collective effort to widget making in favour of other things. The “other things” are mainly dealing with other people – ie services – which, because of the nature of other people, is about as difficult as ever.

  6. Crocodile Chuck says:

    One more time: why manufacturing is important:

    1) you can apply technology to it, to boost productivity. In the long run, the only way to increase our standard of living (funny, but the guy who cuts my hair still takes the same amt of time to do so as a quarter century ago MANY SERVICES CANNOT BE AUTOMATED)
    2) you can wrap high value services around manufactured goods, e.g. GE sells ten year operating leases to airlines, to maintain their jet engines. BUT YOU HAVE TO MAKE THE JET TURBOFAN FIRST.
    3) with collaboration between shop floor expertise and design/engineering, whole new products (not extensions) can be developed.

    UPSHOT: the two fastest growing employment categories in the USA in the 2000’s: hairdressers and mortgage brokers.

    I certainly hope that this isn’t Australia’s future.

  7. desipis says:

    The “other things” are mainly dealing with other people – ie services – which, because of the nature of other people, is about as difficult as ever.

    The question is to what extent are these “other things” actually positive (e.g. medical services, education, etc) and to what extent are they merely “fighting” over what is being made by everyone else (business, marketing, lawyers, sales people, etc) in a way that may not be of positive benefit overall?

    • David Walker says:

      Don’t write off the potential for increases in services productivity. In many ways, we are living through an era of service productivity improvement. Examples:

      * In the delivery of videos, fully digital delivery is currently killing the video store. That’s a gain, as even my gloomy local video store owner points out.
      * In accounting, online software is making it easier to do your own accounts with a little help from an accountant you rarely visit. That’s a gain, though it makes life hard for accountants.
      * In retail, services like Amazon have driven a bunch of bookstore owners into other work and are now doing the same in electronics, clothing etc.
      * In education, there’s a surge of interest in digitally delivered services. I don’t know which of these will work, but I do suspect they will have an eventual effect, if only because our current system of delivering tertiary education is so inefficient.
      * The once expensive process of media buying is being automated – and the margins crushed – by the likes of Google.
      * Many trips to the bank branch have been replaced in the past 15 years first by trips to the computer and then by the act of pulling your phone out of your pocket.
      * Contra Baumol, the productivity of great musical performers has been hugely amplified by the rise of digital music (and YouTube).
      * Access to information has been transformed by Google. I used to have to visit the library to read The New Republic. Now I can call it up even before I get out of bed.
      * Even in sales, things are changing; sales people in some industries are being told that they are going to have to actually help customers, because in the Internet era you can no longer just turn up and say “Here’s our product – buy it!” (Yes, I am way oversimplifying here.)

      Some of these improvements don’t show up in the GDP figures – most of what Google does is pure consumer surplus – but it is real nevertheless.

      • Crocodile Chuck says:

        David, thanks for your reply. Points:
        – ‘Contra Baumol, the productivity of great musical performers has been hugely amplified by the rise of digital music (and YouTube)’ Great! and a infinitesimal % of musicians today make any money whatsoever!

        – I could continue, but the more fundamental issue underlying all your examples above is the imploding concept of ‘full employment’ for 95% of working adults, for life. And, there is no, nada, zilch mention of this today, let alone discussion or debate.

        The people being made redundant will not beget the newest social media platform, nor next generation crowdsourcing business models.

        In the grand sweep of history, these unfortunates will be, in Lou Gerstner’s words, ‘fireflies before a storm’.

        But we live in the present.

        And our governments are clueless, and the media knaves.

        • Tel says:

          You seem to be saying that tech-shock destroys jobs so we should outlaw technological advance and strive for inefficiency. I find that personally unappealing.

          I do think that individual people should be free to use as much or as little technology as they choose. It isn’t for you or me to decide what’s best for other people.

  8. Crocodile Chuck says:

    “Medical Services”: 18% of America’s GDP. Somehow, I don’t think that all of these are a good thing………

    & ‘financial services’ are the La Brea Tar Pits of formerly great countries (Holland, then England, now the USA).

    NEXT! ;)

  9. Tel says:

    Slightly smarter summary: The richer you get, the less manufacturing you have.

    As a percent of GDP, which does not prove that manufacturing is shrinking. GDP is a hairy beast at the best of times.

    http://www.economicsinpictures.com/2013/01/changing-top-manufacturing-countries.html

    The USA held top rank in manufacturing for best part of 50 years, and some argue that China has now overtaken it… just. However, the USA largely handled it’s own entire product cycle from design through to sales for most of that time, while China mostly depends on catching up with other people’s preparation work. It’s a big effort to go from one behind to being the leader. Ask any migratory duck.

    Don’t get me wrong, I think the USA has plenty of problems and their lead has certainly slipped away, but there’s no comparable picture to Australia. We just aren’t much good at manufacturing and we never were.

  10. Crocodile Chuck says:

    @ tel @ 6:16 pm

    You’re in luck-just wait for what’s coming ’round the bend!

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