VIABILIDAD AMBIENTAL Y SOSTENIBILIDAD SOCIAL

The early theoretical arguments linking the manufacturing sector to economic growth were motivated by the observation of structural change taking place in countries going through the industrialisation process in the late 19^th and early 20^th centuries. These scholars observed that a transfer of labour from agriculture to industry resulted in an increase in overall productivity and per capita economic growth because labour productivity seemed to be much higher in industry than in agriculture (e.g. Chenery, 1960; Fei and Ranis, 1964; Lewis, 1954).

But why is productivity higher in manufacturing? Part of the answer can be found in Nicholas Kaldor’s three growth laws, which are perhaps the most classic endorsements of manufacturing as the engine of economic growth. The three laws postulate the following: 1) The growth of GDP is positively correlated with the growth of the manufacturing sector, in part explained by the absorption of surplus labour from agriculture to industry; 2) The productivity of the manufacturing sector is positively correlated with growth of the manufacturing sector (also known as Verdoorn’s law). This is attributed to the increasing returns to scale of the manufacturing sector, both static and dynamic. The former refers to output level or sector size, while the latter signifies the effect of learning by doing, which is a function of both cumulative past output and/or cumulative production experience over time. 3) The productivity of non-manufacturing is positively correlated with the growth of the

10 Neither Botswana nor Oman are mentioned, as their current level of GDP per capita arguably does not qualify for having achieved ‘high and sustainable standards of living’.

manufacturing sector, because of technological spillover effects from the manufacturing sector to other sectors (Kaldor, 1966).

The superior productivity potential mentioned in Kaldor’s second law is an important point. Economies of scale are more easily achieved in the manufacturing sector as manufacturing activities lend themselves more easily to mechanisation and chemical processing than do other types of economic activities. The ease of spatially concentrating manufacturing production is also an important factor behind the greater productivity potential.

Agriculture is more constrained in terms of space, soil and climate. And some services activities are, by their very nature, impervious to productivity increases. Chang (2014) provides the example of consuming music: if a string quartet trots through a 27-minute piece in nine minutes, we will not say that its productivity has trebled.

It is also important to emphasise the third law, as many people tend to forget that productivity growth in other sectors are often a result of innovations in the manufacturing sector. The world’s most productive agricultural economies are heavy users of chemicals, fertilisers, pesticides and agricultural machinery, while the world’s most productive service economies rely on top-tier computer technology, transport equipment and, in some instances, mechanised warehouses. These spillovers also take form through organisational innovations that originate from the manufacturing sector. For example, many fast food restaurants use assembly techniques in their kitchens, and some even deliver food on a conveyor belt (‘YO!

Sushi’ being the famous example). For another example, large retail chains often apply modern inventory management techniques that were developed in the manufacturing sector (Chang et.

al., 2016).

The importance of the manufacturing sector for a country’s entire innovation infrastructure cannot be highlighted enough. Even in advanced countries, where manufacturing production is supposed to have been on the decline since the early 1990s, the bulk of innovation happens in the manufacturing sector. In the US, industry still employs 64 per cent of all scientists and engineers, and the manufacturing sector accounts for 70 percent of industrial R&D (Bonvillan, 2012)—in essence, many services ‘import’ technology from the manufacturing sector. This means that the demise of manufacturing would greatly diminish the size and also efficiency of the overall innovation infrastructure. Berger (2015) points out that in many industries, it is difficult to separate the manufacturing and services segments of the value chains (i.e. separating production from R&D and design). For example, in solar power, the most promising R&D and innovation involves cheaper and more efficient ways of manufacturing photovoltaics. The innovation is in the manufacturing. She predicts that only

those countries that can build powerful links between laboratory research and manufacturing will have the strongest innovation economies.

Pisano and Shih (2012) argue that the US is already starting to lose its innovation infrastructure (mainly through outsourcing manufacturing activities) through the gradual decline of its ‘industrial commons’, which they define as, “The R&D and manufacturing infrastructure, know-how, process-development skills, and engineering capabilities embedded in firms, universities, and other organizations that provide the foundation for growth and innovation in a wide range of industries” (Pisano and Shih, 2012, p.2). For example, the initial offshoring of consumer electronics production from the US to then-little-known Japanese companies such as Sony and Matsushita, led to the relocation of R&D in consumer electronics to Japan—and later South Korea and Taiwan—because it made sense to tightly coordinate the transfer of learning between the manufacturers and the designers and somewhat co-locate the production, design and R&D environment (and also because these East Asian countries pushed for it through industrial policy). As consumers demanded ever smaller, lighter and more powerful computers and cell-phones, electronics companies were pushed to innovate in batteries. In the process, East Asia became the hub for innovation in the design and manufacturing of compact, high-capacity, rechargeable lithium ion batteries, a technology that was invented in America (Pisano and Shih, 2012). Plenty of other high-tech activities in the US have now been ‘lost’ to these countries in the process of offshoring, including LCDs for monitors, TVs and handheld devices; desktop and notebook PCs; hard disk drives; and integrated circuit packaging. The main point is that if you lose manufacturing production through the process of offshoring, you stand at high risk of losing R&D as well.

On the flip side, these East Asian countries have gradually built up their innovation infrastructure through the process of industrialisation, and it is by no means coincidental that these countries have also been some of the world’s fastest growing economies as they built up their innovation infrastructure, as already evidenced. So from an innovation standpoint, there are good reasons why African countries should pursue manufacturing development. But there are many more reasons why, especially for African countries, pursuing a manufacturing development strategy is sensible.

2.3.3 Why a manufacturing development strategy is sensible particularly for Africa