Why China's Industrial Policy Worked - Jostein Hauge
Thank you for checking out The Front Row Podcast and my interview with Professor Jostein Hauge
Dr Jostein Hauge is a political economist and an Assistant Professor in Development Studies at the University of Cambridge, based at the Centre of Development Studies and the Department of Politics and International Studies. He is also the Director of the MPhil in Development Studies and a Fellow of Magdalene College.
His research lies at the intersection of international political economy and development economics.
He is the author of The Future of the Factory: How Megatrends are Changing Industrialization, published by Oxford University Press.
The book investigates how industrialization pathways are shaped by recent technological developments, new forces of globalization, and the threat of ecological collapse. It also charts new pathways for industrial policy and global governance.
TIMESTAMPS:
0:00 Introduction and Trailer
01:20 Why Alexander Hamilton Still Matters
03:03 The Return of the State: From Free Markets to Industrial Policy
07:21 Beyond Tariffs: The Full Toolkit of Modern Industrial Policy
10:28 America's Industrial Policy Deficit
14:02 The Rise of Services
17:35 How America Deindustralized
20:43 The Fatal Mistake: Conflating Low Price with Low Value
23:41 Losing the Industrial Commons
26:04 The East Asian Tiger Playbook
33:32 China's Gladiator Economy: When Copycatting Drives Innovation
37:27 The Patent Paradox
40:16 Vietnam's Geopolitical Tightrope
44:56 Mexico's Cautionary Tale
54:31 Why Industrial Policy Requires Embracing Failure
55:35 Who Bears Responsibility for Climate Change?
59:00 China's Green Tech Dominance
1:02:01 The Overcapacity Debate
1:08:52 AI Anxiety
1:16:20 Ha-Joon Chang's Impact on Jostein
1:20:42 Advice for Fresh Graduates Entering the Working World
This is the 68th episode Of The Front Row Podcast
I want to start with Alexander Hamilton, the first US Secretary of the Treasury. Many of us know him through the musical, but I think he played an important role in formulating the importance of tariffs in creating the infant industry argument. Help me understand why we should care about Alexander Hamilton.
Jostein 00:00:41
It's great that we're starting with Alexander Hamilton. Just to give a brief introduction to who he was: he was one of the founding fathers of the United States, the first US Treasury Secretary. He's a very important figure in United States history and also very important in understanding theories of economic development and theories of the state.
He submitted a wealth of reports to the US Congress during his time as Treasury Secretary. One important one was the Report on the Subject of Manufacturers. In that report, he argued that the United States needed an active industrial policy and specifically needed to implement protectionist measures in order to catch up with the economic powerhouse and industrial powerhouse of that time, which was Great Britain.
He laid the basis for something we today know as the infant industry argument, which is that when countries are in early stages of development, they need some kind of state intervention, some kind of state protection sometimes as well, in order to be able to catch up technologically. The importance here is the role of the state, but also the importance of manufacturing growth. Hamilton said that for the United States to become a prosperous nation, it really needed to put emphasis on developing the manufacturing sector.
Keith 00:02:06
In recent times, we've seen a huge pivot from embracing free trade, embracing globalization, especially in the northern more developed economies, towards embracing tariffs and protectionism. That's maybe most clearly articulated by someone like President Trump. What animates this shift?
Jostein 00:02:26
We can talk about the return of industrial policy and the return of state intervention, and then on the other hand, the move towards more protectionist measures. They are linked, but they are somewhat separate.
Let me start with the return of the state and the return of state intervention. I think there are multiple factors here at play. We saw after the 2008 financial crisis that there was less faith in free market orthodoxy. We've also seen that climate change has become a real threat, and there's increasing recognition by countries worldwide that to deal with it, there needs to be some interference by the state.
But I think there are two big factors here that really explain it well. One is the COVID-19 pandemic. It really exposed to countries the vulnerabilities of being dependent on a lot of imported inputs. That gave many countries around the world this idea and this drive that they needed an industrial policy to be able to become more resilient across segments of supply chains.
Then I think geopolitics and geopolitical tensions play a big part. The rise of China is unarguably the most significant political and economic event of the 21st century, not just from the perspective of a huge transformation happening within China and also around the world because of that, but also a lot of countries around the world, especially wealthy countries and most prominently the United States, have responded with industrial policy and protectionism.
In some wealthy countries, we need to understand the rise of the state and the return of industrial policy and state intervention and trade policy as a response to the rise of China as an economic competitor and as an economic threat. It's not an understatement to say that economic competition policy in the US these days is very much centered around how it can compete with China and sometimes how it can actually prevent China from developing technologically.
Now what about protectionism? We've seen the return of the state in many parts of the world, not just in the US but also in Europe and in some parts of the global south, but not all countries are implementing protectionist measures. This does seem to be a very Trump-like thing. Trump implemented tariffs during his first term, especially on China. Biden then continued some of these tariffs during his term, again mostly on China. And then Trump in his second term, for reasons many of us are still a bit confused by, implemented sweeping tariffs, not simply as an economic policy but as a negotiation tool. Maybe he was upset about the way he was talked about around the world, but sweeping tariffs on almost all countries in the world in his second term.
I think we need to understand that these tariffs and these protectionist measures by Trump are not driven by a clear economic rationale like it was for Alexander Hamilton or like it has been for a lot of the East Asian tigers during their development periods, but simply as a negotiation tool, simply to make a statement in global politics.
Keith 00:05:21
Thank you for decoupling the role of the state in economics and protectionism, because I think a country like Singapore, for example, has traditionally had active involvement from the state. Some might say we practice a modicum of industrial policy, especially in our early years, but we never embraced protectionism. But today I think a lot of us tend to conflate both of them together.
I had Louis-Vincent Gave from Gavekal Research, and he was talking about this idea that in 2018, the trade war between the US and China escalated into a technology war in the sense of America trying to prevent China from getting access to critical technology such as chips. It continued to accelerate under the Biden administration, and that drove China towards technological self-sufficiency.
If we were to see that as one form of industrial policy, what are some other forms of industrial policies that are maybe more modern in nature or flavor that we are seeing today?
Jostein 00:06:24
I've written a book called The Future of the Factory. I'm just going to plug it in here now because I have this table in the book that provides a taxonomy of industrial policy instruments that gives readers an idea of how big the toolkit is of industrial policy, and it is really massive.
The most obvious ones we think of are trade policies like protectionism or subsidies to domestic industries, but really there are a lot of other important instruments that countries use. I think especially in developing countries, state ownership in the economy, so that the state takes an active role in owning certain assets in the economy, is a very important instrument of industrial policy.
You can also talk about how the state is involved in the financial sector, for example, through controlling the banking system and through lending money directly through state-owned development banks. This has historically, and also especially in developing countries, been an important tool of industrial policy to mobilize investment, mobilize credit, and to direct and steer credit into desired sectors.
And then, especially in the context again of lower-income countries, developing hubs or zones for manufacturing where both foreign and domestic firms can cluster and agglomerate together has been an important part of industrial policy.
These are just a few important examples, but the toolkit, once you start studying it, is really big and can encompass microeconomic policy, skills, education policy, research and development and innovation policy at the national level. It really is a big toolkit.
Keith 00:08:10
In recent years, the American flavor tends to be a bit more restrictive, meaning that there's been a lot of trying to constrain its main geopolitical rival. On the supply side, within the country itself, there hasn't been an effort from my point of view to upgrade its internal industrial capacity. Do you think that's a fair statement, or do you think that's a bit of an exaggeration?
Jostein 00:08:40
You could argue that if you look at industrial policy in the United States in the 1980s, 1990s, 2000s, and early part of 2010s, you could make a strong case that there has not been much of an industrial policy. This is also reflected in the fact that America in that time period, and even earlier than that, started losing manufacturing, or manufacturing was offshored. That was to some degree a deliberate choice. There has been a period in that time of minimal industrial policy in the United States.
Although the United States has for a while had this strong national innovation system—there's this book called The Entrepreneurial State written by Mariana Mazzucato which outlines how, for example, every technology in the iPhone comes from military-related spending in the United States through agencies like DARPA—the military-industrial complex in the United States is in some aspects part of its industrial policy.
Then I would say industrial policy, starting with the first Trump administration, did ramp up a bit. It hasn't been extensive. You saw trade policy increasingly implemented. I also think it's very important to talk about the CHIPS and Science Act. This is the largest industrial policy bill in human history in terms of the amount that is potentially promised from the federal government to develop semiconductor capabilities, or redevelop semiconductor capabilities, in the United States.
And then of course now in the Trump administration, we're seeing less of that, but still we're seeing trade policy.
I think an important point to make here is that although there have been aspects of industrial policy in the US, especially ramping up in the last 10 years or so, there hasn't been a very clear long-term vision or plan of industrial policy in the United States like, for example, we've seen in China. Made in China 2025 was a very clear vision published in 2015 that was more or less completely followed up on in the next 10-year period. Whereas in the United States, we've had different administrations with different visions implementing different types of policies.
Private manufacturing firms in the United States have explicitly said during this period of Trump's quite reckless and unpredictable tariffs that they are becoming more uncertain about the future of manufacturing because they don't know what exactly the policies will be, where the direction is heading. That's the main thing that's been lacking in industrial policy in the US—a long-term vision and direction due to competing visions between these different administrations.
Keith 00:11:06
If we were to zoom out a little bit and go into some of the things that we cover in your book, there are four major structural trends or megatrends. The first one being the rise of services. The second one is the adoption of smart manufacturing, and I think a lot of it ties into the conversation around AI today. The third one being global value chains, the emergence of globalization as a modern production phenomenon. And the last one being ecological breakdown, or what we call the climate crisis.
If we were to look at the first point, one might look at the American economy today and Chinese economy and say, if I look at the Mag 7 in the stock market, for example, you have companies like Nvidia and Apple—their core capability, their value, is not really manufacturing per se, but an ability to design or build an ecosystem that encompasses the services, the design, and the production. One might say, it's okay that we're a bit overly financialized, it's okay that we've offshored majority of our manufacturing, as long as we're doing a lot of these higher value-added activities, we should be fine.
Jostein 00:12:22
One thing we need to keep in mind is that a lot of services are dependent on manufacturing. If you go to an economy like the US, things like industrial design and research and development are very much connected to the manufacturing sector. Actually, if you look at services and manufacturing and agriculture as separate sectors, we see that the manufacturing sector is much more closely connected to R&D spending than the other sectors of the economy.
If you want a—so it's not just about the factories, it's also about the research and development ecosystem that surrounds it. That's why when high-income countries start losing some manufacturing, they're also at the danger of losing this entire innovation and R&D ecosystem that's not all the time captured in these manufacturing statistics.
Another important point to keep in mind is the spillovers. There's been a lot of research on the spillover effects or the job creation effects that different sectors in the economy have, and research consistently finds that the manufacturing sector has stronger spillover effects to other parts of the economy. Meaning that it generates a lot of demand from other parts of the economy, and it also creates more jobs than other sectors of the economy, also in other sectors.
That's because, think about construction, for example. So many jobs in construction, while not always counted in manufacturing, are very much dependent on manufacturing activity. Obviously these spillover effects and these demand effects go vice versa. You also have creation of manufacturing jobs to the services sector. But again, research consistently finds that manufacturing has stronger spillover effects. This is why it's really crucial to develop a prosperous economy to have a strong manufacturing base.
Keith 00:14:17
Given the importance that one might understand manufacturing has on the local economy, the US saw its share of global manufacturing dip from 37% to 12% essentially, within the past 34 years. To me, the policymakers are definitely smart. So what happened there that caused them to willingly give up this important part of their economy that now they're trying to recover and reinstate?
Jostein 00:14:43
There are a few different factors at play here. One is obviously the lack of industrial policy and the deprioritization of manufacturing. The centrality of industrial policy in US politics, as I said, has varied, but generally over the course of the last 50 years, there's been a strong belief that the US can move towards a service-oriented economy. That's largely been reflected in policy priorities—that manufacturing was something that in many instances could be outsourced.
As East Asia largely got integrated into the global economy with cheap labor, it turned out that many East Asian countries could do cheap manufacturing activities, and American firms and American consumers were actually very happy for that to happen and happily outsourced a lot of manufacturing production to East Asia. So part of this is that industrial policy wasn't central and there was a belief that the US economy doesn't need a huge manufacturing sector. It should move towards a more service-oriented economy.
Another more neglected part of this story is how we count manufacturing in national accounts and national statistics. In this figure, say the US—say manufacturing is 12-13% of the US economy—in the central figures, this doesn't actually capture a lot of these activities that are related to manufacturing but counted as services. For example, the people who design an iPhone or all the research and development activities that are carried out by actual engineers that are interested in production but that don't happen on the factory floor.
Apple, for example, is an American company. When you buy an iPhone, the iPhone says designed in California, made in China, or the components are made in a lot of other countries. So Apple itself doesn't have any factories. Does that mean that there aren't any manufacturing capabilities or manufacturing-related capabilities in the US? No. There are still many manufacturing-related services in the US, but these are also in danger of being lost now to the East Asian production system as it becomes better and better.
Those are the two reasons that I think explain the decline of manufacturing in a lot of wealthy countries, especially in the US.
Keith 00:17:20
When I speak to my learned commentators, I think a lot of them also share that there was a faulty mental heuristic that happened, which they ascribed value to price. Meaning that a lot of them thought that because manufacturing was cheap or maybe it was low margin, therefore it was not valuable. They should focus on the parts where they could charge a higher price for, and therefore it is more valuable. But I think we're starting to see that mental model break apart right now, where actually the real value a lot of people neglect is in the low margin, the manufacturing component.
One example I can raise off the top of my head is the Apple case study that you talked about, which Patrick McGee wrote a whole book about. He was talking about how it was really this manufacturing capability that was developed in East Asia, especially in China, that allowed them to catch up and emerge as a manufacturing powerhouse.
Jostein 00:18:20
I'm glad you bring that up because if you think about the value-added along the stage of a supply chain, some component manufacturing is actually pretty low value-added as a share of the final retail price. Some is high value-added. For example, if you look at the semiconductor supply chain, a lot of the component manufacturing adds a lot of value. Value here being defined as the share of the retail price going to a specific activity in the supply chain.
It's quite fair to say that assembly tends to be low value-added, and then you look at these production services like industrial design, like testing, like research and development—they tend to be fairly high value-added. That's why companies like Apple were so happy to keep outsourcing, because a lot of the high value-added, service-related or manufacturing-related service activities were still retained in the US.
But the danger is when you offshore all the other stuff, eventually you start losing that as well. And that is what we're seeing now. Ten years ago, China was doing much more low value-added manufacturing stuff. Now China has taken over so many parts of the supply chain, also the high value-added stuff, because they're connected to the low value-added stuff and they start learning more and more. So the danger of outsourcing too much is that you eventually lose the entire supply chain.
Obviously we need to recognize it's not all a story about industrial decline in America, not all a story about choices made in America. It's also about brilliant policy choices made in other countries—brilliant policy choices made in Japan, made in Korea, and now more lately made in China at a massive scale.
Keith 00:20:03
I'm glad you brought it up because I think there's this point that I heard a Chinese VC share with me. She said that basically, if you look at the ecosystem within China itself, because every entrepreneur is so close to the supply chain, they can actually conceptualize what product to build because they know where they could source those parts, where are the different parts of the supply chain they could access. But if you completely outsource it, then you lose that ability to be close to the supply chain. Actually, that's something that maybe you wouldn't account for in your national accounting—the effect or the spillover effect of being close to the supply chain on entrepreneurial activities.
Jostein 00:20:44
There's a book I highly recommend people to read if they're interested in this, called Producing Prosperity by two economists at Harvard Business School, Gary Pisano and Willy Shih. They capture really well what they call the industrial commons. So not just what happens in the factory, but the ecosystem of activities that take place in the process of making a product from beginning to end.
They map out these different industrial commons in the United States and make the point that I also made, which is that when you offshore some things in some industries, you will also be in danger of losing other capabilities, the productive capabilities too. This varies from industry to industry. In that book, they talk about which industries have capabilities strongly clustered together across the supply chain, which can be more spread out, and so on.
Keith 00:21:34
You earlier alluded to the point of the brilliant policies in East Asia and China. So I have to ask a two-part question. The first one is: what were some of the brilliant or maybe important policy decisions that were made by the East Asian tigers that remain underappreciated today that allowed them to emerge really well in the global value chain? And then I guess the second one is: why is it faulty to assume that China is simply an East Asian tiger on steroids? Meaning there's just whatever the East Asian Tigers did but with much more massive scale.
Jostein 00:22:06
Let me try to talk about what the policies were that made it really successful. It's obviously complex, but I can think about a few certain key aspects here.
Just for the audience, when we talk about the East Asian tigers, we talk about Singapore, South Korea, Hong Kong, and Taiwan. These are countries that achieved enormously high growth rates for an extended period of time. They went from low to high income in what, a 30-40 year time period, 1950 to 1990s or thereabouts.
Let me highlight three things that have been key in countries that have successfully industrialized in the 20th century, and these countries here being really the most important.
One is achieving a high investment rate in productive sectors, because when you're a lower-income country, mobilizing investment is incredibly hard because resources are strained. This entails incentivizing more savings by households. It entails setting up development banks to direct investment to desired sectors. It entails a degree of financial repression, so repression of consumption and low-interest loans to the industrial sector. It entails some degree of attracting foreign direct investment, although this was limited in the Asian tigers. I'll get back to that when I talk about China.
It's a mix of a lot of effort to really mobilize investment. You need a high investment rate in productive sectors to industrialize. If you don't have that, you're not going to industrialize, period.
Another thing is understanding that the process of industrial policy is not only a process of picking winners, it's also a process of losing. Think about the state being a big venture capitalist putting different bets in different sectors of the economy. Some of them don't go well. Some of them take a long time to really bear fruition.
South Korea's steel industry is a great example. It took a long time for POSCO, the steel company that was set up as a state-owned enterprise, to actually become competitive. Today, POSCO is a private company, one of the most successful steel companies in the world. Same with Japan's automotive industry, which had to be protected for decades before it actually started succeeding. You don't see these winners instantly.
The third aspect, especially among the Asian tigers that was important, is what we call reciprocal control mechanisms. This is something that's written about by the economist Alice Amsden, a great scholar of South Korean industrialization. She highlighted how in South Korea, the state really put in place financial incentives to make firms become internationally competitive and to make firms export rather than producing for the domestic market.
This could be simply things like bonuses or prizes if a firm makes a product that's close to the technological frontier. The important part being here that the state actually puts in place incentives for companies to become competitive and punishes companies if they don't.
These are three broad aspects of the process of doing industrial policy right that was very central to the Asian tigers.
Now let's get to your point about China. In what way is China different from this? I do think it is important here to mention scale before we go on, because scale is a big part of what makes China different. When you have a country of 1.4 billion people becoming dominant in global manufacturing, it looks very different from when you have a country of 50 million people or even Singapore, four, five million people.
Because of the scale, this has allowed China to become dominant in almost all manufacturing activities, and this is not something we've seen in these other East Asian economies. China literally dominates almost all manufacturing. Not necessarily everywhere—it's still behind, for example, when it comes to the aerospace sector—but it's not really controversial to predict that quite soon, China is going to dominate all segments of manufacturing, and it can do that because of scale, I think.
But there are a few elements where China differs a bit from what these East Asian tigers did. Although foreign direct investment was important in the industrialization drive of the Asian tigers, it's been more central to China and generally more central to developing countries that have embarked on a development process after hyperglobalization since the 80s, 90s, and 2000s.
So foreign direct investment was very important in China, but obviously China succeeded a lot more with that than many other countries. I think in big part it was because of the way they formed joint ventures between foreign companies and state-owned enterprises in particular. Although state-owned enterprises have been central in Singapore, for example, and also Taiwan, in China itself the role of state-owned enterprises has been extremely important. China has by far the most state-owned enterprises in the world. Some estimates put the number at something like 3 million state-owned enterprises that exist in China.
Those are some very particular Chinese characteristics. I also think we need to mention here the model of internal competition in China. The way that China does industrial policy is in some industries they pit firms against each other in quite fierce competition. I had one person on Twitter saying that it's kind of like a gladiator match where whoever comes out on top turns out to be a super competitor on the global stage.
We've seen this, for example, in the EV industry, where lots of automotive firms have competed against each other, and now we've seen the emergence of a few giants that are producing extremely good cars at very competitive prices. I'm thinking in particular of BYD.
Those are some of the particularities of China where it distinguishes itself from these East Asian countries.
Keith 00:29:31
The gladiator economy. I think that was first popularized by Kuo Yuli, right? He was talking about this idea that in China, the copycatting is a feature, not a bug. When Westerners throw shade at China, in which they say China's very good only at copying, what they fail to understand as a secondary implication is that when you copy each other all the time, then that is the forcing function for innovation. Because now you have to find a new mode which your opponent can't copy. So if the opponent can copy it, it means that it wasn't actually a very strong advantage.
I think that was Kuo's understanding from his point of view, which is that the copycatting is actually a form of open-source innovation. And that's the way I understand it, at least. I think quite a few other commentators do make that point.
Jostein 00:30:21
This is an issue that's created a lot of controversy—the way that China engages in technological learning. I want to be clear, though, that the process of economic development is in part about imitation before it becomes innovation. Well, innovation plays a part throughout, and there are overlapping periods, but we need to understand that copying technologies, or—I'm not sure if I would use the word—I would say technology transfer from wealthier parts of the world to poorer parts of the world is an incredibly important process of technological development. Some people call it copying. That's fine. Some people have called it technology theft, which I think is the wrong way to look at it.
Because, for example, if you look at a company like Apple, Apple made a huge chunk of its operating profit in the last 10 years from China. Apple is just one example of many manufacturing firms in the West, in Europe and in North America, that have gone to China and taken advantage of cheap labor, of a cheap production system, and an efficient production system, and to be honest, subordinated China into their supply chains.
In some sense, you could say that because they profited tremendously, shouldn't some degree of technology be owed to these countries given the role they play in making technology for wealthy nations and for consumers in wealthy nations? I think so.
There are many ways to look at this phenomenon of technological learning and technological copying or technology theft, but I'd argue that looking at it as theft is something we should try to avoid.
Keith 00:32:06
One of the challenges people have is: how do I incentivize the original innovator? What are the existing IP laws? Are they insufficient in protecting intellectual property? For example, I would say in Singapore, I think we benefited a great deal of technological transfer. Taiwan did as well. Morris Chang was part of Texas Instruments before he started TSMC. A lot of the chip entrepreneurs of the 90s and 80s from Singapore did come from Texas Instruments as well, and they enjoyed a lot of implicit knowledge transfer about manufacturing or industrial design. So it's not clear to me actually how do you draw the line between theft and transfer, because to me the lines seem very politically drawn.
Jostein 00:32:51
I'm glad you bring up the issue of patents and laws around patents, because we need to ask: are patents in place to protect the interests of large and powerful transnational corporations in the world economy and to protect their profits, or are they in place to stimulate innovation?
The traditional argument is that patents will incentivize innovation through the profit motive. But then again, there are tons of innovative practices we've seen that have taken place throughout the history of capitalism without a motive for profit.
We also need to really ask the question: what kind of world do we want to create when we have extremely strict laws about patenting? If we want a world of shared prosperity and also shared technology, we need to have more relaxed patent laws. For example, the agreement within the World Trade Organization called TRIPS—Trade-Related Aspects of Intellectual Property—needs to become much more relaxed, even scrapped, if we want to see developing countries being able to develop technologically and having access to some of these technologies.
My point that I was trying to make is that given the central role that labor in so many of these countries plays in the world economy and plays for technological manufacturing companies and technology companies in the West, we should talk about how a lot of these countries and firms in developing countries deserve access to some of this technology.
Keith 00:34:26
One of the past guests that I had on, Gita Wirjawan, did talk a little bit about Southeast Asian dynamics of China. His concern is that primarily, given China's overwhelmingly strong leap in critical technologies, what happens to Southeast Asia for the most part is you'll just be an adopter of technology, which is good. Maybe in the near future you adopt the technology at a cheap price, you benefit a bit from their overcapacity or involution, depending on how you see it, and then you upgrade your infrastructure or technology stack within your country. But then the question I have for you is: what is the playbook for developing countries today to say, hey, how can we actually accelerate our ability to go further up the value chain?
Jostein 00:35:10
I don't think the playbook necessarily looks that different. If we look at each development experience, each successful development experience, you see a lot of unique features. Every country takes advantage of the situation that they're in.
For example, I've talked about the importance of the policy ingredients in South Korean industrialization, but we cannot neglect the role of geopolitics at that time and the role of the United States at that time in supporting South Korea during the Cold War. So historical circumstances matter. The point I'm trying to make here is that all development experiences are unique.
I want to be clear—some people say it's become so much harder to industrialize today. It's become, the window isn't as open. We need to keep in mind that the number of countries that have actually successfully embarked on industrialization, transformed their economy from low to high income—the number of countries that have done so in the last 150 years or so is quite small, actually. The number of countries that have done so altogether is quite small.
I'm saying this because the point here is that it is really hard to successfully industrialize. It's not an easy task. So it's always been hard. It's not that it's harder today.
But I do think one new challenge that developing countries face today, and a very recent challenge, is how to deal with these competing power poles that are emerging now—the US on the one hand and China on the other, especially, but also the EU. Some countries are successfully navigating this great power competition. I think maybe Vietnam is the prime example. If someone were to ask me which developing country today that's still developing, that's still not at high middle income or the income status of China, I would say Vietnam is really that country that's going to be the next success story. This is a country that is able to manage to keep good relations with both the United States and China.
I've heard people refer to this maneuver as being a geopolitical swing state or a connector country.
That becomes important, but I also think fundamentally, given that China is now becoming such an important player in the global south, that somehow finding a way to have a good economic relationship and good economic partnership with China is going to be key for industrialization in the rest of the global south.
I was at a workshop on green industrial policy recently, and someone there said that it looks like across the global south that any strategy to develop green tech intrinsically has to involve China, given China's dominance in green tech. So now development in the global south is much more about how to find a way to develop good economic cooperation with this huge and emerging power, which is China.
Keith 00:38:16
The idea of leveraging China to accelerate your development, and the point that you made about Vietnam, is really interesting. Because if one looks at the way they are approaching, for example, their own rail programs, they import technology from China, but they also import technology from Japan, from Europe. So when they build a rail system, I think it's very diversified in nature. You're able to create what many investors would call a diversified portfolio, so you derisk yourself on multiple fronts.
The other point that came up after you showing how to successfully industrialize—there's another point that I thought would be interesting, which is: what are the cautionary tales? Because there's the right way to do it and there's the wrong way to do it. I think in your book you talked a little bit about Mexico being a cautionary tale on how one should actually liberalize itself.
Jostein 00:39:08
This is a really important topic because it touches upon these fundamental debates about liberalization versus the role of the state. Every time a country successfully develops, there are people who come in and say they developed because they liberalized their economy, it adopted free market orthodoxy, and so on. Because in a lot of countries that have successfully developed, we've seen an integration into the world economy.
What we saw in Mexico, especially in the 80s and the 90s, was a liberalization period, was attraction of foreign companies at that time. They came from the United States. But they ultimately had a lot of footloose operations. So technological capabilities weren't developed much in Mexico during that time period. There wasn't much upgrading in the value chains. And then eventually when China joined the WTO and they became a cheaper outsourcing destination compared to Mexico, American companies moved there.
Mexico is doing better today, but in that time period in particular, liberalization didn't work for Mexico. And I think Mexico is not the only story here. We've seen, especially in African countries, that liberalization, trade liberalization, and rollback of state intervention has been disastrous for countries around the global south. Particularly the African countries in the 80s and the 90s, and in Latin America it's been more mixed, but trade liberalization has generally heightened inequality and the results haven't been as good or as promising as in East Asia.
Now, the key point if I were to draw lessons from liberalizing the economy around the world for the purpose of economic development: you really see that the countries that have been successful have had a state that has managed this very gradually and done it on its own terms.
I really want to come back to China here because there's a huge debate on this. Did China develop because it integrated itself into the capitalist world economy, or did it develop because it had a very strong state?
China did liberalize trade, opened up after Deng Xiaoping. You saw on so many metrics clear signs that China became more integrated into the world economy, the capitalist world economy, since the 80s and the 90s and the 2000s. But they managed this extremely carefully. They didn't allow multinational corporations to gain control over key resources, which has happened in a lot of other instances of trade liberalization. They didn't do everything on the terms of international corporations. As I talked about earlier in our conversation, they had these state-owned enterprises that made sure that they learned technology from multinational corporations that came into their country.
So they had a very clear strategy of how to use liberalization and attract multinational corporations to upgrade domestically and to upgrade in international value chains, to embark on this process of technological transformation. The financial sector was controlled, still is controlled in China.
That's very important to know, that in successful cases of industrialization, you could argue yes, you've seen trade liberalization, but you've always also seen a state that has governed the market.
Keith 00:42:48
To summarize that into one sentence: it's really about viewing liberalization as a tool, not a goal.
Jostein 00:42:54
Yeah, completely. The aim of the liberalization is to actually achieve certain economic outcomes and not to see the liberalization as the end goal.
Keith 00:43:03
On that note, I interviewed Manoj Pradhan, and he made this point which is that the impact of globalization on China is huge, but China's impact on globalization was equally large, in the sense of its labor mobilization on such a huge scale created such a massive deflationary influence on the entire global labor supply. He talked about the introduction of close to a billion people into the global labor pool and how that actually reduced the cost of production so much for a lot of these multinational firms that you talked about earlier.
And then on that other note, within Southeast Asia, there is this book called Ambivalent Engagement by Joseph Liow in Singapore. He's a political scientist, and he talks about how Southeast Asia has a lot of ambivalence towards liberalization, partly because of the Asian financial crisis, where there was this huge push towards financial liberalization. As a result of the contagion effect when the Thai economy started to collapse, what happened with financial liberalization was actually you had a lot of bad behavior that was exposed, but at the same time you experienced a lot of shocks that would not have been there if you liberalized on your own terms.
Jostein 00:44:17
The Asian financial crisis is a perfect example. Also here, the role of the state in controlling the financial sector is an incredibly important point that perhaps I haven't talked enough about. Capital controls obviously is one. Financial repression, although it sounds bad—the word itself, repression, is a negatively loaded term—but that's actually been very key in countries that have successfully developed their economies.
That's something that the Asian Tigers and China actually share in terms of controlling the banking system, having capital controls in place, having a state that mobilizes investment, having a state that directs investment in the direction that it wants, rather than having for-profit capital that directs investment.
I think this has become so apparent in green tech right now—the different system that China has in place versus the United States. In China, you have a state that directs investment. In the United States, for-profit capital, and in particular wealthy individuals that have no alignment necessarily to national long-term objectives, control much more the direction of investment.
How did China become so dominant in green technology in such a short period of time? It would have been impossible had it not been for the fact that you actually have a state that says we're going to go for green tech, because green technology isn't necessarily profitable. You see this in the West where there's still huge investment into fossil fuels because fossil fuels are still highly profitable.
There's this great book by Brett Christophers that gets this point on climate and finance very right, and it's entitled The Price Is Wrong: Why Capitalism Won't Save the Planet. He talks about how if you follow a logic of just price incentives and letting the market fix everything, you cannot steer the economy into a direction that doesn't necessarily look profitable in the short term. But when you have control of the financial sector, that's what it allows you to do. And this is particularly what's allowed China to become so dominant in green tech.
Keith 00:46:33
It reminds me of the story of Solyndra in the US, right? I think a lot of the investors back then in climate tech said, "Hey, when Solyndra failed, the wrong lesson I think they took away was you shouldn't do green tech," where maybe the right lesson was something that you alluded to earlier, which is that you have to expect failures if you want to solve some of these hard problems. From my understanding and from my conversation with some of these people within the space, they were like, yeah, because of that, now this became a taboo issue because no one wanted to have another Solyndra happen again.
Jostein 00:47:08
This goes back to the point I made about being successful with industrial policy—it's about failing. I mentioned Japan and I mentioned South Korea. I could also have mentioned China. I could also mention how industrial policy in the automotive industry in China was really not going very well. Industrial policy in the semiconductor industry in China was considered a failure for a very long time.
We've definitely seen also in China, which everyone is pointing to as the perfect example of successful industrial policy these days, and rightly so in many ways, has also failed a lot along the way.
Keith 00:47:43
On that note, I'd like to segue us into two challenges that we face now in a lot of our modern economies. The first one is what you call the ecological breakdown. Many of us see the effects of climate change, especially in Singapore—sea levels are rising. Our government's spending a lot of money in terms of building the right infrastructure to ensure that we don't get flooded. That's one.
And then the other one is the adoption of AI. I think in Singapore, especially in a service-oriented, service-heavy economy, there is a lot of existential worry about where AI might take us.
Like to go first into climate change. The big question I have actually with regards to attacking or solving or maybe reducing the impacts of climate change is that when it comes to industrialization, one thinks of industrialization as a very pollutive activity. How does one go towards an industrialized economy that will be less taxing on the planet and perhaps more sustainable in the long run?
Jostein 00:48:44
I don't think industrial activities are generally more harmful to the climate than service-based activities. I think all economic activities at scale can harm the climate, whether that be through emissions or that be through resource use. When I say resource use, I think about things like soil degradation, I think about mass extraction of rare earth minerals and metals, and deforestation—these are things that take a toll on the earth's resources that can result in emissions but are their own separate issue here.
When we talk about climate change, it's important to be clear about who bears responsibility and also where currently emissions are the highest per capita. Overwhelmingly, research—and if you look in research on this, in journals like The Lancet Planetary Health or Nature, highly respectable science and climate journals—mostly research concludes that wealthy nations overwhelmingly bear responsibility for climate change and also in per capita terms, that's mostly where emissions are happening today.
It's really—we really need to understand that the responsibility at the moment, to take action fast to reduce emissions, lies with wealthy nations.
But this doesn't mean that developing countries shouldn't embark on green strategies. As we've seen, becoming competitive in green tech can also have economic benefits, and China is a very strong proof of how—they now dominate solar module manufacturing, wind turbine manufacturing, EV manufacturing, lithium-ion battery manufacturing. These are also technologies of the future. So an industrial strategy and policy for green tech should be about saving the climate, but it can also be a strategy of becoming economically competitive.
For a lot of countries in the global south, and this is something I alluded to earlier, it has become a lot about what kind of relationship you develop to China at the moment and seeing what's going on in China. Because it's impossible to talk about green tech without talking about China. China dominates globally this sector so much.
If you go to Brazil, for example, another large developing country that is trying to put efforts into green industrial policy and green tech, China is an integral player in terms of imported products, in terms of investment. China isn't just producing all these things, but it's now becoming a major investor around the world in green energy products.
Keith 00:51:28
Fundamentally, what you were recommending is like, hey, if a country wants to seriously embark on green growth, perhaps the best way to do it without sacrificing development is to adopt Chinese tech, especially at its current price point.
Jostein 00:51:45
It's tricky, though, because on the one hand, talking about China in the global south, China provides a lot of opportunities. China helps actually some countries achieve more energy sovereignty and a higher share of renewables in electricity and energy production by, for example, providing pretty affordable solar modules. Solar modules I think have become an incredibly big part of the story here in terms of how China is helping a lot of other developing countries embark not only on a green transition but also an energy transition.
I want to emphasize that in some ways, we talk about the decarbonization challenge of the world. Well, most lower-income countries, to put it bluntly, have a carbonization challenge. What I mean by that is that they have an energy production challenge. We should accept that there are some emissions along the way, and ideally, it's about finding diversified sources of energy and ideally as much clean energy as possible given the situation we're in.
China is to some degree helping those countries through investment projects, through, for example, export of solar modules like we've seen in many parts of Africa, through, for example, export of EVs like we're seeing in Nepal. But at the same time, it's also become a challenge to develop productive capabilities in green tech in those countries given China's dominance.
I talked to representatives from both Indonesia and Brazil a few weeks ago, and they told me that it's becoming hard for companies in those countries to compete with Chinese companies in green tech. I mean, generally in all manufacturing, but this was specifically about green tech.
Are we expecting a model where China dominates the green tech sectors in all these countries? Will China to some degree crowd out opportunities for green industrialization and green tech and manufacturing more broadly to develop in those countries? It's hard to say, and I myself am quite ambiguous about this question.
I do think China generally is a better development partner for countries in the global south than traditionally the West has been, because China invests more in infrastructure, they invest more in manufacturing, and they respect sovereignty more. But it's not obviously, as I've just mentioned, it's not all unambiguously positive. China is crowding out some industrialization opportunities in the global south.
Keith 00:54:21
That's the trade-off actually that I wanted to get you to speak on, because I think that has traditionally been the problem when people complain about Chinese overcapacity, which is that, especially in a small country like Singapore—I will give you a very lame example, but it's like if Chinese F&B outlets expand too rapidly within Singapore, man, a lot of the restaurants in Singapore are complaining. Because to these Chinese conglomerates, Singapore is just another city, but to a lot of the Singaporean restaurants, this is your neighborhood, and now you can't have a steak. You're being crowded out in that case. That's a toy example, but it kind of illustrates a broader point, which is that when you have such China scale and you're exporting at such a massive rate, there is this concern of what people call overcapacity. I think that's actually a very legitimate concern of overcapacity, not in the way some of the Western media portray overcapacity to be.
Jostein 00:55:22
Yeah, I take your point here. When we talk about China in the international stage and China's role in trade, I'm a bit hesitant to call it overcapacity. I do think it is dominant and it is everywhere, which reflects I think China's population, China's scale.
So China is 17% of the world's population. When you have a country of that size, 1.4 billion people, developing at that speed and especially starting to export goods of all kinds, more, higher variety of goods and higher volume of those goods at cheap prices at incredible speed, that overwhelms the world. But is it overcapacity?
China represents 17% of the world's population. I think it makes up around 13% to 14% of global goods exports. So lower than you'd expect maybe given its population. Also, in per capita terms, its trade surplus is far below a lot of other countries. This is something that the economist Kyle Kuo or the sociologist Kyle Chan has pointed out—that China's trade surplus per capita is actually not that high.
I do think we're more talking about a large developing country that developed incredibly fast and specifically a model that relied on exporting manufactured goods to the rest of the world, which to be honest is the model that has proven to be successful for development in the past for other countries too. So I wouldn't call it overcapacity, but I definitely understand the point about China being dominant in trade.
Keith 00:57:03
I think it's also the speed, right? Like the speed in which the takeoff has happened. You pointed out BYD—it's like five years ago or 10 years ago, you remember the Elon Musk interview where he was laughing at BYD, but now he's not laughing anymore. It's just the way they have accelerated, I think, has caught a lot of people off guard as well, a lot of policymakers off guard, because I think it was really after COVID that a lot of these industrial policies really came to bear.
Jostein 00:57:32
The auto industry and the EV industry is perhaps the perfect example here of how it's scary for countries around the world. If you go to Germany, what's the future of the German auto industry? Especially if we're going into EVs more and more, which we are, is there a future for the German automotive industry given how much more dominant and how much further ahead China is in EVs than Germany?
If you're a German policymaker, you have legitimate reasons to be worried about an eroding industrial base and also especially the future of the German auto industry because of China. That's perfectly legitimate.
At the same time, I think the framing here is very important. On the one hand, a lot of the West was very happy to have China integrated into the world economy as long as it wasn't a direct competitor. They were very happy to have China subordinated in supply chains. They were very happy to, are still happy to, import a lot of Chinese products.
We need to understand that fundamentally, China's trade surplus is happening because there are a lot of places in the world that are happy to buy Chinese products at prices they very much enjoy. It's not like China is forcing onto other countries their products. There are firms and consumers in those countries that willingly buy Chinese products.
So it's very important that framing, because in the West, in Western media, we see a lot of talk about China is an unfair trading partner, China is exporting too much, they need to behave more with its exports. China has, from its perspective, done everything right. I'm a development economist, and when I look at China, it has done exactly what a developing country should do to develop its economy.
We also shouldn't forget that when we talk about EVs and green tech, China is the one country that's actually now giving us some hope to solve the climate crisis because they're actually investing in this stuff and also giving the rest of the world a chance.
Of course, it's not all a dance on roses. As I said, there are problematic aspects of this, especially in terms of other countries retaining their competitiveness. But we really need to nuance the debate here more than it has been in particularly Western media.
Keith 00:59:58
I want to talk about another existential challenge, which is automation technologies, or nowadays the way we see it, artificial intelligence. There is a worry, especially among maybe the more advanced economies that are more indexed towards the service side, that the way technological progress of LLMs has been so quick has created a swarm of existential worry—that people are going to be structurally unemployed or perhaps displaced by someone who is maybe cheaper offshore, augmented with AI.
I wanted to ask from your point of view as someone who studied this space: how do you see the role of such technologies in perhaps the reorganization of labor forces?
Jostein 01:00:48
I don't have a crystal ball, so it's always difficult to talk about this because to some degree we are talking about what are the expectations for the future.
But we've now had maybe 20 years where we've seen digital automation technologies being commercialized at scale. Maybe some people say, "Oh, but we haven't seen the full scale yet," but I've heard that said for a long time. We even had people protesting—you might be familiar with the Luddites, this group of people protesting in the early 1800s in Nottingham about the use of machines in the textile industry because it was taking away their jobs. These were artisan textile weavers that broke into factories in Nottingham to destroy machines because they were taking their jobs.
So that kind of the fear of automation in terms of displacing jobs has been around for a long time.
If we look at forecast studies today, for example by McKinsey—the McKinsey Global Institute generally produces a lot of good forecast studies on the impact of automation on job displacement—they say that yes, automation is going to displace jobs, but the restructuring of the labor force that we'll see is not going to break with historical trends. Because when you implement automation tech, you have effects that also create jobs.
You'll have productivity-enhancing effects which create jobs. You also need jobs to oversee that technology, etc. So there are a lot of job-creating aspects of automation tech that people don't see because they focus on the tasks and the jobs that this technology can automate.
We also need to keep in mind that some automation technology can only automate tasks rather than entire jobs. So at times you'll have a task automated, but not a human fully replaced.
So I do think the fearmongering around automation displacing jobs is a bit excessive. But this is not to say that this—we talk about restructuring, we talk about some sectors of the economy actually losing out. You'll see people in some industries just fading away and some jobs and some professions becoming redundant because of automation and because of LLMs, and we're already seeing that.
The big question is: is that actually breaking with historical trends? Because we've also always seen the fade and the rise of new industries. The composition of the labor force in the countries we're sitting in today, in Singapore and in the UK, is it the same today as it was 50 years ago? Are people in the same type of jobs generally? And no, not really.
So this is the consequence of rapid technological change worldwide. But I don't want to dismiss the fact that some sectors are going to face challenges quite seriously because of LLMs and automation tech.
Keith 01:03:48
The takeaway is that you really have to be grounded a little more in history, right? Look at how technological disruptions have occurred in the past, be it through the industrial revolution, the digital revolution—with it came both its boons and its banes. To be wary of the worry that you're just going to be completely displaced in a matter of seconds. I mean, that process takes a bit more time, and diffusion happens a little more slowly than one expects.
Jostein 01:04:14
I agree. I mean, the counterargument to that is to say, "Well, this time it's different." And maybe, and in many ways it is different, and maybe you'll come back to me in 10 years and say I was wrong.
But we are seeing—let's go to China where we are seeing industrial robots applied at scale. And at the same time, the manufacturing ecosystem in China employs tens of millions of people. The manufacturing ecosystem in China employs more than 20% of the labor force, which is an example of how you implement automation tech and at the same time it's not labor-displacing.
Another interesting piece of evidence in light of "well, this time is different" is a study done by the OECD which looked at the OECD countries that had implemented automation technology in the 2010s, so the most recent period of available long-term evidence. It found that the countries that had applied the most automation tech among OECD countries in that time period, so 2010 to 2020, had the lowest unemployment rates and the lower labor displacement rates because of the impact that the adoption of new tech has had on productivity growth.
So the evidence keeps pointing out to this positive impact that automation tech has on productivity growth.
Keith 01:05:47
Okay, so that's actually a very optimistic perspective to have, especially with a lot of AI fearmongering now, that's grounded in history. We should take a more grounded view—adopt the technology early, experiment with it, but don't be consumed by the worry that it will displace you.
Jostein 01:06:05
Just a final point here which I think is important. If we talk specifically about the prospects for labor-intensive industrialization, and this is something that economists like Dani Rodrik have said, that it's not that feasible any longer because of automation tech—if you look at the two fastest-growing economies in the world today, Vietnam and China. So when I say fastest-growing, I mean over a sustained period of time. So really two of the big success stories among developing countries today. The labor force in manufacturing is extremely high. So they are proof that labor-intensive industrialization is happening at this point in time.
So I would be very optimistic, especially if we take this and talk about the prospects for labor-intensive industrialization in light of automation tech. It's still very much possible because it's actually happening right now.
Keith 01:07:03
I have to come down to my last few questions for you. First, I have to ask you—you're a disciple of one of the most famous East Asian economists, Ha-Joon Chang. I wanted to ask you: how did his thinking influence the way you think about the world today?
Jostein 01:07:20
Yeah, so Ha-Joon has influenced me a lot. For the audience, Ha-Joon Chang was my PhD supervisor when I did my PhD, but I encountered his work way before I did my PhD. Actually, one of the first non-textbooks in economics that I read was one of his books called Bad Samaritans that was recommended to me during my undergraduate studies.
I was just reading normal economics textbooks. I read this book and it really opened my eyes to a lot of questions in development that I hadn't thought about before. Me and my friend, we read that book I think between the first and second year of our economic studies during undergrad and talked about it all the time. That book really got me thinking about development questions in a very grounded sense.
And then later, lucky coincidence in some part would have it that he became my PhD supervisor. So of course, given that his work has had an influence on me for a long time, given that he was also my supervisor, I do a lot of the work and touch upon a lot of the questions that he does. His influence has been great.
I think one thing I like about Ha-Joon Chang is that whatever questions he talks about, he always tries to relate it to something that's happening in different countries around the world. Real-world economics is very much applied, something that appealed to me a lot and something that I really try to carry on. We always have to ground these big economic theories in what's happening in the world today.
Given that you're from Singapore, he loves talking about Singapore. One thing he says about Singapore is that no economic theory can explain Singapore. What he means by that is that Singapore is this example of a country that—you could make the case that Singapore is very free-market-oriented and capitalist-oriented. At the same time, you can make a case that Singapore has a very strong state and governs the market and so on.
He uses that often as this example of a country that doesn't really fit into any straitjacket of either capitalism or communism or socialism. It's kind of a mix of all of it.
Keith 01:09:37
The joke I have with my friends from the US when they come over to Singapore is that depending on whether they're Democrat or Republican, they have very interesting takes. The Republicans like the low taxes, for example, but they can't wrap their head around the public housing. Therefore, the Democrats operate the reverse. So it's really fun to have my friends come here and then them try to make sense of this beautiful little country we call Singapore.
But a lot of us appreciate that we're small. So maybe that allows us greater bandwidth for experimentation, and that maybe explains a little bit why we're a little idiosyncratic from the outside eye.
Jostein 01:10:15
Yeah, I do think that's something we haven't talked about today, but it is an interesting point that if you have, quote-unquote, idiosyncratic elements like being a small country—well, sorry, if you're a small country, you can implement more idiosyncratic directions in terms of development.
We talked a lot today about the importance of manufacturing. Well, there are small countries who have managed to develop without manufacturing. Oil-rich economies in the Arabian Peninsula, and my home country Norway, very much dependent on oil, no competitive jobs, still a high-income, wealthy country. So yeah, when you're a small country, you can experiment a little bit more and might go in certain idiosyncratic directions.
Keith 01:10:57
With that, I come to my final question, Prof. Given all that you know, what is that one piece of advice you'd give to a fresh graduate entering the working world today?
Jostein 01:11:06
I think there are two qualities. If we talk about students entering the workforce or whatever they want to do, I think there are two qualities that really can shape your career in a positive direction.
The one thing you really need to have if you want to be successful is passion for what you do. And the other is grit and perseverance. I know right now it's tough for graduates. The labor market is extremely competitive, and it looks like it's becoming more competitive. But if you stick with something for a while that you have passion for, and if you have the grit and endurance to stick with it, I think those are some ingredients that I think are important in being successful.
And I also want to say that as an academic or intellectual, students often come to me, and if they pursue corporate careers or something in that field, they feel embarrassed to tell me about it. And I would say really, really don't. I think there are so many different types of careers that are worth pursuing, and worthwhile careers shouldn't be just limited to intellectual, academic endeavors. There are lots of exciting paths to take in government, in the private sector, etc. So it's all about finding what you're passionate about first and foremost.
Keith 01:12:29
With that sage advice, Dr. Hauge, thank you so much for coming on.
Jostein 01:12:33
Thanks for having me, Keith. It's been a pleasure.
Keith 01:12:36
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