Friday, August 17, 2012

Chapter 10 - The Diffusion of Prosperity

It seems intuitive that inclusive institutions would serve to promote the exchange and the diffusion of technology, ideas, activity, and wealth. Acemoglu and Robinson see the roots of the initial divergence in world progress in the industrial revolution and the degree to which institutions in various parts of the world incentivized industrialization.

Interestingly, in a recent blog post, Dani Rodik ( ) argues that the process of diffusion identified in Why Nations Fail is decelerating -

"Successful long-term development therefore requires a two-pronged push. It requires an industrialization drive, accompanied by the steady accumulation of human capital and institutional capabilities to sustain services-driven growth once industrialization reaches its limits. Without the industrialization drive, economic takeoff becomes quite difficult. Without sustained investments in human capital and institution-building, growth is condemned to peter out.

But this time-tested recipe has become a lot less effective these days, owing to changes in manufacturing technologies and the global context. First, technological advances have rendered manufacturing much more skill- and capital-intensive than it was in the past, even at the low-quality end of the spectrum. As a result, the capacity of manufacturing to absorb labor has become much more limited. It will be impossible for the next generation of industrializing countries to move 25% or more of their workforce into manufacturing, as East Asian economies did.

Second, globalization in general, and the rise of China in particular, has greatly increased competition on world markets, making it difficult for newcomers to make space for themselves. Although Chinese labor is becoming more expensive, China remains a formidable competitor for any country contemplating entry into manufactures.

Moreover, rich countries are unlikely to be as permissive towards industrialization policies as they were in the past. Policymakers in the industrial core looked the other way as rapidly growing East Asian countries acquired Western technologies and industrial capabilities through unorthodox policies such as subsidies, local content requirements, reverse engineering, and currency undervaluation. Core countries also kept their domestic markets open, allowing East Asian countries to export freely the manufactured products that resulted."

I found chapter 10 to be a key one in book as the identification of diffusion as a key process in development is supported by comparison and contrast (Japan v China). I do wonder, however, at the significance attributed to colonization and the nature of the society colonized (see pages 299-300) by the authors and look forward to our discussion of this chapter and examination of diffusion.

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