Friday, March 21, 2014

Premature Deindustrialization

The pattern of development in most countries is to move from agriculture to industrialization and then to deindustrialization followed by a services economy.  That has happened in most of the Western economies, and it is beginning to happen elsewhere.  One of the problems with this pattern is that convergence between the rich and poor countries depends upon the income levels at which deindustrialization occurs.  Premature deindustrialization at low levels of income presents a number of development problems.  Productivity growth slows down, and many of the institutions that are essential for effective democratic government fail to develop.  This traps nations at a low level of income and with ineffective governance.  Apparently, an extended period of industrialization is a prerequisite for income convergence between rich and poor nations.  The bargaining that takes place between labor and management on the shop floor also sets the pattern for the political compromises that are necessary in democratic governance.

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