Why Countries Shouldn't Outsource Their Industrial Sector

The more I research about economic growth, the more convinced I am that almost every modern economy needs a thriving manufacturing sector of decent size.

If you’re an island country in the Caribbean, i.e. too small to have meaningful industrial diversification, then you’re probably out of luck here. Otherwise, preserving its own manufacturing base is something every country should strive for. And outsourcing your industrial sector to foreign countries with cheaper labor is an extremely short-sighted move that will come back to bite you later.

Don’t get me wrong. this is not an anti free trade manifesto. Efficiency gain of international trade is proven. I’m all for countries pursuing their comparative advantage. But short-term efficiency is not the purpose of life. It’s certainly not the purpose of a nation.

Why is manufacturing so important? There’re many reasons. To name a few–

Manufacturing is the engine of productivity growth. At the end of the day, much of what we call “economic growth” involves better ways to make things and make different things. 95% of patents issued in the last century was to the manufacturing sector. Manufacturing has higher labor productivity growth compared to services in almost every country on earth.

Innovation comes from getting your hands dirty. Sometimes this is not even a figure of speech. The ideas of how to better make things comes from actually making things and solving problems along the way. When you stop doing something, you lose the ability to innovate in that department gradually. To make things worse, innovations in manufacturing informs upstream and downstream sectors on the value chain and level up innovation in the entire economy. So when you stop making things, everyone suffers (yet has no idea what they missed).

There’s no software without hardware. You may think innovations these days are becoming more and more “intangible”. Google , Amazon and Facebook do not make things. Even for the companies that make physical things, e.g. Apple, their innovations are largely design focused. But on the flip side, you can also argue that the reason why recent innovations coming out of advanced economies are increasingly intangible is because these countries are no longer good at making tangible things.

The industrial sector supports a well-fed middle class. The industrial sector provides large quantities of jobs that are stable and require skills and learning. When you take this sector out of the economy, you take away an important channel for a large percentage of the population to obtain a decent livelihood. You also skew the decision making of the younger generation in what kind of education they should pursue– less incentive to go into areas of studies that are useful in industrial process innovation. This breeds many troubles down the road– in the form of higher social tensity, bigger income inequality, and shortage of the right kind of human capital for making future innovations happen.

You see this playing out in the United States today to a large extent already. Divesting its industrial base to cheaper countries has drastically improved consumer welfare, helped to keep inflation low, and increased the profit margins of companies that used to make things. But after doing so for 30 years, political-economic tension is at all time high between inland region (the country’s old industrial base) and coastal region (where the intangible economy thrives). A generation of college graduates struggle finding a vocation that justifies their student debt obligation. And the country has lost its innovation leadership position in a long list of industries, with the list getting longer every year.

Most humans don’t have the ability to fathom the long-term implication of our short-term decisions. Hindsight is 20/20. For the US though, it’s not too late to change the course. And it should serve as a cautionary tale for other countries pursuing economic excellence.

© 2021. Natasha Che. All rights reserved.