An interesting thread by Kamil Galeev:
Why the USSR failed? There are two ways for a poor, underdeveloped country to industrialise: Soviet vs Chinese way. Soviet way is to build the edifice of industrial economy from the foundations. Chinese way is to build it from the roof. 1st way sounds good, 2nd actually works.
Read the whole thing.
I’m reminded of something Peter Drucker wrote in 1969:
In any aid program, the economist, especially the development economist employed by government, tends to impose his own values on the choice of priorities and projects. Understandably he likes things that look big, impressive, and “advanced”: a petrochemical plant, for instance. He likes the things he knows the poor “ought” to have. He has nothing but contempt for the “frivolous,” e.g., small luxuries. In this respect there is amazingly little difference between the Russian planners and the economists in the governments of the most “capitalist” nation.
The factory girl or the salesgirl in Lima or Bombay (or the Harlem ghetto) wants a lipstick. She lives in a horrible slum and knows perfectly well that she cannot, in her lifetime, afford the kind of house she would like to live in—the kind of house her counterpart in the rich countries (or the white suburbs) can afford. She knows perfectly well that neither she nor her brothers can get the kind of education they would like to have. She probably knows perfectly well that—if lucky—she will marry some boy as poor as herself and as little educated who, within a few years, \vill start beating her out of sheer despair. But at least she can, for a few short years, try to look like the kind of human being she wants to be, respects, and knows she ought to be. There is no purchase that gives her as much true value for a few cents as cheap cosmetics.
A cosmetics plant gives more employment per dollar of investment than a petrochemical plant. It trains more people capable of developing and running a modem economy. It generates managers, technicians, and salesmen. Yet the economist despises it. And the reliance on aid makes it possible for his moralism to prevail over economics and for his desire for control to prevent development.
(The Age of Discontinuity)
Of course Drucker understood the importance of the petrochemical plant; his argument is that things work better when the petrochemical plants are called forth by the cosmetics factories and other consumer-facing businesses, rather than planned from the top.
I don’t think the above points just apply to poor & undeveloped nations. In the US, the development of the computer and semiconductor industries benefited greatly from the sales volumes and technical challenges created by the computer game field…which is not the kind of thing that a central planner would be likely to earmark as a critical industry for the future.
In a market economy, ‘industrial policy’ intended to spur vital industries via subsidies and tax incentives will often seem to make sense–the US certainly does need it own ability to produce high-end chips, for example–but carries the danger of starving other industries of investment dollars and talent. And some of those industries may turn out to have been just as critical, or more critical, than the ones focused on by the industrial policymakers.
I don’t think the Soviet vs Chinese analogy is properly described. After all, China has (for example) the most modern steel plants in the world. The difference between the Soviet & China paths is that China in the Deng Xiaoping days invited foreign capital, foreign technology, and foreign expertise to come in and build their first generation of (e.g.) steel mills — offering those foreigners the benefits of limited regulations, low labor costs, light taxes, and easy repatriation of profits. Whereas the Soviet style was to build the steel mills indigenously; in a sense, this meant the Soviets had to pay the price of reinventing the wheel.
Of course, that was then and this is now. The Chinese learned carefully from the foreign manufacturers, and now the student has surpassed the teacher.
The best Industrial Policy the US could have at this point would be to roll back masses of regulations, repeal many counter-productive laws, greatly simplify the tax system, and conscript every lawyer in the US for immediate front-line service in the Ukraine. And since the US has now fallen behind in so many technological areas, there could usefully be a positive attitude towards encouraging foreign manufacturers to set up shop here and Make It In America.
The Soviets did take some advantage of Western technology via participation of US companies and experts:
https://www.perplexity.ai/search/tell-me-about-us-companies-par-PTo080DAR8muQQQwGYydqg#0
…not sure specifically about steel mills.
There’s an interesting book, Black on Red, by Robert Robinson, a black toolmaker working for Ford in Detroit. He accepted what he *thought* was going to be a 1-year assignment in the Soviet Union. Stayed longer voluntarily at first (didn’t want to return into the Great Depression), but after WWII he wasn’t allowed to leave. Finally got out in 1986.
Whether the words are uttered or not, the actions of government will effectively create an ‘industrial policy’ based on laws passed, treaties signed, and regulations published. Just because it results in *de-industrialization* doesn’t mean it wasn’t a deliberate policy choice, and didn’t have bad effects.
This whole thread is relevant:
https://x.com/PierrePoilievre/status/1867994821165797505
The lipstick parable is very neat and plausible and it’s unusual for Drucker to strike out so completely, so I’ll explain.
You have to start with the stick. It’s produced by blending various waxes, oils and fillers derived from animal, vegetable, mineral and petroleum sources, each produced by separate processes in separate facilities. Then there’s the color, also from all those sources and different facilities. With any one shade possibly requiring a dozen or more.Then there’s the tube, comprising, almost certainly, plastic with it’s long production train and possibly metal as well.
All of this, along with the requisite machinery and knowledge have to come together in your lipstick factory. What are the chances that any single variable of this equation will be procurable domestically in your undeveloped region? So, everything has to be imported. Not in any great quantity, a single shipping container can hold a lot of lipstick, but imported nevertheless. Now, what are the chances that your local factory can compete with finished lipstick imported from a few of the hundreds of producers that already export to fifty countries? Again, one shipping container holds a lot of lipsticks.
This is why successful development programs, and they are scarce as hen’s teeth, hinge on leveraging something that’s produced locally. Assuming our backwater is already producing palm kernel oil and could produce more. A plant to refine that for export might be successful. Given that source of raw materials, it’s barely conceivable that your lipstick factory might work.
Of course. your average “development wala” has zero experience producing anything and he works for politicians who only most rarely have any experience producing anything but hot air.
Finally: I certainly would want my pension, if I had one, to be invested in something like “AI” at the stage where it is mostly noted for burning through government sized piles of cash without producing any return beyond the odd six fingered hand.
Drucker probably just grabbed lipsticks as an example, without thinking too deeply about the production process…he could have used anything that was valued by ordinary people but not likely to be impressive to politicians and development economists.
Although…somewhere in the lipstick production process, there is probably a labor-intensive step that is difficult to automate…final assembly and packaging, maybe?…in which case, maybe it *would* make sense for the impoverished country to import components and perform those final steps locally.
The lipstick is trivial, I further reference the “I, Pencil” essay via Megan McArdle from before her wits were deranged by TDS:
https://www.theatlantic.com/business/archive/2011/04/markets-and-the-common-good/237572/
Drucker’s error is fundamental. Possibly, a matter of the difference in the world between 1969 and now. What he misses even in 1969, in the sort of places he envisages, there were and are numerous wheeler-dealers constantly looking for, exploring and exploiting every possible opportunity to make money. What odds that every one of them has missed the cosmetics space or any other everyday comfort Drucker is talking about? The, by far, easiest path to all of this is importation. Imagine if the phenomenal, even miraculous penetration of smart phones had depended on the ability of each country to manufacture its own.
A key difference between a poor country in Africa and the U.S. or China, for that matter, is the lack of infrastructure to support manufacturing. So, a multinational, given an adequately lucrative opportunity can develop my palm oil refinery or mine or smelter by importing every last nut and bolt, while the average citizen would find outfitting a simple workshop next to impossible.
This, alone would make true economic development hard and slow. When combined with the corruption and other dysfunctions ubiquitous in these places, it’s no wonder that success eludes us so easily.
MCS: “Now, what are the chances that your local factory can compete with finished lipstick imported from a few of the hundreds of producers that already export to fifty countries?”
This brought back a memory of the autobiography of an English mechanical engineer who had worked in various countries, including in the United States in the 1960s. What amazed him was the scale of production in the US — with production runs being an order of magnitude larger than what he was used to in Europe.
This ties into Elon Musk’s observation that, as the scale of production increases, the cost of a product drops and exponentially approaches the cost of the material inputs. It is tough for a low volume producer to compete.
This is why being the Workshop of the World brought such competitive advantage first to the English, and later to the US, and now to China. It also suggests the potential importance of tariffs to a country which is trying to set up a domestic producer — provide that the domestic producer has the potential eventually to scale-up to being a world-scale producer.
Implicit in this discussion is the dead weight losses in efficiency in production in accordance with comparative advantage by trade restrictions (tariffs, quotas and subsidies). The de-industrialization of the west has been, intentional or unintentional, has been significantly accelerated by the asymptomatic trade restrictions. The infant industry and national security justifications for such market distortions are reasonable, but they are seemingly impossible to reasonably limit and rationally apply. The potential for government capture by those private interests being benefited by the special protections afforded is easily understood. The results of pernicious regulation follow the same capture scenario. With massive international actors directing world trade and government intervention, the ease of playing both sides of the game is increasingly common through both financial and political international means.
Wasn’t it Milton Friedman that popularized the example of the wooden pencil as an illustration of the intricate cooperation specialization and trade incentivizes in such apparently simple goods? Not to forget Smith’s pins.
The difference between the crony capitalism of our era and the mercantilism of Smith’s and Hume’s British Empire era is largely a matter of scale as far as I can see. The structure of the United States fledgling government was significantly influenced by a motivation to avoid the incentives for government economic and political intervention in individual activities to the benefits of others without consent. That structure of limiting government function and power has been greatly circumvented. The task of addressing the worst abuses is daunting. I’d like to see at least a beginning of a consensus that this must be addressed in an effective and long term way by limiting such incentives for political capture.
Proposing more detailed and invasive, but “better informed” politically based economic intervention to address the issue of crony based political economic intervention is akin to riding a dead horse harder. Lots of dead horses with little or no positive results. As far as I can see, limiting the power to intervene is the only way to limit the operation of crony capture.
The fact that we are so integrated internationally vastly increases the scope of such capture limitation. I’m very skeptical. We have some significant international influence, but so do the aggregated international entities who depend on the current structures to exploit and increase their economic and political power.
Death6
I do not know about the bottom-up or the top-down development strategies, one being more successful than the other, but do have little belief that the economy in China is as good as it is being touted to be. Their real estate/development industry is tripping over its shoelaces. Multiple large developers have failed to complete projects at all, much less on time or under budget. Many of the projects are Tofu, that is to say, in other words, made of inferior materials in slap-dash manner. Walls to be of concrete are styrofoam covered with a layer being just one observed phenomena. Foundations that are not completed properly leading to complete collapse of brand-new buildings is not uncommon. Highway bridges and overpasses that tumble for no reason, complete sections of roadway that fail even without the load of traffic, BEVs that catch fire and burn to the ground, city owned bus fleets mandated to be electric that cannot be used, BEVs that are built, and licensed to capture government subsidy, never driven, but kept registered to gain annual subsidy payments, all contribute to a picture of an economy run by scammers, each set to outdo their competitors in slinking just inside(outside?) the legal limit. Those who are caught are tried, convicted, and given the .45 cent solution. By the side of the road or in traveling execution vans.
If you want to see a paper mache economy, visit Shenzen. Even the vaunted PLAN cannot field their prize project to launch planes at sea. Their efficient shipyards sink their submarines alongside the pier. Green paint is sprayed on hillsides to emulate some sort of concern for pollution while the water is for the most part contaminated with industrial runoff.
China is a mess. Perhaps driven from the top, but a mess nonetheless. The only difference between R and CN is that R built steel mills that made inferior steel, while the CN buillt ‘eonomy’ that was mostly Tofu. Fake, useless, with no distinguishing quality of any sort. Both were directed ‘from the top’, planned economies, and are failed in general. The young people in CN are signing off, not competing, not working, moving into retirement homes in their 20’s.
When the only savings for old age is real estate investment, and the investment has been hollowed out by the developers, and all are required to work until put into a box, with their life savings evaporated, the current regime may be entering its final times. Once they lose the acceptance of the populace, their days will be numbered. Much more likely in CN than in R.
tommy w: “… with their life savings evaporated, the current regime may be entering its final times. Once they lose the acceptance of the populace, their days will be numbered. Much more likely in CN than in R.”
Now how about the current regime in the US? We are already seeing the current regimes in France & Germany collapse — with little prospect for anything better emerging.
We agree that the world faces big economic problems everywhere, in ALL countries. The difference is that a country like China has real factories which produce real goods, while a country like Russia has real resources — oil, gas, minerals — which it is not afraid to develop. The once-dominant West — not so much anymore; all we have is a surfeit of lawyers and bureaucrats.
It is time for us to get serious about fixing our own very serious — maybe existential — problems. We can’t sit around hoping that other countries’ serious problems cause them to collapse first — especially when we are heavily dependent on those other countries for manufactured goods and resources.
tommy w; Amen. To tommy’s litany, I’ll add the Belt and Road. Xi has anteed a trillion dollars so far with little prospect to ever recoup more than a small fraction. The projects show the typical hallmarks of Chinese quality and economy. Of those few projects that have been completed, many are already starting to fall apart while many others have simply stopped in their tracks with no signs of ever resuming. There have been massive increases in the foreign account balances of many third world “leaders” however. Large portions of these debts have been written off with more to follow. Xi’s fond dream of basing PLA Navy ships in Sri Lanka has been dashed by India. The Venezuelan debts that are payable in oil are utterly dependent on our continuing to supply the naphtha that they need to dilute their heavy crude enough to load on ships. China will have paid the better part of a trillion dollars for a crash course in third world economic development, not that there isn’t that much and more in that 35 trillion hanging over all of our heads with no sign that we’ve learned anything at all. Maybe Trump and Musk will turn that around.
Which is not to say I disagree with Gavin. America has been very fortunate in our enemies and that luck seems to be holding. I’d rather be good than lucky but I’ll take lucky.
In the end, economic development comes down to serving a market profitably which is not something that any government has ever been any good at.