Volume 43, Number 170,
July-September 2012
Economic Growth and Industrial Policy in Mexico
Cuauhtémoc Calderón and Isaac Sánchez
SLOW ECONOMIC GROWTH AND MANUFACTURING INDUSTRIES ( ...continuation )

It is in manufacturing where such virtuous cycles are generated for the economy. For Smith, only here are rising scale profits to be found, that is, when productive inputs rise, so does production in a greater proportion. The cases of China and most Asian countries (Taiwan, Singapore, Malaysia, Japan, Hong Kong) offer overwhelming evidence of the importance of industrial manufacturing processes for an emerging economy. However, certain works of a sociological nature have thrown Smith’s ideas into doubt, based on the appearance of the modern service activities.4

Smith’s ideas were broadened and improved many years later by Young (1928) and other development economists.5 For them, industry drove economic growth, whether as a result of rising scale profits or productive links with other sectors of economic activity. Prebisch (1957) in particular, suggested that industrialization was key to overcoming the dependent relationship that existed between the center and periphery, given that the production of manufactured goods by periphery countries - Latin America - would help to improve the relation of exchange terms and with it overcome the restriction to growth resulting from a balance of payments almost always in deficit. This author believed it was necessary to incorporate technical progress into industry and make the most of its rewards for new processes of this type. This results in a cumulative, dynamic and expansive process.

In the mid-1960s, Kaldor (1966) clearly established the importance of manufacturing industry for economic progress through three laws. The first of these laws states that growth of total output is determined by the growth of manufacturing; Kaldor believed explicitly that manufacturing drove economic growth and with this established, along with development economists, that the activities a country or region specialized in determined economic success or failure.

From the Kaldorian perspective, manufacturing is the nucleus or central driver of an economy, because of its strong buying and selling links with other sectors, however it is not the only sector of interest. Manufacturing and its growth is responsible for the growth of global production. Industrialization is very closely linked to structural change and economic development of countries, bringing with it social progress at all levels (Martínez del Campo, 1985:15).6

The second law, the Verdoorn-Kaldor law, indicates that rapid growth of manufacturing industrial output, through rising scale returns, leads to rapid growth of industrial labor productivity, productivity and technical progress thus being endogenous. Initially productivity does not lead to greater production, but rather a greater demand for output and increased production to meet it, in the long run increasing productivity and thus competitiveness.7

Growth for Kaldor is the result of a complex process of action between rises in demand brought about by increases in supply, and by increases in the supply generated as a result of increases in demand. From the point of view of demand, there are at least four determinants of growth of manufacturing output: consumption, domestic investment, foreign investment and net exports. Regarding supply, there are two types of restrictions: to supplies and to labor. Kaldor recognized that the process of economic growth is the result of a complex interaction between supply and demand, but that in developing countries the factors relating to demand acted before those of supply.

According to the traditional estimates of Verdoorn law, changes in manufacturing labor productivity are dependent on changes in manufacturing production. Empirical evidence suggests that the coefficient of said relationship is around the value 0.5, with an increase in manufacturing productivity of 10% resulting in a 5% rise in labor productivity. This coefficient provides information relating to scale returns.

Kaldor (1966) in the spirit of Young (1928) saw returns as a macroeconomic phenomenon, related to the interaction between the elasticity of demand and supply for manufacturing goods. It is this strong and powerful interaction that highlights the positive relationship between manufacturing output and labor productivity (Thirlwall, 1983: 346).8

The third law Kaldor puts forward is that growth in aggregate productivity is positively related to growth in manufacturing output and negatively related to growth in non-manufacturing employment. The logic in this relationship, through the Verdoorn-Kaldor law, is that rapid growth in manufacturing will increase manufacturing productivity (and hence aggregate productivity).

In fact, with a labor surplus in agriculture and the service sectors, rapid growth in manufacturing will raise growth in productivity in this sector because of the increases in the sectorial labor transfers from the rest of the economy to manufacturing (as a consequence of underemployment and disguised unemployment). Because work moves from agriculture, where marginal work productivity is reduced, to manufacturing, where it is high, productivity increases. A rapid rate of decline in non- manufacturing employment will increase the growth of non-manufacturing productivity.

As a result of increasing returns in manufacturing and of the rising productivity in non- manufacturing sectors, a rapid rise in the growth rate of manufacturing productivity will lead to a rise in the productivity growth rate of the whole economy.

Viewing the proposals together, it can be concluded that a rapid growth rate of manufacturing industry output tends to establish an accumulative process or virtuous cycle through the link between the growth in output and manufacturing productivity. If the contrary applies, a vicious cycle of stagnation is established or low rates of economic growth.

4 Modern services in the transport and telecommunications sectors are almost always linked with a manufacturing process. Even in the information era, manufacturing activities continue to drive economic growth, although the rising importance of some services should be recognized, mainly those linked to information technology.

5 See Toner (1999) and Ros (2004) for a broad overview of the ideas of development economists.

6 This law has been verified in numerous studies. On an international level, the work of Wells and Thirlwall (2003) is prominent. They show the importance of the manufacturing sector in a selection of African countries. The importance of manufacturing for economic growth in Mexico is highlighted in the work of Ocegueda (2003); Díaz-Bautista (2003); Loría (2009) and Sánchez (2010); the latter uses both time series and data panels to show that in Mexico manufacturing drives economic growth.

7 An excellent summary of the Verdoorn-Kaldor law can be found in Bairam (1987). The name alludes to the fact that the idea was originally. posed by Verdoorn (1949) and was taken up again by Kaldor (1966).

8 Some studies which have evaluated this law in relation to Mexico’s case are Ocegueda (2003), Calderón and Martínez (2005), Calderón (2008), Sánchez and Campos (2010) and Sánchez (2010).

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 193, April-June 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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