23 Things they don't tell you about Capitalism

According to some free-market economists, the decline of manufacturing and the simultaneous rise of service and knowledge industries in rich countries is reason to celebrate. They hold that developing countries would be wise to skip the manufacturing phase if possible.

Questioning these assumptions, Chang points out that the reduction in manufacturing in rich countries has been overstated because of changing measurements as well as changes in the relative prices of services and goods. Additionally, he suggests that decreases in manufacturing levels are harmful over time because they create a trade deficit, as more goods must be imported from overseas. This dynamic gradually reduces a country’s purchasing power in the world, slowing its economic growth. While countries such as the US and Great Britain have managed to get by despite increasingly reduced manufacturing and the resulting trade deficits, developing countries would face much greater difficulties in doing so. Severe trade deficits may even prevent developing countries from purchasing the advanced technology from other countries that is needed to facilitate further growth.