Industrialization of Developing Economies in the Global Economy with an Infectious Disease

Discussion Papers

No.815

by Hitoshi Sato

March 2021

ABSTRACT

Manufacturing has long been the center of industrialization strategies for poor developing countries. This paper first investigates the effects of labor supply constraints on industrialization, which may have been caused by the coronavirus disease 2019 (COVID-19). Then, the study examines how manufacturing automation could affect industrialized developing economies based on the premise that manufacturers may accelerate production automation in response to the COVID-19 pandemic. The model predicts declines in developing economies’ manufacturing competitiveness and a heterogeneous pattern of recovery from the COVID-19 recession. In comparison, developing economies with large manufacturing bases would recover relatively quickly, whereas those with weaker manufacturing bases would suffer from a long-term decline and manufacturing contraction trends (undesirable deindustrialization). Manufacturing automation can enhance economic welfare, causing a contraction in the unproductive non-tradable good (service) sector. However, with low labor mobility, the welfare effect is ambiguous, thereby widening the wage gap between skilled and unskilled labor.

Keywords: COVID-19, industrialization, automation, financial globalization, social mobility

JEL classification: F12, F16, O14

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