How to Become an Industrialized Nation

Tuesday, December 08, 2015

How is becoming an industrialized nation like learning math? In this video, Assistant Vice President and Economist Yi Wen discusses the stages a nation must go through for an industrial revolution. He also touches on why it took so long for China to become an industrialized nation. This video is part of the St. Louis Fed’s Dialogue with the Fed series, and a transcript of the video is below.

So, therefore, now come back to the questions I posed earlier. What is the secret recipe of industrial revolution? Why did China not find it before? Now I can give you the summary. So I create a new stage theory in my book. So firstly we need to create a market. A modern industrial market takes several key stages to create. Development is a sequential process of market creation. No matter how late a nation starts its development it must repeat earlier stage to succeed. You cannot just skip it, jump forward directly from agricultural, primitive method of production to modern automobile assembly line.

If you do that it is not sustainable. Just like learning mathematics, human race has through thousands of years discovered the laws of mathematics but starting from numbers to arithmetic to algebra to calculus, etc. So despite we already know calculus very well from mathematician. But for today's children to learn mathematics you still have to repeat those earlier stages, exactly like the entire human race has traveled except at a rapid, faster pace. You have to repeat it. So that's my metaphor for this new stage theory.

In contrast, most modern development economic theories try to teach developing countries or the nations they want to do that themselves, too. OK, it's not like taking lessons from other economies. They want to do it themselves; they want to leap forward. OK, they want to leap forward. And to start industrial revolution by building advanced capital-intensive industries, by setting up modern financial systems, by erecting more than political institutions because that's what U.S. has today, therefore they think if we want to grow to the level U.S. we should do that also. But that's the roof of the building, not the foundation. They missed the chance to see how the American built their foundation in the 19th century. They are born too late. But those are written in history and we have to read it.

I pose several wise theories I read. That's people's argument why should we repeat earlier backward stages. We should just jump directly forward but that's going to be a big mistake. So I said such a top-down approach violates the historical sequence of the Industrial Revolution, therefore create problems.

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