In this interview, Harvard Kennedy School’s Gordon Hanson, who is a Stone Center Affiliated Scholar, discusses pandemic-related trade disruptions and some of his recent work.
There was a New York Times article in late August with the headline “The World Is Still Short of Everything. Get Used to It,” which analyzed the disruptions in the global supply chain caused by the pandemic. There seems to be widespread uncertainty about how long these disruptions will last. What is your take on this?
Hanson: Yes, the Covid pandemic and recession have been fascinating in terms of what they have taught us about absence of resilience in cities, countries, and industries. We’ve seen how sensitive global value chains are to disruptions, how hard it is to readjust, and how these readjustments can further disrupt global shipping. Globalization has helped integrate markets, but also made markets sensitive to shocks even in remote places.
You could see the light at the end of the tunnel if you could say, “Okay, we’re confident that uncertainty is going to be resolving itself around this time.” We thought we were there earlier this year before the Delta variant hit, because it looked like things were winding down. We were confident in vaccination in higher-income countries, and that vaccination would continue in lower-income countries, and we’d gradually work our way out.
Now, we understand that this pandemic has a lot more life in it. We have Delta now, and a new variant in South Africa that might be spreading. And so uncertainty just ramped up. And because of that uncertainty, you have a reticence on the part of business as well as government to make what might be sensible, longer-run changes until they know we’re a little farther along, a little closer to recovery.
Do you think this pandemic-related uncertainty is having an effect on inequality?
Hanson: Some of the folks who lost out immediately as global trade ramped down were factory owners and other businesses that facilitate trade. These are folks at higher income levels. You might be compressing inequality, but you’re not compressing inequality in a way that you like. You’re compressing inequality by bringing down the top, rather than by bringing up the bottom. And I see those effects as transitory — they might last for a few years but no more. When global value chains get back at full capacity, they might look different and we might have different actors participating, but the same pressures that were there before, that created divides between urban workers and urban capitalists and between urban workers and rural workers, will still be there.
In your paper “Who Will Fill China’s Shoes? The Global Evolution of Labor-Intensive Manufacturing,” you discuss China’s retreat from its role in global manufacturing. For the countries that are moving in to take China’s place, what are the risks and benefits? What will this mean for inequality in those countries?
Hanson: Vietnam and Bangladesh have stepped in to fill a very particular role in global value chains, and that’s the assembly of labor-intensive manufactured goods. And what stepping in to take part of China’s role means for those countries is a whole bunch of urban factory jobs for workers who used to be rural farmers. That’s a big increase in their productivity, and that will be reflected in increases in their standard of living. It will also mean rising inequality between cities and rural areas, because the economic opportunity is not in rural areas, it’s in the cities, and this is creating divides. That’s an inevitable consequence of the urbanization-industrialization process. It also means that the entrepreneurs who are best positioned to organize the factories and that are linked to the global value chains are set to make a killing.
And the property developers and the people who provide the services that make finance happen are set to make a killing, too. Hong Kong got really, really rich off of facilitating China’s trade with the rest of the world. You’re going to see the creation of this business-service-finance- trading-logistics class that didn’t exist at the same scale before.
One question I have is whether those roles in Bangladesh and Vietnam will be supplanted by multinational enterprises. In which case they’ll miss out on developing those skills among their own commercial elite.
So you see other countries coming in to claim those roles?
Hanson: They have come in. The way China connected itself to the rest of the world was not that China made goods and went out and marketed them. It’s that multinational chains went there and said: Make this and we’ll sell it for you.
And the firms, initially, they were only doing one thing. They were just putting together final products made from imported parts and components from elsewhere. They weren’t contributing anything to the designs, to the marketing, the distribution, to the logistics. Over time, China, just like other East Asian countries before it, have moved up and down the value chain, taking more roles in the production process. And in Vietnam and Bangladesh, the same thing happened — multinational companies showed up and said: We want you to make this, and we’ll sell it for you. In Bangladesh’s case, I think the first multinationals were from Korea. In Vietnam’s case, you have a mix of multinationals. You have some U.S. companies there because of the U.S.-Vietnam links. You’ve got a big Chinese presence. And so China is playing the role in Vietnam that Hong Kong and Taiwan played in China 25 years ago.
“Who Will Fill China’s Shoes” also talks about the country moving into more high-tech industries, rather than labor-intensive manufacturing. What has that meant for inequality in China?
Hanson: Well, it’s hard to know because China makes it very hard to study inequality. The data we do have suggest that inequality has increased quite dramatically, but some of that increase in inequality, again, is a divide between really rich cities on the coast that are at the center of globalization and places inland. Then within those cities on the coast, you have this big divide between the locals who have permission to live in those places — those are the business owners and the factory owners and the managers — and the workers, who are primarily migrants and don’t have permission to be there. The workers are, in effect, like undocumented immigrants and they can’t be promoted into management positions. So China has engineered some inequality by holding onto some of its central-planning era restrictions on where workers can live and work.
In your presentation for Harvard Kennedy School’s “5 Big Ideas in Inequality” series, you talked about the case of Martinsville, Virginia, and called for creating a rapid-response force that would address joblessness when towns suddenly lose their major employers. Do you see this as a strategy that could work in regional economies throughout the world?
Hanson: I think it’s a real flaw in how we approach job loss to think of it as a macroeconomic phenomenon. We deal with it, we address it, with macroeconomic tools. Labor isn’t as mobile as we think it is. We’re fooled into thinking that labor is mobile because we see periods of urbanization. We see the rural-to-urban migration in China and Vietnam. But once things stabilize and people are where they are, movement declines substantially. And what that means is that when job loss happens in a place, it really affects that place. So we have to think of job loss, especially when it happens at scale, as being a localized phenomenon that needs localized interventions. And if we don’t do that, we’re going to have a distressed region that we’ll then try to help rebound 10, 20 years hence.
Gordon Hanson is the Peter Wertheim Professor in Urban Policy at Harvard Kennedy School, a research associate at the National Bureau of Economic Research, and a life member of the Council on Foreign Relations.
Read the Study: Who Will Fill China’s Shoes? The Global Evolution of Labor-Intensive Manufacturing