Is stronger intellectual property protection linked to “premature deindustrialization”? A thought experiment

Dani Rodrik has a fascinating chart up at his blog that’s got me thinking about the link between intellectual property and economic development, and that it might not be as straightforward as we’ve tended to think.

Typically, it’s been argued that economic growth and stronger intellectual property protection go hand in hand. As economies become more sophisticated, they move from benefiting from copying more advanced processes, etc., to wanting to protect their own processes. More economic development = stronger IP protection. And, of course, it’s assumed this is a good thing.

Looking at Rodrik’s chart (reproduced below), though, I wonder. It suggests that the returns to industrialization have been declining for a few decades now. As you can see, it notes the year in which the country’s manufacturing employment’s share of total employment hit its peak, charted against the GDP per capita at this peak.

While modern economies all seem to follow the same path of developing “first by industrializing, and then by moving into services,” Rodrik argues that “the onset of deindustrialization is now taking place much sooner, at lower levels of industrialization and lower incomes.” Economically, this is a problem because “it slows down growth and delays economic convergence. Politically, it forecloses the typical path to democracy – through the development of a labor movement, disciplined political parties, and habits of compromise and moderation arising out of industrial struggles over pay and working conditions.” So this is not a trivial issue.

Rodrik isn’t sure what’s behind what he calls “premature deindustrialization”; in a column he muses that global competition might be to blame for part, but not all, of it.

My hunch – and it’s only that at this point – is that the story has something to do with the fact that, thanks in part to ever-stronger global intellectual property laws, manufacturing doesn’t pay like it used to. Most of the $800 cost of a contract-free 64 GB iPhone, to take a purely hypothetical example, stays in the US, even though most of the actual assembly happens overseas, mainly in China. Because the large value-added categories have migrated away from manufacturing toward design and the like (protected by patents, copyrights and trademarks), we’d expect to see late-arriving countries hitting their industrialization peak at lower per capita incomes, and (maybe? I’m not sure of my logic here) at lower employment shares. It’s just not worth as much as it used to be.

If I’m right, then the more economic development = stronger IP protection link could continue to hold. However, it may also be the case that stronger IP protection may place a ceiling on industrialization and overall economic growth. In such a situation, I’m not sure that stronger IP protection would be an economically rational policy.

This might be a case where, when all you have is a hammer (IP-focused research, in my case) every problem looks like a nail. But it’s a fascinating question that’s worth investigating, in my opinion. What do you think?

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