Manufacturing matters

It does for sure. But the graph below just shows the varying share of manufacturing since the mid-18th century (source is Robert Allen, 2011). And I don't intend to say much on whay it matters per se, but note that global economic dominance goes hand in hand with manufacturing.

Note that the West, narrowly defined as England the rest of Western Europe, what was to become the US and Russia (called for the whole period USSR) had a share of less than 20% in 1750, it had expanded to more than 80% on the eve of WW-I. If you add Australia, Canada and Latin America (which are all in Rest of the World, but are what Maddison would call Western offshoots), the numbers are even larger. Most of the changes were associated to the squeeze of China. And most of the recent changes are associated with expansion of China and East Asia (which includes Japan). We have not gone full circle, by the way.

In other words, the process of development (or indutrialization in the center) went hand in hand with the process of underdevelopment (deindustrialization) in the periphery, and old lesson from a little book by Osvaldo Sunkel which is still worth reading.

Industrialization, Wages and the Terms of Trade

The quote above is from Raúl Prebisch's classic paper "The Economic Development of Latin America and Its Principal Problems," the so-called Development Manifesto (available in Spanish here), published in Spanish and Portuguese in 1949, and the following year in English.

Note that his explanation for the tendency of terms of trade of commodities to fall over time (the so-called Prebisch-Singer hypothesis) was based on the fact that in the boom wages went up in the center, but not so much in the periphery, since industrial workers in the center were organized and could demand higher salaries, while that was not possible for the agricultural and mining workers in the periphery. So in the recession, while prices of commodities and wages fell in the periphery, they didn't in the center. Class conflict, and not just technological change, was at the heart of the asymmetries between the center and the periphery.

Hence, industrialization in the periphery, and the re-organization of the labor force, would imply that more workers in the periphery would be able to keep part of the benefits of higher productivity. Industrialization would be good for the production of the commodity sector, since prices of commodities would go up, with higher wages in the periphery.

Also, note that this explanation of terms of trade suggests that if wages in the periphery fall, then the prices of commodities fall too. And it is worth remembering that a depreciation of the currencies of peripheral countries implies lower wages.