What Can Hot Wheels Tell Us About the World Economy? A Lot, Says a Georgetown Economist

This story is a part of our "Ask a Professor" series, in which Georgetown faculty break down complex issues and use their research to inform trending conversations, from the latest pop culture hits to research breakthroughs and critical global events shaping our world.

When Erwin Tiongson was a child growing up in the Philippines, Hot Wheels were just that: toy cars. But even as a boy, Tiongson made note of where each of his set of wheels came from.

Erwin Tiongson is a professor of the practice and deputy director of the Global Human Development Program in the School of Foreign Service.

"I remember playing with them together with my brother and my cousins, and we all owned a few back in the seventies during our childhood," said Tiongson, professor of the practice and deputy director of the Global Human Development Programin the School of Foreign Service. "And even back then, I had already noticed that some had been made in England and some were made in Japan."

It wasn't until Tiongson, who was featured in a Washington Postopinion article on toy cars,became a development economist that the miniature metal-and-plastic cars would take on a whole new meaning. Today, those same toys give the economics professor a window to explain how countries go from being rural agrarian societies to industrial and advanced modern economies.

Dive into the economics of toy cars with Tiongson as he explains the history of the industry and where it might go next, along with the future of advanced economies like the U.S.

Ask a Professor: Erwin Tiongson on the Global Toy Car Industry and Economic Development

Editor's note: This interview has been edited for length and clarity.

How did you start thinking about toy cars and economics?

When I had kids, they were into Lightning McQueen from Cars, so I got a Lightning McQueen Hot Wheels for my child. I looked at it and it said Vietnam, which I thought was interesting. I started thinking about it, and of course [it made sense with] the transition of countries from agricultural to industrial and post-industrial economies. I knew from my work as a development economist that that's the kind of transformation we've been seeing around the world over the last 150 years.

So how do economies develop and industrialize?

Almost every country in the world starts with an agriculture-based economy. Mostly everyone is a farmer. Everyone is informally employed. There are none of these big conglomerates and big companies. Eventually, people start moving out of agricultural work into what we call the modern economy.

They go into factories and start producing more durable things. You're in a factory producing supplies, clothes, maybe things made out of steel. There's also more room for technological transformation and economies of scale in which a factory is able to produce so much with limited input and become more organized and systematic.

Eventually, people become richer and earn higher wages. At some point, a company then looks around and says, "Okay, well I can't afford to keep paying people at this rate, but I have to keep producing. So maybe I can open a factory in a lower income country where I can employ people basically using the same processes and the same technology but with lower wages."

In January, Tiongson published an opinion piece in the Washington Post on toy cars and the world economy.

How has the toy car industry developed?

You can imagine that from light manufacturing, producing something simple like a toy car with a mold and not much complicated technology, a country will then go to producing computers or software, which require more of an educated background.

Japan went through this in the 1960s and 1970s and became richer while learning to produce simple things. It became a ticket to learning to produce more complicated things, such as video games, software, computer technology and so on.

As Japan, should they hire one more Japanese worker to produce a toy car that you sell for $2 versus the same worker who can produce more valuable, expensive technology?

Where is the toy car industry now if not in Japan?

From Japan, part of the industry moved to South Korea and eventually to other countries like Malaysia, Thailand and so on. Eventually, China started producing toy cars in the 1990s.

What happens to a country's economy when a toy car factory, for example, moves to other countries?

Workers move into the service sector. That would include things like finance or, eventually with an older workforce, more services in the medical field, such as healthcare, old age care and so on. This phenomenon of going from agriculture to industrial to service sector is sometimes referred to as deindustrialization or the post-industrialization phase.

Is post-industrialization inevitable for every economy?

There's no guarantee that you can go from one stage to another. There's something called the middle-income trap. A country just stays middle-income for the longest time and doesn't move up the value chain. Similar to how we saw Japan go from producing toy cars to more complex appliances, we haven't seen that kind of transformation at the same scale in volume of production in Malaysia.

In Malaysia's case, economists are seeing, for example, that the enterprise sector is not as innovative. They don't invest as much in research and development. These are the kinds of things you need to produce new things.

Is there anything that comes after the post-industrial service sector?

The short answer is we don't know. Back then, people thought that the service sector is not quite as productive or enhanced by technology as manufacturing. Maybe you needed 20 people once upon a time to produce an automobile. But now with technology, maybe you just need one or two people to produce an entire car.

The service sector includes music or the performing arts. How many people do you need to produce a Schubert quartet live? Four. A hundred years later, how many people will you need? Well, still four.

What we're seeing is instead of countries going through these stages, a few countries are going straight into the service sector. India being one of them. A good number of African countries are also in a way skipping the manufacturing stage.

Why are countries able to skip past the industrial era?

We're in the middle of it, so I can't say that this is the consensus. One reason is because with information technology and so on, there's been a more rapid growth in service sector output and demand than we had initially anticipated decades ago.

We used to think service output wasn't tradeable. You could trade cars, but you can't trade a haircut. That's still true, but you can trade accounting services. For example, out of the Philippines, you could have a bunch of people producing accounting services for companies in the U.S. So then it's possible for a country to be a service sector economy and still grow as rapidly as another country that's primarily industrial.

Will every country in the world eventually become post-industrial economies? Where will the factories go?

We have about 200 countries, and we still only have a handful of higher income countries. Eventually, the factories will need to go elsewhere. They would need to be staffed by people who have the skills but still do not earn wages at U.S. levels. Where is that going to come from? I think it will have to come from Africa. At some point, Africa will be supplying most of the world's working-age population because most other countries will be older.

Technology now allows you to produce as much with fewer people. Just like with agriculture, it never actually disappears. Everybody still produces food. Even the U.S. has an agricultural sector, except it doesn't have as many farmers as it once needed because now it's so heavily mechanized.