The manufacturing–services dynamic in economic development

DOIhttp://doi.org/10.1111/j.1564-913X.2015.00052.x
Date01 June 2016
Published date01 June 2016
Copyright © The authors 2016
Journal compilation © International Labour Organization 2016
International Labour Review, Vol. 155 (2016), No. 2
* Senior Economist, ILO Employment Policy Department, Development and Investment
Branch, email: kucera@ilo.org. ** Assistant Professor of Economics, Franklin and Marshall
College, Lancaster, PA, email: leanne.roncolato@fandm.edu.
Responsibility for opinions expressed in signed articles rests solely with their authors, and
publication does not constitute an endorsement by the ILO.
The manufacturing–services dynamic
in economic development
David KUCERA* and Leanne RONCOLATO**
Abstract. This article addresses the debate on services-led growth in which services
are variously portrayed as a substitute for or as a leading or lagging complement
to manufacturing. Following a survey of related empirical studies, it applies growth
decomposition methods to data for 18 countries in Asia and Latin America for
1980 –200 5, focusing on manufacturing and services that make intensive use of
information and communication technology. By grouping the countries into four
categories according to aggregate labour productivity and employment growth,
the authors seek to identify common structural characteristics of better and worse
performing countries. They also consider the viability of the services-led growth
path in India in particular.
A
long-standing tenet of development economics is that manufacturing
is the main engine of growth and the leading sector in the process of
economic development (Szirmai, 2012). Yet a number of authors have called
this into question in recent years and argued for the viability of “services-led
growth”, focusing on advanced services that make intensive use of informa-
tion and communication technology (ICT). The contrasting views on the re-
lationship between manufacturing and services variously portray services as:
A potential substitute for manufacturing, enabling countries to leapfrog
from agriculture to advanced services, passing over manufacturing to a
large extent;
A lagging complement to manufacturing, expanding alongside manufac-
turing because demand for advanced services is largely generated by
manufacturing activities;
A leading complement to manufacturing, expanding alongside manufac-
turing because advanced services can generate manufacturing as well as
other activities. In this view, services can be a leading sector though a strong
manufacturing base remains essential.
International Labour Review172
Examples of those holding the rst view are Bhagwati (2011) and Ghani
and Kharas (2010). According to the latter, India’s experience shows that ser-
vices can provide an alternative to manufacturing as the leading sector in driving
economic growth, for services have become increasingly tradable and share with
manufacturing the potential for increasing returns to scale. This export-oriented
path is sustainable, they argue, because the potential global market for services
is vast and largely untapped. The view that services are a lagging complement
to manufacturing is represented by Kaldor (1966, 1967 and 1968) and Chang
(2011), who contends that most of the more dynamic elements of the service
sector are dependent on the manufacturing sector. Like the rst view, the third
holds that services can be a leading sector, but it emphasizes domestic inter-
industry linkages, spillover effects, and the continued importance of manufac-
turing and indeed agriculture for sustainable growth. Exponents of this view are
Joshi (2004) and Dasgupta and Singh (2005 and 2 006), the latter writing with
respect to India that, “In the case of IT [information technology], in particular,
it seems that the services are leading to the expansion of manufacturing, rather
than the other way round” (Dasgupta and Singh, 2005, p. 1055). Yet the second
and third views are themselves potentially complements, in that the manufac-
turing–services dynamic can also be described as a co-evolutionary process in
which developments in manufacturing and services each provide opportunities
for the other (Guerrieri and Meliciani, 2005; Andreoni and Lopez Gomez, 2012).
To a large extent, these debates turn on the continued relevance of inu-
ential works by Kaldor and Baumol – published well before the ICT revolu-
tion – for developing countries today (Kaldor, 1966, 1967 and 1968; Baumol,
1967). Particularly relevant are Kaldor’s growth laws, which state that more
rapid expansion of manufacturing relative to the economy as a whole results
in more rapid growth of national income as well as more rapid productivity
growth within manufacturing and also agriculture. At least historically, labour
has tended to shift from agriculture to manufacturing in the process of eco-
nomic development, that is, from a low-average-productivity to a high-aver-
age-productivity sector. Such structural transformation has a positive effect on
aggregate productivity. This is an example of a reallocation effect, dened as
the change in aggregate productivity resulting from shifts in the composition
of employment or output among sectors with different levels of productivity.
This is distinct from a within-sector effect, dened as the change in aggregate
productivity resulting from changes in productivity within sectors (more de-
tailed denitions of these effects are provided below).
For Kaldor (1968), reallocation effects were less important than the
within-sector effects induced by such reallocations. Within manufacturing, pro-
ductivity growth is argued to result from the sector’s particular amenability
to increasing returns to both static and dynamic economies of scale, the latter
being characterized by learning-by-doing (Kaldor’s application of Verdoorn’s
(1949) Law). Kaldor also argued for the importance of returns to scale at the
macroeconomic level that were not measurable at the level of individual rms
or sectors – that is, positive externalities or spillovers (Kaldor’s application of

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT