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The role of manufacturing versus services in economic development

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... Em decorrência das economias de escalas, é mais lucrativo para uma indústria adquirir alguns serviços de fornecedores especializados ao invés de produzi-los (NAYYAR, 2013;HAUGE;CHANG, 2019). Assim, a fabricação de produtos industriais mais complexos demanda mais conhecimentos, estimulando o crescimento do setor por meio do aumento da demanda por serviços especializados (GIOVANINI et al., 2016). ...
... Em decorrência das economias de escalas, é mais lucrativo para uma indústria adquirir alguns serviços de fornecedores especializados ao invés de produzi-los (NAYYAR, 2013;HAUGE;CHANG, 2019). Assim, a fabricação de produtos industriais mais complexos demanda mais conhecimentos, estimulando o crescimento do setor por meio do aumento da demanda por serviços especializados (GIOVANINI et al., 2016). ...
... Os desenvolvimentos tecnológicos e a redução dos custos de transações possibilitaram que o comércio de serviços, antes limitado pela proximidade física entre comprador e vendedor, se tornassem comercializáveis da mesma forma que os bens, principalmente os serviços de informação, telecomunicações, financeiros, seguros e negócios (BHAGWATI, 1984;KHARAS, 2010;HAUGE;CHANG, 2019). Assim, tais serviços passaram a gerar divisas e contribuir para melhorar o BP. ...
... Historically, the process of economic development has been associated with a process of industrialisation, specifically through developing and expanding the manufacturing sector. This is why many of the seminal theories within the field of development economics focus on the importance of manufacturing for the process of economic development (see Hauge and Chang (2019) for a list of economists associated with these seminal theories). But a snapshot of countries' national accounts around the world reveals that the size of the manufacturing sector is shrinking almost everywhere. ...
... While scholars have highlighted the importance of services for economic development for some time now (see for example Baer and Samuelson (1981) and Bhagwati (1984)), only in recent years has the literature on this started to grow fast, highlighting the increased potential of services to be catalysts for trade, innovation and productivity growth (Baldwin and Forslid 2020;Ghani and O'Connell 2014;Hallward-Driemeier and Nayyar 2017;International Monetary Fund 2018;Loungani et al. 2017;Miroudot and Cadestin 2017;Owusu, Szirmai, and Foster-McGregor 2020;WTO 2019). In fact, service-oriented development strategies are already showing some promise in countries in the Global South, such as India and Rwanda (as discussed by, for example, Behuria and Goodfellow 2019;Ghani and Kharas 2010;Hauge and Chang 2019;Kleibert and Mann 2020). This increased potential for services to contribute to economic development relates to digital technology on several levels. ...
... Developments in digital technology, specifically ICT, are making economies of scale more easily achieved in a range of services and making it more profitable to procure some services from specialist providers rather than provide them within a manufacturing firm (Hallward-Driemeier and Nayyar 2017;Hauge and Chang 2019;Nayyar 2013). Many digital service operations now have higher productivity growth potential than manufacturing operations. ...
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In this article, I analyse challenges to manufacturing-led development in the Global South in the context of digitalisation. I look at three phenomena in particular: (1) the rise of digital services as an alternative to manufacturing in achieving economic development; (2) the impact of digital automation technologies on job creation in the manufacturing sector; (3) manufacturing-led development in the context of digital and global value chains. I make two important arguments. The first argument is that the rise of digital services or digital automation technologies do not require a serious reformulation of manufacturing-led development strategies. The second argument is that the expansion of digital and global value chains are empowering transnational corporations headquartered in the North at the expense of industrialisation in the South. Industrial policy and international politics can play a part in mitigating the challenge underscored by my second argument. At the national level, the establishment of state-owned enterprises is a good alternative to development strategies that rely purely on linking up to transnational corporations. At the international level, we need change within organisations that enforce rules of trade in favour of the North, and we need to support agreements and initiatives established by and for the South.
... China contributed less than 1% of all IC production in the globe in 1996. But the strength of the country's burgeoning electronics industry being a major exporter promises a ready market for any acceptable IC that Chinese wafer fabrication factories can provide (Hauge, 2019). Global corporations including Motorola, NEC, Mitsubishi, STMicroelectronics, Philips, Siemens, and Toshiba are assisting this emerging semiconductor sector. ...
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This article examines a possible Chinese semiconductor industry’s merger and acquisition in 2017, the year before the Sino-US trade war and US high-tech sanctions against China. The feasibility of a merger between Tsinghua Unigroup and Taiwan Semiconductor Manufacturing Company is thoroughly examined as well as their development history and the current financial standing. The financial data collected form the two companies’ annual report was analyzed using multiple corporate valuating models. We discovered that the industrial policy and financial reports in 2017 favored the merger, but the combination ultimately collapsed, which was quite a pity for Chinese chip sector. The research contributes to an in-depth comprehension of China’s semiconductor business and serves as a model for future financial analyses of comparable sectors.
... The Kaldorian limits of service economies refer to the various arguments sharing Kaldor's insight that manufacturing is special because of its unique growth-inducing properties which set it apart from any other productive activity (Cohen and Buigues, 2014;Hauge and Chang, 2019;Pisano and Shih, 2012). For Kaldor (1967), in agriculture and services productivity growth relies on external technological developments, but in manufacturing it is selfgenerated. ...
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The post-2008 era saw a return of the manufacturing fetish, the idea that manufacturing constitutes the flywheel of growth without which no nation can thrive. Across the Global North and South, voices are calling to reverse deindustrialization and revive manufacturing. While today deindustrialization is met with anxiety, in the 1930s economists predicted deindustrialization but interpreted it as a liberating process leading to a post-industrial age based on material abundance and widespread economic security. Far from delivering this vision, deindustrialization actually produces a precarious economic order driven by labour precarity, economic stagnation and lost development opportunities for the Global South. What can be termed the Baumolian and Kaldorian frameworks, attribute this precarious reality to services’ inability to replace manufacturing as a growth engine given their technologically stagnant nature. However, this article argues that, by focusing on the technical aspects of service economies, such views overlook the social limits of the capitalist economy and its historically specific conception of wealth, value. As capitalism matures, productivity becomes an increasingly inadequate form of augmenting social wealth as it results in great increases in physical output but counterintuitively undermines the expansion of value. Capitalism is underpinned by a secular movement towards declining dynamism, as it increasingly struggles to maintain its former economic vigour. Stagnation and heightened labour precarity are not merely the product of tertiarization but symptoms of capitalism’s declining trajectory.
... These are reflected in Kaldor's three growth laws, which describe positive associations between (i) growth of manufacturing output and average GDP growth, in part explained by the shift of labour from agriculture to industry; (ii) growth of manufacturing output and manufacturing productivity, which is associated with increasing returns to scale in manufacturing, resulting from (a) its large scope for mechanisation and spatial agglomeration, and (b) cumulative production experience over time and large sector size, which thanks to the tradability of manufactures even economies without large domestic markets can achieve through export-oriented industrialisation; and (iii) growth of manufacturing output and overall productivity of the economy, resulting from technological spillovers from manufacturing to other sectors and from stronger backward and forward linkages in manufacturing than in other economic sectors (e.g. Hauge & Chang, 2019). ...
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The digitalization of economic activities, combined with a secular slowdown in the growth of global output and trade, reduces the potential of traditional export-oriented manufacturing as a development strategy. This paper takes a trade economics perspective to outline a possible response to the changed nature of industrialization. The outlined response currently applies mainly to middle-income countries but deserves attention also in longer-term development strategies of low-income countries. The paper argues that digital technologies affect trade costs through various mechanisms, which apply differently to manufactures and services and determine decisions of multiproduct firms on what to produce for what market. Emphasizing big data analysis of customer preferences as an input to manufacturing, the paper finds that (i) industrialization and services-oriented development strategies are complements, rather than substitutes; (ii) access to data on customer preferences is an asset for developing countries; and (iii) data governance, which harnesses the increasing dependence of manufacturing on data, and innovation policies, which give greater importance to indigenous innovation, crucially augment the potential of industrialization as a development strategy in a digital era.
... Some studies highlight that jobs in developing countries are at high risk (Chang et al., 2016b;Frey and Rahbari, 2016;World Bank, 2016), particularly manufacturing jobs or job creation in the manufacturing sector (Hallward-Driemeier and Nayyar, 2017;Manyika et al., 2017a;Schlogl and Sumner, 2020). This trend is especially worrying for developing countries because of the importance of labour-intensive manufacturing for economic development (Chang et al., 2016a;Hauge and Chang, 2019;Szirmai and Verspagen, 2015). In fact, the prospect of automation-related unemployment is leading some scholars to suggest that manufacturing-led economic growth may be a less feasible development model (Baldwin and Forslid, 2020;Hallward-Driemeier and Nayyar, 2017). ...
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There are growing fears that automation will lead to major job displacement and increasing unemployment, particularly in labour-intensive manufacturing. This is especially worrying for developing countries because of the importance of labour-intensive manufacturing to economic development. The purpose of this paper is to evaluate the threat of automation to employment, focusing on the manufacturing sector. It does so by critically reviewing studies that evaluate the current and future impact of automation on employment, as well as using industry-specific evidence from the apparel industry in South Africa. Through our literature review, we find that many studies fail to acknowledge: (1) the full range of factors that determine the net impact of automation on employment and; (2) many country-specific and industry-specific barriers to adopting new automation technologies, particularly in developing countries. A qualitative case study such as this one could therefore be a valuable contribution to the literature. The apparel industry has been chosen as a case because many forecast studies predict that the industry will suffer huge job losses due to automation. South Africa has been chosen as a case because the current literature is lacking case study evidence in the context of developing countries, and because South Africa is among those few developing countries adopting automation technologies in the apparel industry. Our evidence draws on 26 interviews with firm managers in the South African apparel industry, as well as with government and union representatives. We find that the overall impact of automation on unemployment has been negligible and is predicted to continue to be negligible. But in some instances, increased automation has and is predicted to increase employment by improving productivity at the firm level.
... It is hard to picture a successful economic development model based on the kind of informal, lowskilled, low-productivity services-from street vending to transport to security services-which tend to be prevalent in the low-to middle-income developing world today. Advocates of industrialled development argue that sustained economic and productivity growth without manufacturing is empirically rare, that the service sector is still less tradable than manufacturing, that service expansion depends on manufacturing development and that technology might not erode manufacturing jobs after all (for a recent discussion see Hauge and Chang 2019). The key issue for the future of structural change nevertheless is arguably about the quality and value-adding capacity of specific economic activities rather than one about broad (and to some degree arbitrary) sectoral categories. ...
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Throughout the history of capitalism, the process of industrialisation has been recognised as the engine of economic development. No region in the world ‘suffers’ more acutely from a lack of industrialisation than Africa, clearly highlighting the need for industrial policy. However, the formulation of such policies is not straightforward in the current era of globalised production. In recent years, a debate has taken hold over whether the geographical expansion and increased fragmentation of production networks—often referred to as the expansion of global value chains (GVCs)—calls for new approaches to industrial policy in developing countries. By drawing on the case of Ethiopia, this dissertation demonstrates that industrial policy in developing countries needs no new ‘magic bullet’ in the era of expanding GVCs. The dissertation applies a funnelling technique, meaning that each chapter builds on information presented and arguments made in the preceding chapters. Chapter 2 contextualises the importance of manufacturing and industrial policy for economic development in Africa. The chapter argues that the manufacturing sector continues to play an integral role in the process of economic development, and discusses the role of the state in the process of industrialisation, arguing that there are strong justifications for intervention through industrial policy. Chapter 3 looks at how the expansion of GVCs affects the productive structures of developing countries, particularly those in Africa, and asks if industrial policy has to change in this new global production environment. I argue that the fundamental problems of participating in GVCs are the same as when countries like South Korea and Taiwan industrialised between 1960 and 1990, although on a different scale. Chapter 4 analyses Ethiopia’s industrialisation trajectory and GVC-oriented industrial policies in the textile and leather industries. This analysis is based on 6 months of fieldwork in Ethiopia, where I carried out several interviews with stakeholders in the private and public sector and collected and collated datasets on industrial performance in collaboration with government agencies. While the findings of this chapter make an original empirical contribution to explaining the specific case of Ethiopia, the insights provided by the analysis offer broader conceptual conclusions as well.
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Whilst numerous accounts claim that the continent is on the rise, driven by high growth rates and supposed better governance and economic policies, Africa's dependent position in the global economy is being reified. This article seeks to analyse the dynamics which are accompanying a notional ‘rise’ of Africa but which are actually contributing to the continent being pushed further and further into underdevelopment and dependency. It calls into question the superficial accounts of a continent on the move or that declare that the continent has somehow turned a definitive page in its history. A ‘rise’ based on an intensification of resource extraction whilst dependency deepens, inequality increases and de-industrialisation continues apace, cannot be taken seriously. A model based on growth-for-growth's sake has replaced development and the agenda of industrialisation and moving Africa up the global production chain has been discarded. Instead, Africa's current ‘comparative advantage’ as a primary commodity exporter is celebrated and reinforced. History repeats itself.
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My subject may appear alarmingly formidable, but I did not intend it to be so. The words economic progress, taken by themselves, would suggest the pursuit of some philosophy of history, of some way of appraising the results of past and possible future changes in forms of economic organisation and modes of economic activities. But as I have used them, joined to the other half of my title, they are meant merely to dispel apprehensions, by suggesting that I do not propose to discuss any of those alluring but highly technical questions relating to the precise way in which some sort of equilibrium of supply and demand is achieved in the market for the products of industries which can increase their output without increasing their costs proportionately, or to the possible advantages of fostering the development of such industries while putting a handicap upon industries whose output can be increased only at the expense of a more than proportionate increase of costs. I suspect, indeed, that the apparatus which economists have built up for dealing effectively with the range of questions to which I have just referred may stand in the way of a clear view of the more general or elementary aspects of the phenomena of increasing returns, such as I wish to comment upon in this paper…
Since the middle of the eighteenth century, manufacturing has functioned as the main engine of economic growth and development. However, in recent research, questions have been raised concerning the continued importance of the manufacturing sector for economic development. This paper reexamines the role of manufacturing as a driver of growth in developing countries in the period 1950-2005. The paper makes use of a newly constructed panel dataset of annual value added shares (in current prices) for manufacturing, industry, agriculture and services for the period 1950-2005. Regression analysis is used to analyse the relationships between sectoral shares and per capita GDP growth for different time periods and different groups of countries. For the total sample, we find a moderate positive impact of manufacturing on growth in line with the engine of growth hypothesis. Splitting our sample into three subperiods, we only find a direct effect of manufacturing on growth for the middle period 1970-1990. We also find interesting interaction effects of manufacturing with education and income gaps. In a comparison of the subperiods, it seems that since 1990, manufacturing is becoming a more difficult route to growth than before.
This paper examines the emergence of manufacturing in developing countries in the period 1950–2005. It presents new data on structural change in a sample of 67 developing countries and 21 advanced economies. The paper examines the theoretical and empirical evidence for the proposition that industrialisation acts as an engine of growth in developing countries and attempts to quantify different aspects of this debate. The statistical evidence is not completely straightforward. Manufacturing has been important for growth in developing countries, but not all expectations of the ‘engine of growth hypothesis’ are borne out by the data. The more general historical evidence provides more support for the industrialisation thesis.
Article
Large gaps in labor productivity between the traditional and modern parts of the economy are a fundamental reality of developing societies. In this paper, we document these gaps, and emphasize that labor flows from low-productivity activities to high-productivity activities are a key driver of development. Our results show that since 1990 structural change has been growth reducing in both Africa and Latin America, with the most striking changes taking place in Latin America. The bulk of the difference between these countries’ productivity performance and that of Asia is accounted for by differences in the pattern of structural change – with labor moving from low- to high-productivity sectors in Asia, but in the opposite direction in Latin America and Africa. In our empirical work, we identify three factors that help determine whether (and the extent to which) structural change contributes to overall productivity growth. In countries with a relatively large share of natural resources in exports, structural change has typically been growth reducing. Even though these “enclave” sectors usually operate at very high productivity, they cannot absorb the surplus labor from agriculture. By contrast, competitive or undervalued exchange rates and labor market flexibility have contributed to growth enhancing structural change.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Book
The current economic crisis reveals just how central finance has become to American life. Problems with obscure securities created on Wall Street radiated outward to threaten the retirement security of pensioners in Florida and Arizona, the homes and college savings of families in Detroit and Southern California, and ultimately the global economy itself. The American government took on vast new debt to bail out the financial system, while the government-owned investment funds of Kuwait, Abu Dhabi, Malaysia, and China bought up much of what was left of Wall Street. How did we get into this mess, and what does it all mean? Managed by the Markets explains how finance replaced manufacturing at the center of the American economy and how its influence has seeped into daily life. From corporations operated to create shareholder value, to banks that became portals to financial markets, to governments seeking to regulate or profit from footloose capital, to households with savings, pensions, and mortgages that rise and fall with the market, life in post-industrial America is tied to finance to an unprecedented degree. Managed by the Markets provides a guide to how we got here and unpacks the consequences of linking the well-being of society too closely to financial markets.
Article
A central organizing framework of the voluminous recent literature studying changes in the returns to skills and the evolution of earnings inequality is what we refer to as the canonical model, which elegantly and powerfully operationalizes the supply and demand for skills by assuming two distinct skill groups that perform two different and imperfectly substitutable tasks or produce two imperfectly substitutable goods. Technology is assumed to take a factor-augmenting form, which, by complementing either high or low skill workers, can generate skill biased demand shifts. In this paper, we argue that despite its notable successes, the canonical model is largely silent on a number of central empirical developments of the last three decades, including: (1) significant declines in real wages of low skill workers, particularly low skill males; (2) non-monotone changes in wages at different parts of the earnings distribution during different decades; (3) broad-based increases in employment in high skill and low skill occupations relative to middle skilled occupations (i.e., job 'polarization'); (4) rapid diffusion of new technologies that directly substitute capital for labor in tasks previously performed by moderately-skilled workers; and (5) expanding offshoring opportunities, enabled by technology, which allow foreign labor to substitute for domestic workers in specific tasks. Motivated by these patterns, we argue that it is valuable to consider a richer framework for analyzing how recent changes in the earnings and employment distribution in the United States and other advanced economies are shaped by the interactions among worker skills, job tasks, evolving technologies, and shifting trading opportunities. We propose a tractable task-based model in which the assignment of skills to tasks is endogenous and technical change may involve the substitution of machines for certain tasks previously performed by labor. We further consider how the evolution of technology in th
Article
Globalization is characterised by persistent poverty and growing inequality. Conventional wisdom has it that this global poverty is residual – as globalization deepens, the poor will be lifted out of destitution. The policies of the World Bank, the IMF and the WTO echo this belief and push developing countries ever deeper into the global economy. Globalization, Poverty and Inequality provides an alternative viewpoint. It argues that for many – particularly for those living in Latin America, Asia and Central Europe – poverty and globalization are relational. It is the very workings of the global system which condemn many to poverty. In particular the mobility of investment, and the large pool of increasingly skilled workers in China and other parts of Asia, are driving down global wages. This poses challenges for policy makers in firms and countries throughout the world. It also challenges the very sustainability of globalisation itself. Are we about to witness the implosion of globalisation, as occurred between 1913 and 1950? Using a variety of theoretical frameworks and drawing on a vast amount of original research, this book will be an invaluable resource for all students of globalization and its effects.
Article
The paper examines the nature and the evolution of intersectoral relationships between manufacturing and services at different stages of industrialization, as revealed by a cross-country comparative analysis of input-output tables of 26 countries at different income levels. This paper suggests, among many other findings, that the intersectoral relationships between manufacturing and services generally characterize asymmetrical dependence. Namely, service activities tend to depend on the manufacturing sector as a source of inputs to a far greater extent than vice versa. Moreover, the employment absorptive capacity of the manufacturing sector is seriously underestimated, when one only measures the direct employment effect of the manufacturing sector and ignores the intersectoral demand of the manufacturing sector for service inputs and its income induced demand for various types of services. In effect, the capability of the service sector to generate and sustain a high level of employment critically hinges upon its vital linkages with the manufacturing sector.
Emerging Technologies, Manufacturing, and Development: Some Perspectives for Looking Forward
  • S Ahmed
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Ahmed, S. and Chen, P. (2017). 'Emerging Technologies, Manufacturing, and Development: Some Perspectives for Looking Forward'. Unpublished manuscript, World Bank, Washington, DC.
The Risk of Automation for
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Arnzt, M., Gregory, T. and Zierahn, U. (2016). 'The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis'. Social, Employment, and Migration Working Paper No. 189, Organisation for Economic Co-operation and Development (OECD), Paris.
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The Manufacturing Fallacy'. Project Syndicate
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Economics: The User's Guide
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Chang, H-J. (2014). Economics: The User's Guide. London: Pelican Books.
Manufacturing and Development: What Has Changed?'. Unpublished manuscript
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How Real is the Rise of Africa'. The Economist
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