Leapfrogging manufacturing

The Economic Focus in this week’s Economist magazine discussed the fact that there is no longer a set path for economies to develop – that is Primary – Secondary – Tertiary. For years we have seen poorer nations make progress through moving workers from a subsistence farming environment into more productive manufacturing sectors. The economic terms of specialisation and economies of scale come to mind as they are crucial for rasing the output of workers. Japan, Taiwan, South Korea, and more recently China have demonstrated that manufacturing can be a catalyst to development especially when there are export market to benefit from.

Modern services today, especially those that are technology-based, use skilled workers. They ultimately achieve economies of scale and can be exported – eg call centres, software development etc. Therefore the developing country is in the position to by-pass the secondary sector. If you look at the GDP figures services have contributed more to growth than the secondary sector.

In poor countries as a whole, services have contributed more to growth since 1980 than has industry. Productivity growth in services has also outpaced that of industry in India, Pakistan and Sri Lanka. In all three, the level of productivity (measured at purchasing-power parities) is higher in services than in industry. In Nepal, productivity is three times higher in services. The opposite pattern prevails in East Asia. As Mr Ghani writes, “South Asia resembles the growth patterns of Ireland and Norway, rather than that of China and Malaysia.”

Exports of services in poor countries have gone from 6% in 1985 to 10% in 2005. Burundi, Swaziland and Rwanda have all recorded growth of more than 25% a year in services exports between 1995 and 2008. Services have several advantages over the manufacturing sector in that it can readily employ women and are less likely to have an impact on the environment. However to work at this level in the service sector requires skills that some poorer nations don’t have.

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