Wednesday, May 20, 2009

Manufacturing sector and growth

According to Szirmai, the manufacturing sector still matters for growth and catch up in the developing countries because of the following reasons:

  • First, there is an empirical correlation between the degree of industrialisation and per capita income in developing countries.
  • Second, productivity is higher in the manufacturing sector than in the agricultural sector.
  • Third, a further aspect of the structural change bonus argument focuses on the dynamics of sectors. Manufacturing is assumed to be more dynamic than other sectors. A transfer of productive resources to more dynamic sectors contributes to growth.
  • Fourth, the transfer of resources from manufacturing to services provides a structural change burden in the form of Baumol’s disease.
  • Fifth, compared to agriculture, the argument runs that the manufacturing sector offers special opportunities for capital accumulation.Capital accumulation can be more easily realised in spatially concentrated manufacturing than in spatially dispersed agriculture. This is one of the reasons why the emergence of manufacturing has been so important in growth and development.
  • Six, the manufacturing sector offers special opportunities for economies of scale, which are less available in agriculture or services.
  • Seven, the manufacturing sector offers special opportunities for both embodied and disembodied technological progress.
  • Eight, linkage and spillover effects are stronger for manufacturing than for agriculture or mining. Linkage effects refer to the direct backward and forward linkages between different sectors.
  • Finally, as per capita incomes rise, the share of agricultural expenditure in total expenditure declines and the share of expenditure on manufactured goods increases (Engel’s law).

That said, he argues that the role of manufacturing sector on growth is weakening, especially in the industrialized nations. The strongest contributions are found in the period 1950-1973, when there were special opportunities for absorption of mass production techniques by developing countries. In the advanced economies, the role of services has become much more important.