Wednesday, August 21, 2013

Manufacturing sector and the path to prosperity

The manufacturing sector’s role in structural transformation, high wages, job creation and stimulus to growth is pretty well-known as most of the advanced economies have taken off by first strengthening their manufacturing (and overall industrial) sector. However, most low income and emerging Asian economies have seen their services sector widen and manufacturing sector shrink, leading to low to modest growth and income rise—ultimately slowing productivity and structural transformation. Here is more on the importance of manufacturing sector and structural transformation.

Reiterating the importance of manufacturing sector, a latest ADB report asserts that it is impossible to bypass the manufacturing sector on the path to prosperity. It states that no economy has reached high income status without reaching at least 18% share of manufacturing in total employment for a sustained period.

Excerpts from the report:

The report notes that one group of economies—Hong Kong, China; Japan; the Republic of Korea; Singapore; and Taipei,China—rapidly industrialized to become high income countries, while another group of economies, including the People’s Republic of China (PRC), Malaysia, and Thailand, are transforming more slowly.

Other developing Asian nations, such as Bangladesh, India, Pakistan or the Philippines, are changing even more slowly, have created few manufacturing jobs, and are shifting from agriculture into services.

Services are the largest share of developing Asia’s output and agriculture remains the largest employer, providing an income for 700 million people.

Regional diversity means Asia’s economies require different policy priorities to promote transformation. Modernizing the agricultural sector is a key task in developing Asia, in particular for low income countries.

For middle income economies heavily dependent on labor-intensive sectors or currently bypassing industrialization, the focus should be on upgrading their industrial base. For these nations, good quality education is essential for industrial diversification and reducing the path-dependency nature of structural transformation.

For small island economies, industrialization may not be cost effective, and the future lies in becoming competitive in certain service sector niche markets.

For economic transformation, the report observed the following:

  • Agriculture needs to be modernized by deploying infrastructure, introducing technological improvements, developing agribusiness, and increasing linkages to global value chains.
  • Industrialization is a step that, in general, is difficult to bypass on the path to becoming a high-income economy.
  • The service sector is already the largest source of employment and this trend will continue.
  • Basic education of high quality matters for industrial upgrading and, in general, for the development of new industries that can compete internationally.
  • Although it is important for countries to exploit their comparative advantages, some form of government intervention may be necessary and unavoidable to expedite economic transformation.

[Nepal’s structural transformation is going to be slow as the industrial sector is already tanking. The projections for 2040 show: (i) projected growth rate of income per capita of 4.1%; (ii) share of elasticities of income per capita of –0.19 and –0.10 for output and employment, respectively; (iii) agriculture share of GDP about 20.1%; and (iv) share of agriculture employment in total employment of about 49.9%.]