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Does Premature Deindustrialization Matter? The Role of Manufacturing versus Services in Development

  • Gaurav Nayyar EMAIL logo , Marcio Cruz and Linghui Zhu

Abstract

“Premature deindustrialization” typically reflects the fact that the services sector has grown faster than manufacturing at lower levels of per capita income compared to the past. This paper, based on cross-country data, shows that the rising share of services is largely not driven by a statistical artifact whereby what was earlier subsumed in manufacturing value added is now accounted for as service sector contributions. Yet, this matters less for development opportunities because features of manufacturing that were thought of as uniquely special for productivity growth are also shared by some services. And the growth of these high-productivity services is not closely linked to a manufacturing base as it draws on both intermediate demand from other sectors as well as final demand from home and abroad. The prospect of services-led development in lower-income countries however, is limited by the fact that a given service subsector is unlikely to provide opportunities for productivity growth and job creation for unskilled labor simultaneously.

JEL codes: O14; O10

Corresponding author: Gaurav Nayyar, World Bank, Washington, DC, USA, E-mail:

Appendix A

Table A1:

Percentage contribution of contracting out from manufacturing to services, 2000–2014.

All services (ISIC G-P) Average output growth rate Percentage contribution of Δ IO S to M Y M + Δ IO S to M Δ Y M
China 28.3% −1.2%
Indonesia 10.3% −2.4%
India 11.1% 3.2%
Russia 12.3% 1.9%
Brazil 7.1% 2.8%
Bulgaria 5.7% −4.6%
Mexico 4.1% 3.0%
Romania 12.7% 1.8%
Turkey
4.6%
0.8%
Wholesale and retail trade
Average output growth rate
Percentage contribution of Δ I O S t o M Y M + Δ I O S t o M Δ Y M
China 22.4% −13.5%
Indonesia 6.0% −3.6%
India 15.1% 11.0%
Russia 8.0% 1.5%
Brazil 9.1% 9.7%
Bulgaria 6.6% −28.7%
Mexico 4.5% 6.4%
Romania 14.8% 2.4%
Turkey
3.7%
10.3%
Transportation and storage
Average output growth rate
Percentage contribution of Δ I O S t o M Y M + Δ I O S t o M Δ Y M
China 19.8% −11.6%
Indonesia 12.0% −9.5%
India 10.2% 1.9%
Russia 9.2% 1.2%
Brazil 7.2% 6.1%
Bulgaria 2.8% −2.7%
Mexico 3.1% 2.8%
Romania 15.9% −2.5%
Turkey
6.2%
3.3%
Professional, scientific and technical services
Average output growth rate
Percentage contribution of Δ I O S t o M Y M + Δ I O S t o M Δ Y M
China 66.5% 18.0%
Indonesia 10.4% −25.5%
India 25.5% −4.2%
Russia
Brazil 7.3% 3.8%
Bulgaria 18.5% 4.4%
Mexico 3.0% 9.5%
Romania 46.5% 9.5%
Turkey 17.7% 6.6%
  1. Source: Authors’ calculation based on World Input-Output Database. Note: There is missing information on output in Russia’s professional, scientific and technical services.

Table A2:

International trade (direct and indirect exports-to-sales ratio).

International trade
Direct exports-to-sales ratio Indirect exports-to-sales ratio
ISIC Rev 4 classification Total sector Raw score Z-score Raw score of large firms Z-score of large firms Raw score Z-score Raw score of large firms Z-score of large firms
Manufacturing Food 3.2 −0.5 9.7 −0.1 2.7 0.2 3.6 −0.1
Garments and textiles 7.4 1.4 20.5 1.9 3.0 0.4 3.3 −0.2
Chemical products 5.5 0.6 14.4 0.8 2.9 0.3 3.1 −0.3
Plastics & rubber 4.9 0.3 12.0 0.4 2.4 0.0 3.4 −0.1
Non-metallic mineral products 3.8 −0.3 8.0 −0.3 1.6 −0.6 2.8 −0.3
Basic metals & metal products 4.6 0.1 16.8 1.2 0.8 −1.3 2.3 −0.5
Fabricated metal products 5.1 0.4 10.0 0.0 5.4 2.3 3.4 −0.2
Electronics & communications equip 5.6 0.6 9.7 0.0 2.3 −0.1 2.8 −0.3
Machinery & equipment 3.1 −0.6 13.6 0.7 2.0 −0.4 2.2 −0.5
Motor vehicles 7.5 1.5 15.9 1.1 3.5 0.8 5.2 0.4
Furniture 3.7 −0.3 12.1 0.4 3.3 0.7 4.0 0.1
Services Construction 0.2 −2.0 0.8 −1.6 0.2 −1.8 0.3 −1.2
Wholesale and retail 3.3 −0.5 3.4 −1.2 1.3 −0.9 1.7 −0.7
Transport, storage, & communications 7.6 1.6 5.3 −0.8 3.5 0.8 12.2 2.8
Hotels & restaurants 2.0 −1.1 3.6 −1.1 1.1 −1.0 1.4 −0.8
IT & IT services 1.8 −1.2 3.7 −1.1 3.3 0.7 9.8 2.0
  1. Source: Authors’ calculation based on the latest available Enterprise Survey of seven Countries (Brazil China Egypt India Mexico Nigeria and Russia). All indicators are weighted by the survey weight.

Table A3:

Innovation (formal training programs and foreign licensed technology).

Innovation
Share of firms with formal training programs Share of firms that used a licensed technology from a foreign-owned firm
ISIC Rev 4 classification Total sector Raw score Z-score Raw score of large firms Z-score of large firms Raw score Z-score Raw score of large firms Z-score of large firms
Manufacturing Food 38.1 −0.6 60.9 −0.6 7.9 −0.4 27.6 0.0
Garments and textiles 36.8 −0.7 65.4 −0.1 8.9 −0.3 33.2 0.5
Chemical products 45.0 0.0 75.0 0.9 12.7 0.0 33.0 0.5
Plastics & rubber 51.6 0.6 69.7 0.4 11.6 −0.1 19.2 −0.7
Non-metallic mineral products 34.9 −0.8 49.1 −1.8 7.2 −0.4 21.9 −0.4
Basic metals & metal products 37.7 −0.6 52.6 −1.5 8.1 −0.4 23.4 −0.3
Fabricated metal products 43.3 −0.1 60.4 −0.6 10.9 −0.1 19.7 −0.6
Electronics & communications equip 56.2 0.9 70.7 0.5 18.0 0.5 33.3 0.5
Machinery & equipment 43.4 −0.1 70.4 0.5 15.4 0.2 23.2 −0.3
Motor vehicles 70.9 2.2 85.7 2.1 16.3 0.3 26.2 −0.1
Furniture 22.6 −1.8 77.9 1.2 4.3 −0.7 43.9 1.5
Services Construction 44.7 0.0 62.1 −0.4 8.2 −0.4 16.4 −0.9
Wholesale and retail 35.3 −0.8 64.6 −0.2 6.1 −0.5 51.9 2.2
Transport, storage, & communications 40.2 −0.4 57.4 −0.9 7.0 −0.5
Hotels & restaurants 50.9 0.5 65.2 −0.1 3.5 −0.8 6.3 −1.8
IT & IT services 65.4 1.7 72.0 0.6 54.2 3.5
  1. Source: Authors’ calculation based on the latest available Enterprise Survey of seven Countries (Brazil China Egypt India Mexico Nigeria and Russia). All indicators are weighted by the survey weight.

Table A4:

Innovation (new products and new processes).

Innovation
Share of firms that introduced new products Share of firms that introduced new methods
ISIC Rev 4 classification Total sector Raw score Z-score Raw score of large firms Z-score of large firms Raw score Z-score Raw score of large firms Z-score of large firms
Manufacturing Food 34.6 −0.1 46.7 −0.4 29.1 −0.2 39.8 −0.8
Garments and textiles 36.6 0.0 54.8 0.4 41.3 0.9 54.9 0.5
Chemical products 46.3 0.9 51.0 0.0 33.4 0.2 36.8 −1.1
Plastics & rubber 35.2 −0.1 43.5 −0.7 31.5 0.0 38.0 −0.9
Non-metallic mineral products 39.3 0.3 33.0 −1.7 38.1 0.6 44.0 −0.4
Basic metals & metal products 45.8 0.8 60.1 0.9 44.3 1.2 65.3 1.5
Fabricated metal products 41.8 0.5 44.3 −0.6 38.9 0.7 36.5 −1.1
Electronics & communications equip 36.3 0.0 68.7 1.6 28.3 −0.3 59.9 1.0
Machinery & equipment 37.4 0.1 52.9 0.2 29.3 −0.2 51.1 0.2
Motor vehicles 0.2 −3.1 32.3 −1.7 0.2 −2.9 32.3 −1.5
Furniture 30.2 −0.5 62.2 1.0 34.5 0.3 66.1 1.5
Services Construction 56.0 1.7 51.6 0.1 47.3 1.5 49.7 0.1
Wholesale and retail 28.9 −0.6 39.4 −1.1 22.5 −0.8 36.9 −1.0
Transport, storage, & communications 31.1 −0.4 50.2 −0.1 29.4 −0.2 48.8 0.0
Hotels & restaurants 39.4 0.3 61.7 1.0 33.4 0.2 58.3 0.8
IT & IT services 36.9 0.1 63.3 1.1 25.3 −0.6 61.6 1.1
  1. Source: Authors’ calculation based on the latest available Enterprise Survey of seven Countries (Brazil China Egypt India Mexico Nigeria and Russia). All indicators are weighted by the survey weight.

Table A5:

Factor use (capital intensity and skill intensity).

Factor-use
Capital expenditure per employee Years of schooling
ISIC Rev 4 classification Total sector Raw score Z-score Raw score of large firms Z-score of large firms Raw score Z-score Raw score of large firms Z-score of large firms
Manufacturing Food 6301.6 −0.1 9131.6 1.1 9.1 −0.7 9.7 −0.7
Garments and textiles 4867.3 −0.6 2891.1 −0.7 9.7 −0.2 9.3 −1.1
Chemical products 8946.6 0.7 6358.4 0.3 10.0 0.1 10.4 0.0
Plastics & rubber 4724.4 −0.6 5797.1 0.1 8.7 −1.1 9.3 −1.1
Non-metallic mineral products 15,443.9 2.7 4254.9 −0.3 9.5 −0.3 10.1 −0.3
Basic metals & metal products 6502.5 −0.1 10,420.7 1.5 9.6 −0.2 9.8 −0.6
Fabricated metal products 6691.4 0.0 3609.3 −0.5 9.3 −0.6 10.3 −0.1
Electronics & communications equip 4617.9 −0.6 4344.5 −0.3 10.5 0.7 10.6 0.2
Machinery & equipment 4813.0 −0.6 4373.4 −0.3 11.2 1.3 11.2 0.8
Motor vehicles 12,552.5 1.8 14,164.6 2.7 8.4 −1.3 8.6 −1.9
Furniture 3412.3 −1.0 2417.3 −0.9 10.1 0.2 11.6 1.2
Services Construction 6995.5 0.1 2288.7 −0.9 9.4 −0.4 12.0 1.6
Wholesale and retail 5773.7 −0.3 4314.0 −0.3 11.1 1.2 11.1 0.7
Transport, storage, & communications 6212.1 −0.1 3727.3 −0.5 11.5 1.6 11.7 1.3
Hotels & restaurants 3280.6 −1.1 1804.1 −1.1 8.1 −1.7
IT & IT services 5613.4 −0.3 5588.8 0.1 11.3 1.4 10.5 0.1
  1. Source: Authors’ calculation based on the latest available Enterprise Survey of seven Countries (Brazil China Egypt India Mexico Nigeria and Russia). All indicators are weighted by the survey weight.

Table A6:

Decomposition of output growth in wholesale and retail trade.


Percentage contribution from all sources of demand
Country Intermediate Inputs Consumption Investment Exports Net imports + adjustment
China 67.2% 14.2% 6.5% 12.1% 0.0%
Indonesia 64.9% 34.7% 0.3% 0.0% 0.1%
India 55.1% 40.4% 3.8% 3.7% −3.0%
Russia 45.9% 42.9% 1.4% 1.7% 8.1%
Brazil 45.4% 38.9% 8.0% 0.3% 7.3%
Bulgaria 1.2% 2.3% −3.9% 41.9% 58.4%
Mexico 32.1% 57.5% 12.0% 0.0% −1.6%
Romania 55.7% 4.7% −1.5% 20.2% 20.8%
Turkey 64.5% 39.1% 11.2% 0.0% −14.8%

Percentage contribution from sources of intermediate demand
Country Agriculture Manufacturing Industry residual Wholesale & retail Other services
China 1.0% 40.4% 6.6% 4.9% 14.3%
Indonesia 1.0% 25.5% 28.5% 0.9% 9.0%
India 4.2% 32.6% 9.1% 0.7% 8.5%
Russia 1.6% 17.5% 11.1% 5.2% 10.5%
Brazil 2.7% 25.2% 5.5% 2.2% 9.8%
Bulgaria −4.0% 1.7% 1.7% 0.3% 1.4%
Mexico 0.7% 18.4% 5.2% 1.8% 6.0%
Romania 5.9% 22.3% 8.4% 7.7% 11.4%
Turkey 1.7% 26.8% 8.1% 5.9% 21.9%
  1. Source: Authors’ calculation based on World Input-Output Database.

    Note: Adjustments are applied on countries that have discrepancy between the Supply and Use table caused by basic and purchases prices, import and export values, margins, subsidies, taxes and other adjustment items. Industry residual consists of mining, construction, and utilities.

Table A7:

Decomposition of value-added growth in transportation and storage services.


Percentage contribution from all sources of demand
Country Intermediate inputs Consumption Investment Exports Net imports + adjustment
China 86.4% 8.5% 3.6% 8.3% −6.9%
Indonesia 38.7% 52.7% 0.9% −0.6% 8.3%
India 45.8% 47.2% 3.4% 3.5% 0.1%
Russia 38.9% 28.7% 0.5% 6.0% 25.9%
Brazil 68.8% 31.4% 1.5% 0.9% −2.5%
Bulgaria 73.5% −9.9% 0.0% 83.0% −46.6%
Mexico 28.1% 65.3% 11.4% −1.2% −3.6%
Romania 25.8% 28.0% 0.1% 48.5% −2.4%
Turkey 49.8% 31.9% 3.1% −5.0% 20.2%

Percentage contribution from sources of intermediate demand
Country
Agriculture Manufacturing Industry residual Transportation & storage Other services
China 1.0% 39.7% 13.4% 10.3% 22.1%
Indonesia −0.1% 4.7% 14.6% 7.4% 12.0%
India 1.3% 24.6% 6.8% 2.9% 10.3%
Russia 0.9% 7.5% 8.7% 1.6% 20.2%
Brazil 1.7% 23.2% 8.3% 12.3% 23.2%
Bulgaria 0.6% 23.0% 22.2% 9.7% 17.9%
Mexico 0.4% 12.5% 3.1% 3.7% 8.4%
Romania 0.1% 2.9% 3.1% 2.2% 17.5%
Turkey 0.5% 10.0% 3.3% 24.1% 12.0%
  1. Source: Authors’ calculation based on World Input-Output Database.

    Note: Adjustment is applied on countries that have discrepancy between the Supply and Use table caused by basic and purchases prices, import and export values, margins, subsidies, taxes and other adjustment items. Industry residual consists of mining, construction, and utilities.

Table A8:

Decomposition of value-added growth in professional, scientific and technical services.


Percentage contribution from all sources of demand
Country
Intermediate inputs Consumption Investment Exports Net imports + adjustment
China 91.1% 7.0% 1.6% 5.5% −5.2%
Indonesia 0.0% 0.0% 0.0% 0.0% 0.0%
India 42.3% 13.1% 1.6% 28.2% 14.8%
Russia 0.0% 0.0% 0.0% 0.0% 0.0%
Brazil 97.0% 4.7% 16.3% 9.5% −27.5%
Bulgaria 77.9% 5.0% 4.5% 35.3% −22.7%
Mexico 138.3% 9.5% 9.8% 1.7% −59.4%
Romania 82.5% 4.9% 3.4% 15.5% −6.4%
Turkey 74.6% 5.2% 7.5% −0.9% 13.7%

Percentage contribution from sources of intermediate demand
Country
Agriculture Manufacturing Industry residual Professional, scientific & technical services Other services
China 0.8% 30.5% 17.4% 8.3% 34.1%
Indonesia 0.0% 0.0% 0.0% 0.0% 0.0%
India 0.0% 10.8% 5.2% 9.9% 16.3%
Russia 0.0% 0.0% 0.0% 0.0% 0.0%
Brazil 0.4% 26.6% 12.0% 10.0% 48.0%
Bulgaria 2.0% 9.7% 12.4% 30.4% 23.5%
Mexico 0.3% 28.4% 5.1% 0.9% 103.5%
Romania 2.8% 14.1% 7.8% 16.6% 41.3%
Turkey 0.0% 11.4% 5.5% 6.3% 51.4%
  1. Source: Authors’ calculation based on World Input-Output Database.

    Note: Adjustment is applied on countries that have discrepancy between the Supply and Use table caused by basic and purchases prices, import and export values, margins, subsidies, taxes and other adjustment items. Industry residual consists of mining, construction, and utilities.

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Received: 2020-02-04
Accepted: 2021-09-28
Published Online: 2021-11-15

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