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

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.