Manufacturing in Emerging Markets: Still a Driver of Inclusive Growth?

January 16, 2017

As countries compete for the manufacturing business leaving China, new research finds that industrialization may no longer be the driver of growth it once was.

Across developed economies, the perception of a loss of factory jobs to emerging market nations has made globalization a political flashpoint over the last year. The transformative impact of such jobs, first in Europe and America and then in East Asia, is such familiar history that economist Dani Rodrik referred to it as “the well-worn path of industrialization.” The manufacturing sector played a crucial role in inclusive growth for today’s industrialized nations by allowing rural and less-educated workers to enter urban sectors and earn middle-class incomes. It also allowed once-poor countries to become richer through export-led growth.

Yet new research by Robert Lawrence, professor of international trade and investment at Harvard University and senior fellow at the Center for Inclusive Growth, reveals that today’s emerging markets may not reap the same benefits as their industrialized counterparts did in the past.

UK and US manufacturing jobs peak

The employment share in China’s manufacturing sector, for example, is showing signs of decline. China’s manufacturing peaked at just 19.2% of jobs in 2010, with real per capita incomes reaching the same levels as the UK in 1950 —despite China being a major exporter of manufactured goods.

What is happening in China follows what has happened in other emerging markets elsewhere. The data suggest that the manufacturing sector’s share of employment may be peaking earlier and at lower real income levels than it did for countries that industrialized earlier.

For example, in Brazil and South Africa, the share of manufacturing peaked below 18%, reaching income levels far lower than the US and the UK.

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When manufacturing’s share of employment begins to decline at relatively lower levels of per capita income, it no longer provides the same broad entry springboard to prosperity for low-skilled workers that it did historically.

Whereas most developed countries achieved shares of 25%, most of today’s emerging markets are unable to reach even 20%, Lawrence says. Moreover, the current employment share in some developing countries is already past its peak.

“What’s striking is how low the income levels are when manufacturing now reaches its peak,” says Lawrence. “In some cases, we’ve found that part of the reason is an inability to be internationally competitive but far more important is the fact that manufacturing technology has spread globally more rapidly than technology in other sectors. The result is that today’s poor countries need fewer workers to produce the manufactured products that countries at their levels of income demand.”

In developing countries, it’s becoming increasingly difficult to move people into higher-paying jobs. A forthcoming paper by Lawrence will look at how technology and productivity growth are encumbering the manufacturing sector’s ability to sustain employment and enhance growth. This has implications for the countries like India, where the government has a “Make in India” campaign to increase the share of manufacturing jobs to 25%. “But if you look at the data, you see it’s going to be difficult,” says Lawrence.

Note: All data on share of manufacturing employment come from the WIOD Ten-Sector Database. Data on per capita income come from the Maddison Project  and are in 1990 dollars, adjusted for purchasing power.

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