Uri Dadush writes: Manufacturing is often seen as the key to sustainable export and productivity growth in developing countries. This column argues that, while manufacturing played a key role in some countries’ development, high growth can be sustained without relying primarily on manufacturing. A process of learning, productivity improvement, and investment that touches all sectors characterises the most successful economies. Policies that artificially favour manufacturing should instead give way to maximising learning from the frontier in all sectors of the economy.

The manufacturing sector has been a driver of development across at least the last three centuries, but its importance appears to be declining. The long-standing belief that manufacturing must lead the growth process, as set out for example by Rodrik (2015), rests on two critical assumptions:

• First, that manufacturing is the only sector capable of sustainably achieving scale in the world market (downplaying the role of natural resources and other sectors); and
• Second, that it is also the main sector capable of achieving sustained high productivity growth.

So, the argument goes, the rest of the economy, stodgy, unreliable, or confined to the home market, cannot grow unless pulled by the manufacturing sector. But neither of the critical assumptions holds up nowadays, if they ever did. Countries have shown that they can find many avenues to achieve scale on world markets, of which manufacturing is one, and, with the exception of some services that must still be provided face-to-face, rapid productivity improvements are being achieved in all sectors of the economy, often faster than in manufacturing. As I argue in Dadush (2015), this is cause for hope, not despair.

ICT (Information and Communications Technology) has created large new growth and high-productivity sectors in ‘modern’ services – such as finance, telecommunications, software, and business process outsourcing – and also made many services, previously provided face-to-face, such as retailing and banking, storable, divisible and tradable, boosting productivity. Exports of modern services have outpaced those of manufactures by a wide margin since 2000.

Globalisation, ICT, and the associated phenomenon of rapid catch-up growth of developing countries, have opened up many new avenues for earning foreign exchange, boosted the demand and supply of natural resources, and created opportunities in finer combinations of resources, services, and manufactures (‘tasks’) along the international value chain. Many economies that are poor in natural resources and too small or distant to be competitive in manufacturing have found that they can rely on migrant remittances, tourism, and investment links with their diaspora for foreign exchange and growth.  Is Manufacturing Necessary for Developing Nations