When we think of the best way for developing nations to progress, we perhaps think that they need to capitalize on their low cost base to establish a presence in manufacturing before then gradually moving up the value chain as they advance. This process would see people move out of agriculture and into manufacturing, which in itself would be seen as a mark of progress.
This has been the norm throughout history, with the Industrial Revolution providing perhaps the most obvious example of the transition of many economies from agriculture into manufacturing, which in turn resulted in growth in services, capital investment, and often population growth.
Productivity differences
The differences in living standards between poor and rich countries is often attributed to differences in labor productivity, and so moving from agriculture to manufacturing is seen as a key facet of growth as it contributes towards greater labor productivity. This, in turn, allows the productivity gap between the poorer country and richer countries to narrow.
Research from the Princeton School of Public and International Affairs suggests that this may not paint the entire picture, however. The authors collected data on labor productivity levels in the agricultural and manufacturing sectors of 64 mostly poor countries between 1990 and 2018, and found that productivity gaps between rich and poor countries in manufacturing are often even bigger than they are across the economy overall.
While the authors don’t suggest that this is a reason to neglect trying to move workers out of agriculture, they suggest that there is nothing magical about moving them into manufacturing. While there were some productivity gains associated with this transition, these gains could also be found by moving into other sectors, such as transportation or trade.
They cite the example of service-led development as an area of increasing popularity, as this not only results in productivity gains but also large-scale job creation, even among low-skilled workers. They cite examples of countries such as the Philippines and Costa Rica, who have both developed robust professional and technical services sectors, which have grown to account for around half of their services exports.
“Our findings are relevant for poor countries like India that are bypassing industrialization and instead undergoing what might be called service-led development,” the authors conclude. “These countries are not necessarily doomed to experience disappointing productivity growth, as others might believe.”
