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Analysis

Opportunities beyond manufacturing

by Otaviano Canuto

 

Since the second half of the last century, manufacturing has been a vehicle for job creation, productivity increases and growth in emerging economies. First in Latin America, followed by Asia and eastern Europe, rising manufacturing levels transferred labour from low-productivity occupations to activities using more technology. This was facilitated by the transferability of manufacturing technologies relative to other parts of the economy. But two issues cast doubt over the possibility of replicating or deepening this process.

First, manufacturing is highly sensitive to minor changes in overall competitiveness factors, including labour costs, real exchange rates, the business environment and infrastructure. Second, technological changes that reduce labour costs are threatening to unwind some of the motivation for transferring manufacturing to emerging economies.
For latecomers, using manufacturing exports as a platform for high growth is likely to become more difficult. At the least one may say that the requisite standards of infrastructure, business environment, local availability of skilled workers and other competitiveness factors are rising.

Unskilled labour
Market watchers are increasingly asking whether services can eventually surpass manufacturing in terms of job creation in developing countries. They wonder if further innovations can lead to higher transferability of technologies and tradability of services, and examine whether local manufacturing centres will remain a precondition for production of services.
These issues are addressed by Mary Hallward-Driemeier and Gaurav Nayyar, senior economic adviser and economist at the World Bank respectively, in their book Trouble in the Making?: The Future of Manufacturing-Led Development.

Hallward-Driemeier and Nayyar call attention to how technological advances have made some services, including finance and telecommunications, increasingly tradable. This may help raise productivity in developing economies. They highlight, too, the potential benefits of reaping economies of scale in services that are highly affected by technology, especially since only low marginal costs are incurred by adding units to production. However, these services are unlikely to be a strong source of jobs for unskilled labour.

Low-end services that provide unskilled employment are less likely to create opportunities for productivity gains. With some exceptions – Hallward-Driemeier and Nayyar mention construction and tourism – the services sector has less scope than the manufacturing-led development of recent decades to yield both high productivity gains and job creation for unskilled labour.

There is much still to be learned about the connection between manufacturing and services. Alongside increases in demand for stand-alone services that are very sensitive to changes in consumers’ income, policy-makers must determine the prospects for the demand for services accompanying the transformation of manufacturing. They will have to deduce the extent to which local manufacturing centres benefit from demand for these manufacturing-related services.

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‘Servicification’
In their assessment of the rising ‘servicification’ of manufacturing, Hallward-Driemeier and Nayyar conclude, ‘While a range of “stand-alone” services and some embedded services can provide growth opportunities without a manufacturing core, the increasing servicification of manufacturing underscores the growing interdependence between the two sectors.

Given this deepening interdependence, policies that improve productivity across different parts of the value chain will result in the whole being greater than the sum of its parts. The agenda therefore should be to prepare countries to use synergies across sectors to participate in the entire value chain of a product while also exploiting stand-alone opportunities beyond manufacturing.’

It is becoming more difficult to boost employment of unskilled workers while at the same time obtaining substantial increases in productivity. There is no alternative but to raise standards domestically if a developing country wants to make best use of services and manufacturing as engines for meaningful growth.

Otaviano Canuto is an Executive Director of the World Bank. The opinions expressed in this article are his own.

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