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  • Print publication year: 2020
  • Online publication date: March 2020

2 - Manufacturing versus Services: A Misplaced Debate

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Summary

Trajectories of economic development, particularly industrialisation, have largely been conceived in terms of stylised phases marked by structural changes in output and employment. The sequential pattern of the relative importance of sectors such as agriculture, manufacturing and services in terms of output and employment in advanced countries spanning the second half of the nineteenth century to the first half of the twentieth century seems to provide the benchmarks of industrial progress for late industrialisers. Different versions of the classical theories of development assume a virtuous circle of rising productivity translated into capital accumulation in a labour-surplus scenario together with declining production costs diffused across the economy by way of rising real income and, hence, higher demand. The idealised path of moving people from low-productivity agriculture to manufacturing activities with a subsistence-plus wage begins with an initial extensive phase when the industrial sector absorbs labour. This is followed by an intensive phase of employing people in higher productivity manufacturing. With rising income and consequent changes in demand due to varying income elasticities, the importance of agriculture and then manufacturing declines and that of services rises. However, barring China, the experiences of most post-colonial latecomers do not conform with the assumed sequence. The deviation from the stylised sequence for most developing countries where de-industrialisation sets in at a low level of per capita income and at a low peak has been a major concern for policy makers. Contemporary debates on development underline the fact that colonial structures and the imperatives of imperial power led to a peculiar growth trajectory for ex-colonies, making their future completely different from that of advanced countries. It became important eventually to recognise that growth and structural change engage in a double causation rather than in a linear relationship, where the pattern of growth and relative importance of sectors in terms of output and employment are mutually constitutive of each other.

The immediate concern for policy makers in developing countries was primarily to deal with the problem of delinking of employment from growth. In most developing countries, huge supply of unskilled labour remains unutilised which makes high growth politically unsustainable.

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