Manufacturing or Services? An Indian Illustration of a Development Dilemma

53 Pages Posted: 27 Jun 2015

See all articles by Amrit Amirapu

Amrit Amirapu

Boston University - Department of Economics; University of Kent - Department of Economics

Arvind Subramanian

Peterson Institute for International Economics

Date Written: June 10, 2015

Abstract

Manufacturing has historically offered the fastest path out of poverty, but there is mounting evidence that this path may be all but closed to developing countries today. Some have suggested that services might provide a new path forward, while others have expressed skepticism about this claim and consequent pessimism over the future growth trajectories of developing countries. We contribute to debate this by using a multi-sector growth framework to establish five important criteria that any sector must exhibit in order to lead an economy to rapid, sustained, and inclusive development. These are: 1) a high level of productivity, 2) “dynamic” productivity growth (i.e., high growth rates coupled with domestic and international convergence), 3) expansion of the sector in terms of its use of inputs, 4) comparative advantage, or alignment between resource requirements of the sector and resource endowments of the country, and 5) exportability. We then compare the performance of manufacturing against specific service subsectors under each of these criteria using India as a case in point. We find that many of the virtues exhibited by the manufacturing sector (such as high productivity and international and domestic convergence in productivity) are shared by some service subsectors (such as Finance, Insurance, and Real Estate). However, in the Indian case, these subsectors also share manufacturing’s flaws: they are all too skill intensive and hence unaligned with India’s comparative advantage. This poses further difficult policy questions for India and other developing countries in similar positions, which we attempt to consider in our conclusion.

Keywords: manufacturing, India, economic growth

JEL Classification: L6, F3, R5

Suggested Citation

Amirapu, Amrit and Subramanian, Arvind, Manufacturing or Services? An Indian Illustration of a Development Dilemma (June 10, 2015). Center for Global Development Working Paper No. 408, Available at SSRN: https://ssrn.com/abstract=2623158 or http://dx.doi.org/10.2139/ssrn.2623158

Amrit Amirapu (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

University of Kent - Department of Economics ( email )

Keynes College
Canterbury, Kent CT2 7NP
United Kingdom

Arvind Subramanian

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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