Asia’s industries, primarily manufacturing, fueled phenomenal economic growth and poverty reduction in recent decades. But today many countries are looking to the service sector as an alternative.
Industrialisation underpinned high growth in Asia during the past few decades and the catching-up in living standards in general, but this development path is now increasingly uncommon. Should we dismiss industry as a driver of growth, and could services pick up the slack?
As in other parts of the advanced and developing world, most success stories in Asia were driven by industrialisation—from the post-WWII Japanese Economic Miracle to the success of Singapore, the Republic of Korea, and the People’s Republic of China.
As improved regional integration, export orientation, and diversification relaxed the constraints imposed by small domestic markets, industrialisation opened avenues for fast productivity growth and created stable jobs for unskilled workers. The region saw significant shifts in employment and resource allocation from agriculture to industry—particularly manufacturing activities—living standards rose dramatically, and poverty dropped to historic lows.
It is hard to imagine any policymakers in Asia who would not want to follow in the footsteps of the region’s fast-growing economies. However, the traditional path of structural transformation is increasingly at odds with current trajectories. Many Asian economies are now transitioning from being mostly agriculture-based to predominantly services-driven, without developing a sizeable manufacturing sector. In others, such as Indonesia and Malaysia, the process of industrialisation has been short-lived.
The implications are significant. Because of scale effects and learning by doing, industry can produce large productivity gains and, thus, boost workers’ incomes. And, by accelerating the creation of good jobs for the relatively unskilled that are high-paying and secure, industrialisation can foster a more equal distribution of development gains.
This contrasts with services where, on average, workers are typically employed in less-productive activities. As such, the lack of a sizeable industrial sector is often seen as a serious drawback for development trajectories and a reason to advocate industrial policy.
Calls for policy action are often warranted. The People’s Republic of China and a handful of other economies have a dominant position in global industrial goods markets, and this makes it hard for other economies to follow the same development route. But in many cases industrialisation is also held back by low institutional quality, ineffective productive development policies, labour-market constraints, incomplete trade links.