Developing Countries and Services in the New Industrial Paradigm

The traditional export-led manufacturing model provided the twin benefits of productivity gains and job creation for unskilled labor in the past. Over the past two decades, however, the peak shares of manufacturing in value added and employment across a range of developing economies occurred at lower levels of per capita income compared to their high-income, early-industrializer precursors. Looking ahead, there is a concern whether labor-saving technologies associated with Industry 4.0 -- such as robotics, the Internet of Things, and 3-D printing -- will make it even more difficult for lower-income countries to have a significant role in global manufacturing. Can services-led development be an alternative? This paper provides a conceptual framework to inform the discussion, drawing on available empirical evidence from the literature on the subject. The features of manufacturing once thought to be uniquely special for productivity growth are increasingly shared by some services that yield the benefits of scale, greater competition, and technology diffusion associated with international trade. Yet, without sufficient human capital, there are limits to how much labor can be absorbed in these service sectors, which are also highly skill-intensive. Further, while some high-productivity services largely serve final demand or derive demand from several sectors, others are more closely linked to a manufacturing base.