Is Manufacturing Still an Engine of Growth in Developing Countries

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Adam Szirmai and Bart Verspagen

Emanuel Ules and Vu Thi Minh Ngoc19th October 2010

Structure

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Our presentation is following:1. Introduction2. Manufacturing in Developing Countries3. The Engine of Growth Argument4. Literature Review5. Technical Part6. Results7. Conclusions

Introduction

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Definition of manufacturing: make products from materials by use of labor or machines make papers from wood; make computers from steel, plastic, gold…

The role of manufacturing for economic development: manufacturing is the key sector in economic development

The role of manufacturing seems to be of particular important during growth accelerations

The role of manufacturing compare with service sectors in developing countries: service sectors (finance or tourism) play as leading sectors and manufacturing is

decreasing in developing countries. industrialization play as the key role in the past fifty years

The highlight of Manufacturing in Developing Countries

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Manufacturing is an engine of economic growth and development.

Industrialization seems to be main engine of growth and development.

But, developing countries are still dependent on agriculture and miningGlobal industrialization started in Great Britain in the nineteenth century and

spread through Europe and USA, reached Japan and Russian by the end of the nineteenth century (“late Industrialization”).

Industrialization was bypassed in developing countries

Since World War II, manufacturing emerged as a major activity in many developing countries and the share of global manufacturing production and trade has changed

The highlight of Manufacturing in Developing Countries cont.

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The highlight of manufacturing in Developing countries in the period 1950-2005: In 1950, the share of agriculture in developing countries was 41%, down to 16% in 2005. The average share of services in the advanced economies was 40% in 1950, far higher than the total

of industry. In 1950, the share of manufacturing in developing countries was only 11% of GDP compared with

31% in the advanced countries. The share of manufacturing average increased in all developing countries between 1950 and 1980,

around 20% in the early 80s. In advance countries, the share of manufacturing decreased from 31% in 1945 to 17% in 2005. The most important in 2005 is the service sector, account around 70% of GDP, up from 43% in 1950.

The Engine of Growth Argument

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empirical correlation between the degree of industrialization and per capita income in developing countries

structural change bonus (productivity in manufactoring higher than in agriculture)

structural change burden transfer of resources from manufacturing to servicesBaumol´s Cost Disease

Easier capital accumulation in manufacturingPossibility of economies of scale in manufactoring

average cost per unit falls as the scale of output is increased

EGA cont.

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Technological progress spreads from manufacturingLinkage and Spillover effects

Linkage effects create positive externalities between different sectors

Spillover effects refer to knowledge flows between sectorsEngel´s law: proportion of income spent on agricultural

goods (food) falls, even if actual expenditure on agricultural goods rises 0< Income elasticity of demand < 1 Share of expenditures on manufactured goods increases

Literature Review

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Fagerberg and Verspagen, 1999: manufacturing is as a engine of growth in developing countries in East Asia and Latin America, but no significant effect of manufacturing in advanced economies.

Fagerberg and Verspagen, 2002: manufacturing is more positive contributions before 1973 than after. Information and Communication technologies become more significant in productivity growth, especially in the 90s.

Szirmai, 2009: service and industry is high than in manufacturing for some periods. In advanced countries, productivity growth in agriculture is more rapid than in manufacturing.

Literature Review Cont.

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Rodrik, 2009: manufacturing is significant positive in the post war periods and industrial activities is an engine of growth in transition periods.

Tregenna, 2007: manufacturing is especially important in South African economic development.

Timmer and de Vries, 2009: service sectors is more important in Asia and Latin America.

Research Questions/Hypotheses

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1. Is there a positive relationship between the value added share of manufacturing and growth of GDP per capita?

This would imply that manufacturing is one of the main drivers of growth

2. Is the relationship between the value added share of manufacturing and per capita GDP growth stronger than that between the value added share of services and growth of per capita GDP?

What is more important for growth, manufacturing or services?

Hyptheses cont.

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3. Does the relationship between the share of manufacturing and growth of GDP per capita become weaker over time?

Manufacturing especially important in early stages (of industrialization)

4. Is there a positive relationship between the share of manufacturing and the rate of growth during growth accelerations?

If share of manufactoring is growing in times of growth accelerations, also GDP should grow faster

Hyptheses cont.

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5. Is the relationship between the share of manufacturing and growth during growth accelerations stronger or weaker than that between the share of services and growth?

Again, what is more important - Services or Manufacturing?

6. Are there systematic differences between the role of manufacturing in countries with different characteristics (e.g. level of GDP per capita, human capital and region)

Data Set and Methods

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Data Set constructed from various data bases (World Development Indicators, Barro-Lee data set on education, EUKLEMS, Maddison data set, Penn World Tables)

Panel regression modeldependent variable: growth of GDP per capita per five year

periodIndependent variables: shares of manufacturing (MAN),

services (SER) in GDP, GDP per capita relative to the US (RELUS), education level (EDU), and time-intercept dummies

Random or Fixed Effects

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Basic Question: how to deal with potential country level effects that may have an effect on dependent variable, but are not observed as an independent variable in the dataset

Are the country-effects correlated with the other independent variables in the model?If yes, then fixed effects are better choice

Further problem: splitting sample up (country effects in each of the group is normally distributed) or running one „big“ regression (country effects of the group together form one normal distribution)

leads to differences in the estimated coefficients

Reminder RE and FE

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FE takes form

y it = β0 + β1 xit + ai + uit

So ai captures all unobserved, time-constant factors that effect y

it individual specific effect ai is correlated with one or more of the

independent variables so get rid of it

Now assume that ai is uncorrelated with xit elimination of ai would lead to inefficient estimators

So FE is a special case of RE

„Within approach“

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Uses fixes effects

looks at variation within countries, as opposed to between countries

Subtract country averages from regression modelCountry effects don´t have to be estimated explicitly

not be very helpful for estimating the effect of a particular variable on growth

„Between approach“

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all available observations for a country are averaged

Ignores time aspects to estimate long-run tendencies

focuses on the country intercepts themselves, and asks how the independent variables are related to these

Intercepts are constant over time variable which explains them must vary between countries

The estimated coefficients of the between model provide insights into which of the variables drive the fixed effects

Choice of the Authors

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Random effects, Within Approach or Between approach?

Authors performed all of the test!

Results

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Manufacturing is a key for growthThe effects are stronger in the poorest countries with largest

income gapsManufactoring is especially important in times of accelerated

growthWhen sample is splittet up in 3 time periods:

Manufacturing has significant effect on growth in all 3 periods (1950-1970, 1971-1990, 1991-2005)

Services are also important, but not as manufacturingWhen sample is splittet up in country groups

Very mixed results

Conclusions

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Manufacturing is positive relation to economic growth in general.In advance countries, service sector account for over two thirds of GDP.

Manufacturing is increasing in developing countries.In poorer countries, manufacturing is more positive relation to economic growth.

Service sector is low effects.In four groups of countries: Asia, Latin America, Africa and advances

economiesconvergence affects are more important in Latin American and Asia, and

insignificant in the advanced economies shares of manufacturing on average rates of growth are significant in Latin America,

but not in others groups.