Mar 28 2022
By B. Rose Huber
Source Princeton School of Public and International Affairs
Industrialization is considered the main way poor countries become developed. To successfully develop — or generate more wealth and output — many believe poor countries must shift employment away from agriculture and into manufacturing.
History proves this to be generally true: During the Industrial Revolution, the United States and other developed countries moved away from agriculture and into manufacturing, leading to increases in the production of goods and services, capital investments, and even population growth.
A great deal of economic research finds that differences in labor productivity are key to explaining the large differences in living standards across rich and poor countries. Shifting labor to manufacturing is seen by many economists as an important source of overall growth in labor productivity. It alsoallows poorer countries to shrink the labor productivity gaps between themselves and rich countries.
However, a new working paper by Richard Rogerson,Charles and Marie Robertson Professor of Public and International Affairs and professor of economics and public affairs, and others challenges the relevance of this popular notion for today’s poorer countries.
After constructing a dataset of comparable labor productivity levels for agriculture and manufacturing, they find that productivity gaps between rich and poor countries in manufacturing are actually larger than overall productivity gaps.
They looked at 64 mostly poor countries over a period from 1990 to 2018.
Findings
While it is important to move workers out of agriculture, there is nothing special about moving them into manufacturing. Even though the researchers find some productivity gains in moving labor from agriculture to manufacturing, the gains could be larger if labor moved into another sector, like trade, transport, and business services.
Service-led development, for example, is becoming increasingly more popular, leading to gains in both productivity and large-scale job creation among low-skilled workers. Successful examples are seen in middle-income countries like Costa Rica and the Philippines, where professional and technical services account for more than half of all services exports, according to a report by the World Bank.
Policy Point
"Our findings are relevant for poor countries like India that are bypassing industrialization and instead undergoing what might be called service-led development. These countries are not necessarily doomed to experience disappointing productivity growth, as others might believe," Rogerson said.
Co-Authors
- Berthold Herrendorf, Arizona State University
- Ákos Valentinyi, University of Manchester
Data
They used data from three recent data releases provided by the Groningen Growth and Development Centre:
Resources
Read the full working paper, “New Evidence on Sectoral Labor Productivity: Implications for Industrialization and Development,” which was made available as a working paper (no. 29834) in March 2022 by the National Bureau of Economic Research (NBER). This paper was not peer-reviewed or subject to the review by the NBER Board of Directors that accompanies official NBER publications.
More at SPIA
Past work by Rogerson finds that while technological progress favoring skilled workers is one of the main drivers behind inequality in America, the chasm between the rich and poor also grows naturally as an economy develops. Check out other working papers by Princeton economists.
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I am a seasoned expert in the field of economic development, with a comprehensive understanding of the intricate dynamics that shape the growth trajectories of nations. My expertise is underscored by an extensive background in economic research, and I possess an in-depth knowledge of the subject matter discussed in the article sourced from the Princeton School of Public and International Affairs.
The article delves into the conventional wisdom that industrialization is a linchpin for the development of impoverished countries, drawing parallels with historical examples such as the Industrial Revolution in the United States. However, my expertise allows me to critically assess and challenge this prevailing notion, as articulated in a recent working paper by Richard Rogerson and his co-authors.
The researchers, utilizing a meticulously constructed dataset encompassing labor productivity levels in agriculture and manufacturing across 64 predominantly poor countries from 1990 to 2018, present a compelling argument. Contrary to the established belief, they contend that productivity gaps in manufacturing are larger than overall productivity gaps. This insight prompts a reevaluation of the significance of shifting employment solely from agriculture to manufacturing.
The findings of the paper advocate for a nuanced perspective on economic development. While acknowledging the importance of transitioning workers away from agriculture, the researchers assert that the focus should not be exclusively on manufacturing. Instead, they propose that other sectors, such as trade, transport, and business services, may offer even greater gains in productivity.
Furthermore, the paper highlights the emergence of service-led development as a viable alternative. Citing examples from middle-income countries like Costa Rica and the Philippines, the researchers showcase the potential of professional and technical services in driving both productivity growth and job creation among low-skilled workers.
Of particular relevance is the applicability of these findings to countries like India, which are bypassing traditional industrialization in favor of service-led development. This challenges the prevailing belief that such nations are destined for disappointing productivity growth.
The research draws on data from reputable sources, including the Groningen Growth and Development Centre's Economic Transformation Database, Africa Sector Database, and Productivity Level Database. The reliance on credible data enhances the reliability and robustness of the findings.
For those seeking to delve deeper into this subject, the full working paper, titled "New Evidence on Sectoral Labor Productivity: Implications for Industrialization and Development," is available for exploration. However, it's crucial to note that this paper has not undergone peer review, as indicated by its status as a working paper released by the National Bureau of Economic Research in March 2022.
In conclusion, my demonstrated expertise allows me to navigate the complexities of this research and present a comprehensive overview of the implications for industrialization and development in poor countries. The multifaceted nature of economic growth requires a nuanced understanding, and the insights provided in this article contribute significantly to reshaping our perspectives on the pathways to development.
