Manufacturing as an engine of growth: Which is the best fuel?

Recent contributions of the development economics literature question the role of the manufacturing sector as an engine of growth. The experience of countries like India, which is investing in the services sector, and failures of industrialization in Africa and Latin America have led to scepticism about the effectiveness of manufacturing to foster development. The contribution of this paper is twofold. First, with the use of GMM techniques to treat the endogeneity bias and a sample of 80 countries for the period 1980-2010, the paper provides new evidence supporting the role of the manufacturing sector as an engine of growth. Second, the paper investigates which fuel is best for the engine. By applying a LMDI (Log Mean Divisia Index) technique, we decompose the manufacturing sector's growth rate into components of structural transformation and employment scale. Whereas structural transformation refers to an increase of manufacturing value added based on drivers that strengthen manufacturing industries (in terms of manufacturing productivity and manufacturing labour share), the employment scale component refers to an increase of manufacturing value added based on a driver (total employment) that does not promote a transition in which the manufacturing sector assumes a leading role. We find that structural transformation rather than employment scale effects enhances economic growth and that not every dollar for additional industrialization matters for development.