Manufacturing as the Key Engine of Economic Growth for Middle-Income Economies

This paper revisits the role of the manufacturing sector during the middle-income stage. By exploiting a large dataset that covers internationally comparable sectoral information, we prove that the manufacturing sector is imbued with three important characteristics. First, for middle-income economies, manufacturing pulls along services, instead of the other way around. A decline in the manufacturing sector growth rate will negatively affect the growth rate of the services sector, in both the short-run and long-run meanings. Second, we show that manufacturing development not only promotes the incentives of savings, but also accelerates the pace of technological accumulation. Third, an increased share of the manufacturing sector in middle-income economies can enhance the utilization of human capital and economic institutions. Our empirical findings indicate that the manufacturing sector is still the key engine of economic growth for middle-income economies.

WORKING PAPER NO: 573