Are South Asian countries 'deindustrialising' prematurely?

Industrialisation is the process by which an economy can transform its base from agriculture to manufacturing of goods. In contrast, deindustrialisation is the process of reducing manufacturing activities in an economy. Historically, all developed economies, after reaching a certain level of development, have experienced a decline in the share of manufacturing value-added in GDP with the rising share of services value-added. Deindustrialisation thus appears to be a natural outcome of economic dynamism in those developed economies.

Contrary to the aforementioned natural outcome, a premature deindustrialisation is being observed in a number of developing countries where the share of manufacturing value-added in GDP starts to decline. Compared to the early industrialisers this share is already much lower and is declining at much lower levels of income than those industrialisers. As Dani Rodrik in his 2016 article ("Premature deindustrialisation," Journal of Economic Growth, vol. 21, no. 1) suggests, this means that many developing countries are becoming service economies without having had a proper experience of industrialisation. Latin American countries have been especially hard hit by such premature deindustrialisation.  

Are South Asian countries also experiencing premature deindustrialisation? To answer this question, we have analysed the data of GDP per capita and the share of manufacturing value-added in GDP for the years from 1960 to 2015 for five South Asian countries (Bangladesh, India, Nepal, Pakistan and Sri Lanka) and a Southeast Asian country (Malaysia). The analysis shows that Malaysia, over the years, with the rise in GDP per capita, was able to firmly increase its manufacturing value-added share in GDP from 10 percent to 30 percent (during 1960 and 2004). However, after reaching a high level of per capita GDP of around USD 8,000, the share started to decline, and this pattern follows the typical pattern of the deindustrialisation process of the advanced countries. In contrast, with many fluctuations, India very slowly increased its share of manufacturing value-added in GDP from 13.7 percent to 18 percent (during 1960 and 2008). However, for India, the challenge is the declining share of manufacturing value-added in GDP since 2008 (by 2015 the share declined to 16.6 percent) which resembles premature deindustrialisation. The phenomenon of premature deindustrialisation is also very prominent both for Pakistan (the share declined from 14.7 percent in 2000 to 13.4 percent in 2015) and Nepal (the share declined from 9.4 percent in 2000 to 6.3 percent in 2015). Sri Lanka too has started experiencing a declining share of manufacturing in recent years. Contrary to all other South Asian countries, Bangladesh has been experiencing a rising share of manufacturing value-added in GDP at a much faster rate than both India and Pakistan at similar levels of per capita GDP. This suggests that, so far, Bangladesh has been the only exception in South Asia with respect to premature deindustrialisation. However, for Bangladesh, the major challenge is that the manufacturing value-added share in GDP is still low (17.6 percent in 2015), and the country needs to increase this share substantially to turn the manufacturing sector into the major driver of economic growth. 

What is then the concern for South Asian countries? There is no denying the fact that manufacturing has played a key role in the economic growth and overall development processes for many developed and advanced developing countries. As Rodrik in his 2016 article suggests, manufacturing contributes to growth both because of the positive reallocation effect and because manufacturing tends to experience relatively stronger productivity growth over the medium to longer term, which has large positive economic and social benefits. Successful countries have changed their economic structures to benefit from manufacturing as the driver of economic growth. Therefore, premature deindustrialisation as well as low level of manufacturing base is not good news for South Asian countries. It thwarts the opportunities of rapid economic growth. It is very pertinent to mention here that one of the targets of the 9th Sustainable Development Goal is to "promote inclusive and sustainable industrialisation and, by 2030, significantly raise industry's share of employment and gross domestic product, in line with national circumstances, and double its share in least developed countries." 

How do we substantially increase the manufacturing value-added share in GDP and thus promote manufacturing led economic growth in South Asia? South Asian countries have to adopt the right kind of policies and programmes, which can trigger much faster rate of growth of the manufacturing sector compared to those of agricultural and service sectors. The experiences of the successful countries show that human capital has made a major difference. In South Asia, compared to the East and Southeast Asian countries, both the quantity and quality of human capital are at much lower levels. Therefore, policies and programmes should be targeted at the rapid enhancement of human capital in South Asia. There is also a need for pro-active trade and industrial policies in terms of providing effective incentives to domestic investors, setting up special economic zones and attracting foreign direct investment for diversified manufacturing industries. Such policies should also be aimed at integrating the domestic manufacturing industries with the global value chains.

The writer is Professor, Department of Economics, University of Dhaka, Bangladesh, and Executive Director, South Asian Network on Economic Modelling (SANEM).

E-mail: selim.raihan@econdu.ac.bd