Are Services the New Manufactures?

PRINCETON – The global discussion about growth in the developing world has taken a sharp turn recently. The hype and excitement of recent years over the prospect of rapid catch-up with the advanced economies have evaporated. Few serious analysts still believe that the spectacular economic convergence experienced by Asian countries, and less spectacularly by most Latin American and African countries, will be sustained in the decades ahead. The low interest rates, high commodity prices, rapid globalization, and post-Cold War stability that underpinned this extraordinary period are unlikely to persist.

A second realization has sunk in: Developing countries need a new growth model. The problem is not just that they need to wean themselves from their reliance on fickle capital inflows and commodity booms, which have often left them vulnerable to shocks and prone to crises. More important, export-oriented industrialization, history’s most certain path to riches, may have run its course.

Ever since the Industrial Revolution, manufacturing has been the key to rapid economic growth. The countries that caught up with and eventually surpassed Britain, such as Germany, the United States, and Japan, all did so by building up their manufacturing industries. Following the Second World War, there were two waves of rapid economic convergence: one in the European periphery during the 1950s and 1960s, and another in East Asia since the 1960s.

Both were based on industrial manufacturing. China, which has emerged as the archetype of this growth strategy since the 1970s, traveled a well-worn path.