The Service Revolution

WASHINGTON, DC – China and India are both racing ahead economically. But the manner in which they are growing is dramatically different. Whereas China is a formidable exporter of manufactured goods, India has acquired a global reputation for exporting modern services. Indeed, India has leapfrogged over the manufacturing sector, going straight from agriculture into services.

The differences in the two countries’ growth patterns are striking, and raise significant questions for development economists. Can service be as dynamic as manufacturing? Can late-comers to development take advantage of the increasing globalization of the service sector? Can services be a driver of sustained growth, job creation, and poverty reduction?

Some facts are worth examining. The relative size of the service sector in India, given the country’s state of development, is much bigger than it is in China. Despite being a low-income region, India and other South Asian countries have adopted the growth patterns of middle- to high-income countries. Their growth patterns more closely resemble those of Ireland and Israel than those of China and Malaysia.

India’s growth pattern is remarkable because it contradicts a seemingly iron law of development that has held true for almost 200 years, since the start of the Industrial Revolution. According to this “law” – which is now conventional wisdom – industrialization is the only route to rapid economic development for developing countries.