Manufacturing or Services? An Indian Illustration of a Development Dilemma

Manufacturing has historically offered the fastest path out of poverty, but there is mounting evidence that this path may be all but closed to developing countries today. Some have suggested that services might provide a new path forward, while others have expressed skepticism about this claim and consequent pessimism over the future growth trajectories of developing countries. A multi-sector growth framework is constructed to establish five important criteria that any sector must exhibit in order to lead an economy to rapid, sustained, and inclusive development. These are: 1) a high level of productivity, 2) “dynamic” productivity growth (i.e., high growth rates coupled with domestic and international convergence), 3) expansion of the sector in terms of its use of inputs, 4) comparative advantage, or alignment between resource requirements of the sector and resource endowments of the country, and 5) exportability.