Contribution of Within-Sector Change Looking at three broad sectors—agriculture, industry, and services—across a large cross-section of LMICs between 1995 and 2018, we find that within-sector increases explain at least two-thirds of labor productivity growth, on average, in every region of the world (figure 1.5).8 This finding reinforces other evidence that highlights opportunities to enhance productivity growth within sectors. For example, Herrendorf, Rogerson, and Valentinyi (2013) show that, for most high-income and transition economies, productivity growth has largely occurred within sectors. McMillan, Rodrik, and Verduzco-Gallo (2014) also support this finding, concluding that growth accelerations in Latin American, Asian, and Sub-Saharan African countries were based on rapid within-sector labor productivity growth. Strikingly, except in East Asia and the Pacific, productivity growth within the services sector contributes more than productivity growth within industry to aggregate productivity growth. In South Asia, the percentage contribution of productivity increases within the services sector (34 percent) was more than double that of industry. Similarly, in Sub-Saharan Africa, the percentage contribution of productivity increases within the services sector (33 percent) was four times that of industry (figure 1.5). This is not entirely surprising because, despite higher rates of industrial labor productivity FIGURE 1.5 Among LMICs in Most Regions, Services Have Contributed More Than Industry to Aggregate Labor Productivity Growth since the 1990s Decomposition of aggregate productivity growth “within” and “between” sectors in LMICs, by region and relative to high-income countries, 1995–2018
CAGR of value added per worker (%)
3.0 2.5 2.0 1.5 1.0 0.5 0 –0.5
High-income
East Asia and Pacific
Europe and Central Asia
Within services Between agriculture and industry
Latin America Middle East and and the North Africa Caribbean Within agriculture Between agriculture and services
South Asia
Sub-Saharan Africa
Within industry
Source: Calculations based on World Development Indicators database. Note: Data for the “industry” sector include not only manufacturing but also mining and construction. “Low- and middle-income countries” (LMICs), by World Bank income group classifications, had 1994 gross national income (GNI) of less than US$8,955. “High-income countries” had GNI exceeding US$8,955 in 1994. CAGR = compound annual growth rate. For the underlying methodology of the decomposition analysis, see annex 1B.
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At Your Service? The Promise of Services-Led Development
