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Industrialization
Country Readiness to Upgrade Much like high-income countries, LMICs with a strong industrial base can benefit from upgrading their positions in GVCs by increasing the share of services-intensive tasks. But which countries are ready? Figure 4.3 identifies four groups of countries by (a) level of industrialization, and (b) whether their manufacturing base is expanding or shrinking.
The first cluster—the readiest to upgrade—comprises eight middle-income countries (as defined in 1994) in East Asia and Europe and Central Asia: China, the Czech Republic, Indonesia, the Republic of Korea, Malaysia, the Philippines, Thailand, and Turkey. In 1994, manufacturing value added made up 20–30 percent of GDP in these countries, and this share did not change substantially between 1994 and 2015. It increased by 1–2 percentage points in the Czech Republic, Korea, and Thailand but declined by 2–4 percentage points in China, Indonesia, Malaysia, the Philippines, and Turkey.
The second cluster comprises four countries, also in East Asia and Europe and Central Asia, that although relatively small in their share in global manufacturing, might increasingly benefit from diversifying into higher-value-added services. This cluster includes Hungary, Poland, the Slovak Republic, and Vietnam—countries
FIGURE 4.3 LMICs Can Be Grouped into Four Clusters Based on Their Level of Industrialization
Manufacturing value added as a share of GDP, 1994 relative to 2015
40 40
2015 share of manufacturing value added in GDP (%) 35
30
25
20
15
10
5
SVK POL
VNM
NGA HUN
RUS BGD
MEX EGY
IRN PACOL K PER INDARG CZE
IDN TUR PHL
ZAFCHL KOR
THA
MYS CHN
0
0 0 5 10 15 20 25 30 35 40 1994 share of manufacturing value added in GDP (%)
Sources: Calculations using data from the World Development Indicators and United Nations Industrial Development Organization (UNIDO) Manufacturing Value Added (MVA) databases. Note: Bubble size represents a country’s share in global manufacturing value added in 2015. Circle colors designate country clusters by two criteria—(a) level of industrialization, and (b) whether their manufacturing base is expanding or shrinking—that indicate readiness to upgrade their participation in global value chains (GVCs) by increasing their services intensity (share of revenue from selling services). Green indicates low- and middle-income countries (LMICs) with a large manufacturing base, albeit sightly diminished in some by 2015. Yellow indicates LMICs with the largest 1994–2015 increase in manufacturing’s GDP share from a sizable base. Red indicates those with a moderately high, but shrinking, manufacturing base. Blue indicates those with the smallest manufacturing base. LMICs, by World Bank income group classifications, had 1994 gross national income of less than US$8,955. Countries are labeled using ISO alpha-3 codes.
whose share of manufacturing value added in GDP was 10–15 percent in 1994 and increased notably over the next two decades.
The third cluster comprises 11 countries spanning the Middle East and North Africa, Latin America, and South Asia: Argentina, Bangladesh, Chile, Colombia, the Arab Republic of Egypt, India, the Islamic Republic of Iran, Mexico, Morocco, Pakistan, and Peru. In these countries, manufacturing value added was 15–20 percent of GDP in 1994, although this share declined in most of the countries by 1–5 percentage points over the next two decades. By 2015, it had increased only in Bangladesh and Mexico, by 1–2 percentage points.
The fourth cluster comprises a large cross-section of countries, especially in SubSaharan Africa, that account for a negligible share in global manufacturing value added and whose share of manufacturing in GDP was as low as 5–10 percent between 1994 and 2015. Therefore—even in Botswana, Lesotho, Nigeria, and Uganda, where share of manufacturing value added in GDP increased by 2–4 percentage points between 1994 and 2014—this improvement was from very low base shares.
The central question for countries in the third and fourth clusters is the extent to which services with productivity potential can grow in the absence of a robust manufacturing base.
The scope for growth in the services sector beyond links to the manufacturing sector depends on the size of two channels: The first is the growth in final demand, especially the ability to export directly as a way to serve larger markets. The second is the growth in domestic demand from sectors other than manufacturing—that is, the role of services as inputs into agriculture, mining, construction, utilities, and other services. The next section looks at each in turn.
Services Growth without a Manufacturing Core
Services subsectors vary in the extent to which they serve either (a) final demand, comprising consumption, investment, and (net) exports; or (b) intermediate demand from other sectors in the economy. Growth opportunities linked to final demand will not depend directly on a country’s manufacturing base.
Among these subsectors, “skill-intensive social services” (such as health and education) are almost entirely stand-alone services. Many “low-skill domestic services” (including retail trade, household activities, and other personal services) and certain “low-skill tradable services” (including accommodation and food services) also overwhelmingly serve final demand. Final demand accounts for smaller shares of output among other low-skill tradables (such as wholesale trade and transportation services) and among all the “global innovator services.”
However, these smaller shares do not rule out the role of final demand in shaping growth opportunities for these subsectors. Among global innovator services, for example, a range of information and computer-related services are embedded in manufactured goods in ways that do not require countries to have a manufacturing base. For instance, local language and cultural considerations matter for mobile-phone applications, and technological solutions need to be adapted in areas with low communication coverage—for example, by using narrowband instead of broadband, mobile money instead of bank transfers, and so on. This market for apps development and start-ups is booming everywhere, including in Sub-Saharan Africa, where several incubators and accelerators have emerged and the development of local technological solutions and start-ups is supported (Bamber et al. 2017).
At the same time, the growth opportunities from final demand will be limited to the size of the domestic market unless exports account for a large share of final demand. And despite their lower share of final demand in total output, global innovator services and low-skill tradable services have higher shares of exports in total output, as shown in chapter 1. The share of exports in the total output of information and communication technology (ICT) services—on average, across 40 countries—was close to 20 percent in 2014. The corresponding shares were approximately 15 percent for wholesale trade and transportation services (low-skill tradables) and 10 percent for other global innovators: financial services and professional, scientific, and technical services (figure 4.4).
Among the global innovators (as chapter 1 showed), cross-border supply, including through digital delivery, accounted for a notable share of international trade. This has allowed countries to specialize in the production and export of offshore services— computer programming, software development, business process outsourcing (BPO), accounting, and architectural and engineering services—just like manufactured goods.
Among the low-skill tradable services, tourism-related accommodation and food services as well as passenger transportation services have also enabled such specialization. The exports of freight transportation and wholesale trade, in contrast, are closely linked to the export of goods.
The export intensity was lowest in skill-intensive social services and low-skill domestic services—the two groups in which the final-demand intensity was the highest. These services are less amenable to specialization, but this does not imply the absence of all exporting opportunities—especially for health and education.
The Big Exporters Services in high-income economies. Trade costs in services are lowest among high-income economies (WTO 2019). It is therefore not surprising that the large majority of the top 10 exporting economies in each of the global innovator services and low-skill tradable services between 2005 and 2017 were high-income economies (varying by service): Australia; Canada; France; Germany; Hong Kong SAR,
