Transcript Slide 1

Is Manufacturing Still an Engine of
Growth in Developing Countries
Adam Szirmai and Bart Verspagen
Emanuel Ules and Vu Thi Minh Ngoc
19th October 2010
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Structure
Our presentation is following:
1. Introduction
2. Manufacturing in Developing Countries
3. The Engine of Growth Argument
4. Literature Review
5. Technical Part
6. Results
7. Conclusions
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Introduction
 Definition of manufacturing:
 make products from materials by use of labor or machines
 make papers from wood; make computers from steel, plastic, gold…
 The role of manufacturing for economic development: manufacturing is the key
sector in economic development
 The role of manufacturing seems to be of particular important during growth
accelerations
 The role of manufacturing compare with service sectors in developing countries:
 service sectors (finance or tourism) play as leading sectors and manufacturing is
decreasing in developing countries.
 industrialization play as the key role in the past fifty years
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The highlight of Manufacturing in
Developing Countries
 Manufacturing
is an engine of economic growth and
development.
 Industrialization seems to be main engine of growth and
development.
 But, developing countries are still dependent on agriculture and mining
 Global industrialization started in Great Britain in the nineteenth century and
spread through Europe and USA, reached Japan and Russian by the end of
the nineteenth century (“late Industrialization”).
 Industrialization was bypassed in developing countries
 Since World War II, manufacturing emerged as a major activity
in many developing countries and the share of global
manufacturing production and trade has changed
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The highlight of Manufacturing in
Developing Countries cont.
 The highlight of manufacturing in Developing countries in the
period 1950-2005:
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In 1950, the share of agriculture in developing countries was 41%, down to 16% in 2005.
The average share of services in the advanced economies was 40% in 1950, far higher than the total
of industry.
In 1950, the share of manufacturing in developing countries was only 11% of GDP compared with
31% in the advanced countries.
The share of manufacturing average increased in all developing countries between 1950 and 1980,
around 20% in the early 80s.
In advance countries, the share of manufacturing decreased from 31% in 1945 to 17% in 2005.
The most important in 2005 is the service sector, account around 70% of GDP, up from 43% in 1950.
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The Engine of Growth Argument
 empirical correlation between the degree of industrialization
and per capita income in developing countries
 structural change bonus (productivity in manufactoring
higher than in agriculture)
 structural change burden  transfer of resources from
manufacturing to services
 Baumol´s Cost Disease
 Easier capital accumulation in manufacturing
 Possibility of economies of scale in manufactoring
 average cost per unit falls as the scale of output is increased
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EGA cont.
 Technological progress spreads from manufacturing
 Linkage and Spillover effects
 Linkage effects create positive externalities between different
sectors
 Spillover effects refer to knowledge flows between sectors
 Engel´s law: proportion of income spent on agricultural
goods (food) falls, even if actual expenditure on agricultural
goods rises
 0< Income elasticity of demand < 1
 Share of expenditures on manufactured goods increases
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Literature Review
 Fagerberg and Verspagen, 1999: manufacturing is as a engine of growth in
developing countries in East Asia and Latin America, but no significant effect of
manufacturing in advanced economies.
 Fagerberg and Verspagen, 2002: manufacturing is more positive
contributions before 1973 than after. Information and Communication technologies
become more significant in productivity growth, especially in the 90s.
 Szirmai, 2009: service and industry is high than in manufacturing for some
periods. In advanced countries, productivity growth in agriculture is more rapid than
in manufacturing.
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Literature Review Cont.
 Rodrik, 2009: manufacturing is significant positive in the post war
periods and industrial activities is an engine of growth in transition
periods.
 Tregenna, 2007: manufacturing is especially important in South
African economic development.
 Timmer and de Vries, 2009: service sectors is more important in
Asia and Latin America.
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Research Questions/Hypotheses
1.
Is there a positive relationship between the value added
share of manufacturing and growth of GDP per capita?
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2.
Is the relationship between the value added share of
manufacturing and per capita GDP growth stronger than
that between the value added share of services and
growth of per capita GDP?
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This would imply that manufacturing is one of the main
drivers of growth
What is more important for growth, manufacturing or
services?
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Hyptheses cont.
3.
Does the relationship between the share of manufacturing
and growth of GDP per capita become weaker over time?
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Manufacturing especially important in early stages (of
industrialization)
4. Is there a positive relationship between the share of
manufacturing and the rate of growth during growth
accelerations?
 If share of manufactoring is growing in times of growth
accelerations, also GDP should grow faster
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Hyptheses cont.
5.
Is the relationship between the share of manufacturing and
growth during growth accelerations stronger or weaker
than that between the share of services and growth?
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6.
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Again, what is more important - Services or Manufacturing?
Are there systematic differences between the role of
manufacturing in countries with different characteristics
(e.g. level of GDP per capita, human capital and region)
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Data Set and Methods
 Data Set constructed from various data bases (World
Development Indicators, Barro-Lee data set on education,
EUKLEMS, Maddison data set, Penn World Tables)
 Panel regression model
 dependent variable: growth of GDP per capita per five year
period
 Independent variables: shares of manufacturing (MAN),
services (SER) in GDP, GDP per capita relative to the US
(RELUS), education level (EDU), and time-intercept dummies
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Random or Fixed Effects
 Basic Question: how to deal with potential country level
effects that may have an effect on dependent variable, but
are not observed as an independent variable in the dataset
 Are the country-effects correlated with the other independent
variables in the model?
 If yes, then fixed effects are better choice
 Further problem: splitting sample up (country effects in each
of the group is normally distributed) or running one „big“
regression (country effects of the group together form one
normal distribution)
 leads to differences in the estimated coefficients
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Reminder RE and FE
 FE takes form
y it = β0 + β1 xit + ai + uit
 So ai captures all unobserved, time-constant factors that effect
y it
 individual specific effect ai is correlated with one or more of the
independent variables  so get rid of it
 Now assume that ai is uncorrelated with xit  elimination of ai
would lead to inefficient estimators
 So FE is a special case of RE
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„Within approach“
 Uses fixes effects
 looks at variation within countries, as opposed to between
countries
 Subtract country averages from regression model
Country effects don´t have to be estimated explicitly
 not be very helpful for estimating the effect of a particular
variable on growth
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„Between approach“
 all available observations for a country are averaged
 Ignores time aspects  to estimate long-run tendencies
 focuses on the country intercepts themselves, and asks how
the independent variables are related to these
 Intercepts are constant over time  variable which explains
them must vary between countries
 The estimated coefficients of the between model provide
insights into which of the variables drive the fixed effects
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Choice of the Authors
 Random effects, Within Approach or Between approach?
 Authors performed all of the test!
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Results
 Manufacturing is a key for growth
 The effects are stronger in the poorest countries with largest
income gaps
 Manufactoring is especially important in times of accelerated
growth
 When sample is splittet up in 3 time periods:
 Manufacturing has significant effect on growth in all 3 periods
(1950-1970, 1971-1990, 1991-2005)
 Services are also important, but not as manufacturing
 When sample is splittet up in country groups
 Very mixed results
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Conclusions
 Manufacturing is positive relation to economic growth in general.
 In advance countries, service sector account for over two thirds of GDP.
Manufacturing is increasing in developing countries.
 In poorer countries, manufacturing is more positive relation to economic growth.
Service sector is low effects.
 In four groups of countries: Asia, Latin America, Africa and advances
economies
 convergence affects are more important in Latin American and Asia, and
insignificant in the advanced economies
 shares of manufacturing on average rates of growth are significant in Latin America,
but not in others groups.
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