Manufacturing vs Services

There is an interesting debate on the topic between Jagdish Bhagwati and Ha Joon Chang. Patrick Lane of economist moderates the debate.

Ha Joon Chang says manufacturing is very important and Bhagwati disagrees. Lane sums up the debate points:

The chief protagonists in our debate are distinguished economists: Ha-Joon Chang, of Cambridge University, who is proposing the motion, and Jagdish Bhagwati, of Columbia University, who is opposing it. Mr Chang starts by noting that even apparently service-based economies in fact have strong manufacturing foundations. Much of the shift away from manufacturing, he argues, reflects inherently faster productivity growth in that sector; some of the measured productivity growth in services, notably retailing, reflects lower quality and is thus more apparent than real. Deindustralisation and slow manufacturing productivity growth hurt a country’s ability to export and eventually lead it into balance-of-payments difficulties. As for tradable services, they too depend in the long run on a strong manufacturing base.

Mr Bhagwati, by contrast, believes that manufacturing has been fetishised by economists since Adam Smith. Technical progress is not confined to manufacturing: indeed, he says, there is evidence that retailing is the most progressive sector. Nor is it plain that progress in services depends on that in manufacturing in the same country. As for the financial crisis, he argues, in effect, that the baby should not be hurled out with the bathwater: though some financial “innovation” was destructive, some has surely done some good.

Bhagwati’s comments on Adam Smith are interesting. Read the debate for details..

Lane says countrywise experiences are different. Some have followed manufacturing path and others have followed services route:

Our topic for the next few days is one that has divided economic practitioners and commentators for as long as anyone can remember: how important is manufacturing? This old question has had a new lease of life since the financial crisis of 2007-08. To some, this is a cautionary tale of the celebration of finance and the neglect of manufacturing. Some economies that had seemingly come to rely on financial services, such as America’s and Britain’s, have struggled since. Meanwhile, Germany, a manufacturing power almost written off a few years ago, has performed strongly; and China, the world’s workshop, has continued to clock up giddying growth rates. There is more to services than finance, of course; but those who believe that making things is the basis of economic prosperity may see in all this a degree of vindication.

Others may say that the truth is more complicated. Japan, another place where prosperity has been built on making (and exporting) things, has stagnated for 20 years. And while China’s boom has owed much to manufacturing, India has been enjoying a largely service-based surge. Look over a longer period than the few years since the financial bust, and you see that most rich economies have shifted the bulk of economic output (and to a greater degree, employment) away from manufacturing and towards services, and have done pretty nicely. Maybe manufacturing is not the be-all and end-all. And people on both sides, as well as neutrals, may wonder where manufacturing ends and services begin. Makers of many things, from aircraft engines to cars to telephone networks, will tell you that they do not simply make and sell fancy combinations of metal and plastic: customers want advice, design and maintenance too, as part of the deal. Manufacturing and services are complements not substitutes.

This is a real interesting debate.. And like any development story the cases differ. There are many historical and other reasons why certain countries go this and that way. One could extend the cases further.

Japan has stagnated because of many problems. It may have a strong manufacturing base but many things went wrong and manufacturing could not do away with those problems. India tried its hand in manufacturing but it could not really do well as focus was not on incentivizing private sector but pushing public sector into the job. Some people say services remained strong as Indian government did not really understand how to tax/control the sector (especially the IT and software industry).  China is a curious case of pushing manufacturing after committing mistakes early on.

I would really doubt whether anyone can argue whether manufacturing works or services in a generalised way. It is specific to countries. Infact, one needs both especially in large economies like India/China/US. Both have advantages and disadvantages and that is why having both sectors  helps build these economies. India wants a stronger manufacturing base to absorb its manpower and China needs to move into more value added hi-tech services.

Ignore either at your own peril.

 

One Response to “Manufacturing vs Services”

  1. sherryyycherryyy Says:

    Reblogged this on SHERRY RUAN.

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