Misguided obsession on manufacturing

“Let’s propel economic growth through manufacturing” – is a recurring theme around the globe. The familiar rhetoric which emerges periodically has been rekindled by US President Donald Trump’s aggressive bid to revive the American manufacturing sector through tariffs, fiscal incentives, and deregulation.

The fondness towards manufacturing by political regimes is observed worldwide. Britain is attempting to subsidise the energy bills of industrialists while India’s Modi administration is implementing an extensive subsidy scheme for the industrial sector. And governments in many other nations are hoping to galvanise manufacturing with immense zeal.

Many economists and politicians – from both the Left and Right – have a romanticised view about manufacturing while being engrossed about the nostalgia associated with factory work. Some view reviving manufacturing as a path to resolve unemployment. Having a strong domestic manufacturing base is also considered critical for national security, particularly for industries of strategic importance. A multiplicity of ill-advised opinions have led policymakers across the world to pursue policies that promote manufacturing at the expense of other sectors that carry the risk of impeding overall economic growth. 

Last month, the highly respected publication – The Economist – under the title “The world must escape the manufacturing delusion”, claimed the universal fixation on factories is built on myths and the irrational fascination would be self-defeating. The reputed British magazine had further declared that global manufacturing push would not be successful, and rather it would do more harm than good. Pragmatic economists have stressed the widespread obsession with manufacturing needs to end and focus instead should be directed towards high value added wherever it is found.

Although traditional schools of thought on economic development asserted that industrialisation as the path towards growth and prosperity, the empirical evidence suggests that nations can become wealthier by focusing on the services sector. In the past three decades, the services sector has grown faster than manufacturing in many developing economies. According to World Bank Group Chief Economist and Development Economics Senior Vice President Indermitt Gill, by 2019, services accounted for 55% of GDP and 45% of employment in developing economies. In developed economies, services account for an even larger share of economic growth – 75% on average. A few low and middle-income countries were among the top 10 global exporters of services between 2005 and 2017.

Today, India has become an economic giant and the growth of the Indian economy is primarily driven by services. Many commentators point out that India had leapfrogged over the manufacturing sector and also made the view the industrialisation is the only pathway towards economic development for developing countries invalid. The economists in India have concluded that the services-led growth model is sustainable not only from the economic perspective but from social and environmental perspectives as well. Furthermore, they have attributed the resilience of the Indian economy due to the buoyancy of the services sector.

Even in Sri Lanka, the clamour for the manufacturing sector to play a prominent role in terms of driving the economic growth is conveyed by numerous individuals across the political divide. In the run up to the previous presidential election, the NPP pledged to herald a production economy – a political slogan, not a concept found in the principles of economics, which underscores enthusiasm for factory production to be the driving force of the economy. A number of cabinet ministers have expressed their desire to see large amounts of funds getting invested into manufacturing activities to accelerate economic development. 

Nevertheless, the drive towards manufacturing disregarding the evolution of the global economic order comes with costs. Undertaking trade protectionism to safeguard domestic industrialists, a key element of pro-manufacturing policies, would cause unprecedented hardships for consumers. Distorting market forces via subsidies to stimulate a favoured sector often results in inefficient allocation of resources in addition to restricting economic growth.   

It is time to move beyond manufacturing obsession and allow market forces to determine allocation of resources without interference from politicians/bureaucrats as the contemporary economic wisdom suggests.