Driving Economic Growth: The Central Role Of Industrial Manufacturing

By | April 17, 2024

In recent research IMF, or International Monetary Fund, has stated that countries can no longer depend only on manufacturing for economic growth and productivity. IMF is, however, not the first important entity to have confronted the so-called manufacturing fetishism. Famed economists such as Christina Romer and Jagdish Bhagwati have done the same thing recently. For that matter, such skepticism towards pro-manufacturing theories can be traced back to 1976 when “The Coming of Post-Industrial Society” was published by noted sociologist Daniel Bell. However, it would also be completely wrong to say that factories are dinosaurs from a bygone era.

Economic development would not have happened without industrialization
If you look at the history of Capitalism you would see that all countries that have gone on to become high-income countries from low-income ones have done so on the back of industrialization. The West has gradually established its economic hegemony over the world and this started during the 18th century when the Industrial Revolution happened in the UK. In this case, it was manufacturing where the West was trying to establish its supremacy. Regions such as Europe, Japan, and North America made rapid strides because of industrialization primarily.

Manufacturing is a driver of productivity innovation and growth
This is the reason why there is such a strong bond between economic development and industrialization. It is the manufacturing sector that acts as the very lifeblood of technological improvement. It is easier to achieve economies of scale from the manufacturing sector as compared to the service sector. For the uninitiated, this implies lowering the costs of producing each unit by increasing production. Now, the manufacturing sector helps you better with economies of scale because it is more amenable to chemical processing and mechanization. The innovations in this sector contribute to productivity growth in other sectors too!

Manufacturing helps the service sector as well
When you have one economic activity it will stimulate others of its ilk as well. This means that just the way the provision of services is stimulated by manufacturing, the former stimulates production output in the latter sector. However, evidence reveals that the multiplier effect is stronger in the case of manufacturing than in services. Economically advanced countries such as France and Singapore are the greatest examples of the same where manufacturing services contribute more to the services sector than the other way around.

You should also know that the manufacturing sector is much bigger than you consider it to be. It is not as if a lot of service sectors are dependent on the manufacturing sector – they are, in fact, directly linked to the same. The most prominent examples of this are services related to engineering such as industrial R&D, research and development, product design, and innovation. You can also make a rather strong case to have these services included as manufacturing activities in the national accounts but that is presently not how it is done. Also, perhaps, it is a mistake to think that the likes of AI, or artificial intelligence, would steal jobs in the manufacturing sector.