conceptual framework in section 5.3.1 to explain why we think manufacturing development can increase the gross private savings ratio and TFP growth.
Then, we briefly introduce the econometric methodology in the next subsection. Empirical results are shown in section 5.3.3.
The third reason is that the capital to labor ratio or a country’s endowment structure is essential to its industrial upgrading process (Acemoglu and Guerrieri 2008; Ju, Lin, and Wang 2015). According to Ju, Lin, and Wang (2015), this idea goes back to as early as the Rybczynski Theorem, which states that the capital-intensive sector would expand when the economy becomes more capital abundant. Therefore, as the domestic capital endowment increases, output will increase in every industry that is more capital intensive. All these arguments support the critical role of domestic saving in the development of a developing country.
But why is the manufacturing sector critical for raising gross private savings?
The Permanent Income Hypothesis (Friedman 1957) and the Life-Cycle Hypothesis (Modigliani 1966) emphasize the important role of income growth for private savings and abundant empirical research have widely tested these two views.11 However, we hold the view that those studies fail to account for the effects of the economic composition. We hypothesize that a larger share of manufacturing can promote gross private savings ratio. our reasons are explained as follows.
First, in the manufacturing sector, there is a relatively high demand for capital since it requires high investment in machinery, equipment, and building materials (Rowthorn and Coutts 2004). Therefore, it provides great opportunities for capital accumulation. Second, the manufacturing industry has a more rapid technological growth rate due to its large economies of scale, which tends to increase the return on capital. Third, the manufacturing sector has a relatively low labor share, which leads to a low consumption rate and a high saving rate. A recent study by Gollin, Jedwab, and Vollrath (2016) showed that for countries that are highly dependent on resource exports, urbanization will be concentrated in those cities dominated by non-tradable
11 For example, Hall (1978), Bernanke (1984), Hall and Mishkin (1982), and many others have found that shocks to economic growth lead to changes in savings. Moreover, a large number of works, including Barro (1991), Gregorio (1992), and Barro and Sala-i-Martin (2004), prove that savings contribute a lot to higher economic growth rate in the short run.
services. Compared with cities that are more dependent on manufacturing, the saving rate is relatively lower in these “consumption cities” (i.e., cities with high consumption-to-income ratios). Last, compared with the agriculture sector, the manufacturing sector is much more spatially concentrated, which induces more rapid capital accumulation (Szirmai and Verspagen 2015).
As a consequence, we think that the emergence of the manufacturing sector tends to lead to an increase in the private savings ratio.
Manufacturing and Total Factor Productivity Growth. our second hypothesis is that manufacturing development can accelerate the pace of technological accumulation. Technological advancement, represented as TFP growth in the academic literature, is recognized as perhaps the most important factor for long-term economic growth. Considering its importance, many efforts are devoted to studying its determinants. Studies highlight the role of several important factors that promote productivity growth for developing economies, including trade openness, education, institutions, and so on (Acemoglu, Johnson, and Robinson 2005; Helpman and Grossman 1991;
Loko and Diouf 2009). For developed economies, these findings are consistent with what endogenous growth theory predicts. However, those studies again fail to account for the effects of economic structure in the developing economies. We argue that the manufacturing sector can accelerate the pace of technological accumulation during the middle-income stage for the following reasons.
First, for middle-income economies catching up with high-income economies is a process of eliminating the productivity gap. However, different industries play distinct roles in this process. Many studies (e.g., Jones and olken 2005;
Rodrik 2013) have argued that the tradable manufacturing sector is the primary channel through which a developing economy absorbs knowledge and modern science from abroad. Additionally, unconditional convergence happens in the manufacturing industry (Rodrik 2013). It means that the manufacturing sector can obtain easier access to frontier technologies, which is essential for middle-income economies to catch up rapidly with the advanced economies.
Second, economies of scale, as well as its embodied and disembodied technological progress, can contribute to TFP growth in developing economies. Many papers stress the importance of embodied technological progress (Boucekkine, de Río, and Licandro 2003; Greenwood, Hercowitz, and Krusell 1997; Greenwood and Seshadri 2005), which means new machines that incorporate the latest technological advances are more crucial to the development of developing economies. For example, Phelps (1962) proved that the composition of technical progress matters a lot for developing economies and that a larger share of embodied technological progress will help the developing economies move more quickly to the high-income group.
Another significant study consistent with our view is Greenwood, Hercowitz, and Krusell (1997), who conclude that embodied technical progress explains about 60% of the growth in labor productivity. Although several branches of services also offer exceptional opportunities for disembodied technological advances, such as learning-by-doing, the manufacturing sector allows for a faster growth rate in both embodied and disembodied technological progress (Cornwall 1976).
Third, various works have shown that the vehicle of learning and adopting technology is an investment, rather than consumption (Arrow 1962;
Boucekkine, de Río, and o. Licandro 2003; Jovanovic and Rousseau 2002;
Romer 1986). Therefore, the manufacturing sector, which calls for a higher level of capital and investment, takes on the central role of absorbing
technology, as well as creating substantial externalities of knowledge flows to other sectors. These essential characteristics make the manufacturing sector crucial for TFP growth in all middle-income economies.