For some emerging economies, large energy deposits can provide a fast boost to growth. But to move up towards middle income status or beyond, manufacturing has almost always been a necessary step for EMs to build a modern economy.

So what is the picture of the world’s top manufacturers? Who is the biggest, and which EMs have made the biggest strides?

According to a recent report by consultants McKinsey, manufacturing raises incomes and provides the machinery, tools, and materials to build modern infrastructure and housing.

McKinsey notes that “Even India, which has leapfrogged into the global services trade with its information technology and business process outsourcing industries, continues to build up its manufacturing sector to raise living standards — aiming to raise the share of manufacturing in its economy from 16 per cent today to 25 per cent by 2022.”

As the chart below shows, the world’s biggest EMs (with a red background) are moving up the ranking of the world’s biggest manufacturers, with China, Brazil, India and South Korea all improving decade on decade.

Russia and Indonesia appear only in the 2010 ranking, but what is surprising is the resilience of manufacturing in developed economies such as Spain and Canada, holding off the rise of Taiwan and Turkey to stay in the top 15.

Within the top 15, the proportion of the economy that is manufacturing varies to a large degree, with China being over 33 per cent, to the UK where it is just 10 per cent.

And it is this chart (below) that shows the greater EM dependency on manufacturing, with emerging markets (in red) towards the top of the chart: China, South Korea and Indonesia have a quarter to a third of GDP based in manufacturing. The world’s biggest manufacturer, the US, has a more modest 12 per cent.

Given that advanced economies have made the transition to services much earlier, you might expect to see several of the world’s big economies with manufacturing as a smaller part of GDP.

But what is interesting is that although manufacturing is important to EMs for growth, for many it is already shrinking as a share of GDP. McKinsey’s chart below shows that only for low-income countries (with Gross National Income per Capita below $1,005 per year) is manufacturing as a share of GDP rising. For middle income countries, it’s already on the slide.

Of course, the nature of manufacturing itself can change, with new innovations and automation. The decline in manufacturing in some countries as a proportion of GDP masks the even faster decline in manufacturing jobs, with even South Korea losing over one in ten manufacturing jobs from 2000 to 2009, according to McKinsey.

The decline in manufacturing as a share of GDP in middle-income countries is due to the more rapid expansion of services is underway, even though incomes are still far below that of the advanced economies – McKinsey suggest this is partly due to the decline in prices of durable goods – manufacturing productivity gains are passed on to consumers in the form of lower prices.

But another explanation is that the spill-over effect of more sophisticated manufacturing is already taking place in emerging markets. The manufacturing / services divide is blurring as manufacturing involves more service-like activity (including everything from maintenance to software management), and vice versa. Manufacturing requires greater service inputs than in the past, in terms of IT, logistics and finance.

EMs are not immune to this – in fact, McKinsey note that what they term the “intermediate demand” for services from manufacturing is far greater driver of output in China than it is in the US. China’s manufacturers created demand for $500bn in services, while its service companies created demand for $600bn in manufactured goods inputs. This is out of $2.6tn in gross output in services, and $3.4tn in manufacturing. The equivalent figures for the US are higher in absolute terms, but much lower for services as a proportion of output.

(The figures are: Services gross output: $20.2tn, intermediate demand from manufacturing: $900bn. Manufacturing gross output: $4.8tn, intermediate demand from services: $1.4tn. See p42 of McKinsey report).

In which case, if China is any example, we are seeing not just an early switch to services in EMs, but a much closer relationship between manufacturing and services than in developed economies.

Related reading:
What really powers innovation: high wages, FT
Levelling out: emerging markets and the New Industrial Revolution, beyondbrics

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