characteristic, an industry is classified as “high,” “medium,” or “low”’ based on its position in the distribution, which is derived from the aggregation of firm-level data within and across countries. Third, the role of intermediate and final demand in explaining services value added growth is assessed through a growth decomposition exercise, based on input-output tables for China and India, to shed light on the extent to which services can develop without a manufacturing core.

Three main findings emerge from our analysis. First, the contribution of increased ‘contracting out’ from the manufacturing sector to the services sector to annual services value-added growth between 2000 and 2014 did not exceed 10 percent. Second, to the extent that premature deindustrialization is therefore not notional but real, it might matter less than before because firms in ICT services, for example, are not very different from those manufacturing electronics across a range of international trade, learning-by-doing and innovation characteristics. Yet, a given service subsector is unlikely to provide opportunities for productivity growth and job creation for unskilled people simultaneously. ICT and telecommunication services, on the one hand, and hotels and restaurants and construction, on the other hand, typify this dichotomy. Wholesale and retail trade is an exception – neither skill-intensive, nor less amenable to the potential productivity benefits associated with international trade, foreign technology, and on-the-job learning programs. Third, among these productivity-enhancing services, the growth of ICT and other professional, scientific and technical services can be driven by final demand or by intermediate demand which derives from sectors beyond manufacturing. In contrast, the growth of wholesale and retail trade, in contrast, might be more dependent on a manufacturing core.

The remainder of the paper is as follows. Section 2 analyzes the importance of contracting out of manufacturing to services as an explanation for the latter’s growth. Section 3 compares the manufacturing and services subsectors along a set of characteristics that matter for productivity growth and job creation. Section 4 analyzes the role of intermediate and final demand in explaining services value added growth. Section 5 concludes.

# **2. Is Premature Deindustrialization Notional or Real?**

Premature deindustrialization may be attributable, at least in part, to the fact that activities that were earlier classified as “manufacturing” are now “services.” This refers to a statistical artifice whereby what was earlier subsumed in manufacturing value added is now accounted for as service sector contributions to GDP. Owing to a larger scale and the application of new technologies which has increased the complexity of production, firms in the manufacturing sector may find it more profitable to “contract out” service activities to specialist providers than to produce them in-house – a process that Bhagwati (1984) refers to as “splintering”. For instance, firms in the industrial sector may make greater use of specialist subcontractors to provide legal, accounting, and R&D services that the firms had previously provided themselves.

# <u>Methodology</u>

The flow of intermediate inputs from the services sector to the manufacturing sector is the product of the input-output coefficient (the flow of intermediate transactions from the services sector 4