Industrialization typically presented an opportunity for productivity-enhancing structural change because the manufacturing sector absorbed unskilled labor from agriculture at a substantial productivity premium (Restuccia et al. 2008, Herrendorf, Rogerson and Valentinyi 2013). This contribution of manufacturing through an inter-sectoral reallocation of resources is best reflected in the difference between productivity performance in Asia, compared to most countries in SubSaharan Africa and Latin America (McMillan, Rodrik and Verduzco-Gallo 2014).<sup>4</sup> Furthermore, the productivity of this labor in the manufacturing sector tends to converge to the frontier. Unlike cross-country evidence on aggregate labor productivity, Rodrik (2011) shows that labor productivity in (formal) manufacturing displays a clear tendency towards unconditional convergence. That is, manufacturing industries that start further away from the frontier experience faster productivity growth, regardless of policy, institutional, and geographic determinants. Duarte and Restuccia (2010) also find that high productivity growth in the manufacturing sector relative to the United States explains about 50% of the catch-up in relative aggregate productivity across countries.

Recent trends, however, show that the peak shares of manufacturing in value added and employment across a range of developing economies occurred at lower levels of per capita income compared to their high-income, early-industrializer precursors. Controlling for population size and per capita GDP in a sample of 42 economies between 1950 and 2012, Rodrik (2016) finds a lower share of manufacturing in employment and value added over time, as reflected in the coefficients of decadal time dummy variable magnitudes, which are negative and larger over time. Therefore, if industrialization is defined as an increase in the share of manufacturing in employment and value added, these results are indicative of “premature deindustrialization” (Dasgupta and Singh 2007). This suggests that countries are running out of industrialization opportunities sooner than did the early industrializers.

Considering these facts, the objective of the paper is two-fold. First, to what extent does it reflect a statistical artifice whereby what was earlier subsumed in manufacturing value added is now accounted for as service sector contributions to GDP? Second, to the extent that the premature declining share of the manufacturing sector and the increasing share of the services sector is not notional but real, does this matter for development opportunities? The latter has two dimensions. For one, is manufacturing special given the increasing contribution of the services sector to productivity growth? Furthermore, can the services sector can provide growth opportunities in the absence of a manufacturing core?

The paper uses different methodologies and databases to address these questions, which are described in greater detail across each section. First, a growth accounting exercise, based on inputoutput tables for China, India, Brazil, Mexico and the Russian Federation, decomposes services value added growth between 2000 and 2014 to analyze the importance of contracting out of manufacturing to services as an explanation for the latter’s growth. Second, manufacturing and services industries are disaggregated along a set of characteristics that are indicative of international trade, innovation, learning-by-doing and factor use – based on firm-level data for Brazil, China, the Arab Republic of Egypt, India, Nigeria, and Russia – to analyze the potential of the services sector as an alternative source of productivity gains and job creation. For each chosen

> 4 After 2000, structural change contributed positively to Africa's overall productivity growth, accounting for about 40 percent of the total, on average, across the 19 countries in the sample.

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