Letter IEDI n. 1065—Industry as an engine of growth
This Letter IEDI presents empirical evidence on the importance of the industry for economic growth, based on the paper “Manufacturing, economic growth, and real exchange rate: empirical evidence in panel data and input-output multipliers”, authored by economists Luciano F Gabriel (UFV), Luiz Carlos Ribeiro (UFS), Frederico Jayme Jr (UFMG) and José Oreiro (UnB), published in 2020 in the PSL Quarterly Review.
Based on two instruments—a panel data econometric model and an input-output model—the authors find important effects of manufacturing and a competitive real exchange rate on the growth of per capita real income, that is, on the enrichment of countries.
One of the interesting aspects of this study is that it makes international comparisons drawing on a wide sample of countries, both developed and developing, over two decades, from 1990 to 2011.
The authors reach three main conclusions, summarized below.
Firstly, the manufacturing industry is seen as the most important tradable goods sector for achieving higher growth of per capita real income in developing countries, that is, it is the main lever of enrichment in these countries, according to the study's evidence.
Second, the authors show that the greater the distance of a country from the world technological frontier, the greater the positive effect of a competitive real exchange rate on the growth rate of per capita real income.
This occurs because a competitive exchange rate tends to compensate for the low international competitiveness derived from factors such as low innovation and little product differentiation, etc., enabling the expansion of exports and the conquest of other markets, thus accelerating the growth of domestic per capita income.
A third important result of the study concerns the manufacturing industry's multipliers. Whether developed or developing, a country with a strong industry tends to grow more: the multiplier effect of manufacturing production on the total economy is generally greater than the other sectors'.
On average for developing countries in 2010, the authors calculate that for every US$ 1 increase in final manufacturing demand, total economic output expanded by US$ 1.90. In the case of Brazil, this multiplier is 2.03, less than that of China (2.8), but equivalent to India's (2.04).
Were it not for the Brazilian carelessness with its industry, we could have an even higher multiplier. The study's estimates show that, between 2000 and 2010, Chinese manufacturing increased its capacity to generate economic dynamism from 2.47 to 2.8, while in Brazil the multiplier progressed to 2.11 in 2005, but returned to the level of 2.03 in 2010, the same as in 2000.
For comparison, the authors present this multiplier for other sectors of the economy. In Brazil, in 2010, it was 1.61 in agriculture and 1.5 in services. On average in developing countries these figures were 1.59 and 1.54, respectively. Inferior, therefore, to manufacturing multipliers.
The study also calculated multipliers on employment. That is, how many new jobs are created directly and indirectly by a $1 million increase in final demand from each sector of the economy. It should be noted that job multipliers show only the quantitative impact, indicating nothing about the quality of the jobs generated.
In this case, according to the calculations presented in the paper, there are not very large differences between the job multipliers registered in manufacturing and in construction, trade and services, neither in the set of developed countries, nor in developing countries. One possible explanation for this: although the latter are more labor intensive, the industry, by presenting a greater capacity to boost production in the total economy, indirectly leverages employment.
In Brazil it is estimated that for every US$ 1 million in manufacturing, 42 new jobs were created in 2010. In China there were 95 additional posts and in India 200. In developed countries as a whole, due to the greater degree of automation and digitalization, only 12 new jobs were computed, according to the study.
All of this evidence reinforces the need to foster a strong and integrated industrial base in developing economies, in order to promote faster economic growth, approaching advanced countries in terms of per capita income (catching up).
For the authors, in this scenario countries like Brazil—which are going through an acute process of early industrial regression in relation to other international experiences, presenting a loss of relative participation of their industry in total GDP before reaching a high level of per capita income—tend to face greater difficulties in sustaining their economic growth.