New Delhi: September 15, 2015

India is taken up as a case study for addressing this question due to the poor performance of manufacturing in India and the relatively strong performance of services ? which in some ways mirrors the performance of many Sub-Saharan African countries (Ghani and O?Connell, 2014). Lee Kuan Yew was clearly on to something when he challenged the Indian model of development.Historically, there have been three modes of escape from under-development: geology, geography, and ?jeans? (code for low-skilled manufacturing). In recent years West Asia, Botswana and Chile, and further back in time Australia and Canada, exploited their natural resources endowed by geology to improve their standards of living. Some of the island successes (Barbados, Mauritius, and others in the Caribbean) have exploited their geography by developing tourism to achieve high rates of growth.In the early stages of their success, East Asian countries (China, Thailand, Indonesia, Malaysia etc) relied on relatively low-skilled manufacturing, typically textiles and clothing, to motor economic growth. Later on they diversified into more sophisticated manufacturing but ?jeans? offered the vehicle for prosperity early on. No country has escaped from underdevelopment using relatively skill-intensive activities as the launching pad for sustained growth as India seems to be attempting.

Put differently, India seems to have defied its ?natural? comparative advantage, which probably lay in the ?jeans? mode of escape because of its abundant unskilled and low-skilled labor. Instead, it found or created?thanks to historical policy choices and technological accidents?such advantage in relatively skilled activities such as information technologies and business process outsourcing (Kochhar et. al., 2007).

The Indian experience, still a work-in-progress, raises the question of whether structural transformation necessarily requires manufacturing to be the engine of growth. But before we compare manufacturing with alternative sectors in terms of their potential for structural transformation, it is worth elaborating on the desirable attributes of such sectors.

In fact, building upon the Rodrik (2013) framework, it is argued that there are following attributes that allow a sector to serve as an engine of structural transformation and thereby lead an economy to rapid, sustained and inclusive growth:

1. High level of productivity: As described above, economic development is about moving from low productivity to high productivity activities.

2. Unconditional Convergence (i.e. faster productivity growth in lower productivity areas): This too has been discussed earlier. Recall that convergence ensures that the relevant sector acts as an ?escalator? which automatically leads to higher levels of sectoral and economy-wide productivity. In fact one can distinguish between two types of unconditional convergence:

A. Domestic convergence: In large countries such as India, China, Brazil, and Indonesia, one would ideally like to see convergence within a country. That is, productivity growth should be faster in richer than poorer parts. Otherwise severe within-country regional inequality may arise.

B. International convergence: whereby less-productive economic units (firms, sectors or entire economies) in all countries catch-up with units at the international frontier (i.e. those in the most productive countries).