Dani Rodrik discusses the end of the manufacturing escalator – and what comes next.
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Before getting into my write up, Dani wanted to highlight these open access sources as background.
- “The Past, Present, and Future of Economic Growth,” in Franklin Allen and others, Towards a Better Global Economy: Policy Implications for Citizens Worldwide in the 21st Century, Oxford University Press, Oxford and New York, 2014
- Premature Deindustrialization. Journal of Economic Growth. 2015; 21:1–33.
- “Prospects for Global Economic Convergence Under New Technologies,” in David Autor et al., An Inclusive Future? Technology, New Dynamics, and Policy Challenges, Brookings Institution, Washington, D.C., May 2022.
- “A New Growth Strategy for Developing Nations,” (with Joseph E. Stiglitz), in Dani Rodrik and Lili Yan Ing, eds., The New Global Economic Order, Routledge, London, 2025.
Dani Rodrik had been one of the most influential voices arguing that manufacturing is special. Manufacturing acted as a kind of shortcut: countries that could get workers onto the manufacturing escalator could grow rapidly without having to solve every other problem of governance, infrastructure and human capital first. It was the East Asian story, and it was, for a long time, the story Dani would tell.
Dani recently published an essay titled How I Became a Manufacturing Skeptic, and he joined me for a live episode of Ideas in Development to talk through what changed his mind, where growth might come from instead, and what an industrial policy fit for the new era should look like. Despite changing his mind of manufacturing, Dani feels the same underlying framework remains, just that it now needs to focus on services.
A shortcut that no longer exists
Dani’s framework distinguishes between two channels of growth. The first is what he calls fundamentals: human capital, governance, infrastructure, the slow business of broad-based capability building that delivers steady but unspectacular growth of around two to three per cent. The second is structural change: the rapid reallocation of labour from low- to high-productivity activities, which is how East Asian economies achieved decades of growth in the high single digits. Historically, manufacturing was the vehicle for that structural change. It was high-productivity, enabled catch up and was good for jobs.
“it’s a kind of an escalator that keeps rising, but it’s also very wide… you can put a lot of people on that escalator, because the skill requirements aren’t that demanding.”
That last property is what has eroded. Even the most successful current industrialisers, countries like Bangladesh, Vietnam, and Cambodia, are absorbing far less labour into manufacturing than their East Asian predecessors did. Beyond them, manufacturing employment in most of the world is flat or falling. Rodrik’s research on premature deindustrialisation has documented this directly: with each successive generation, developing countries are reaching peak manufacturing employment at lower shares of employment and at lower levels of per capita income. This manufacturing curve has been shifting down for half a century.
One key mechanism, in Dani’s account, is the changing nature of global value chains. Where South Korea and Taiwan exported manufactures based on the resource they had most of, low-skilled labour. But joining a modern global value chain now requires skills, infrastructure, logistics, governance and technological capability that developing countries by definition lack.
Trade in manufacturing, which was once a kind of a shortcut around weak fundamentals, no longer offers that bypass. The international reports on what countries need to do to plug into supply chains are essentially a checklist of fundamentals. The whole point of the manufacturing route was that you did not have to wait for those things.
One case that has helped to crystallise this for Dani is Ethiopia, a country that explicitly tried to replicate the East Asian model, with Chinese investors, industrial parks, and an East Asian-style industrial policy. There was some success. But the closer Dani looked, the clearer it was that it was not delivering enough employment. More on Ethiopia in a future episode, as we are joined by Mamo Mihretu to discuss Ethiopia’s ambitious, growth-oriented reforms of the past decade.
The services that are actually absorbing workers
The paradox Rodrik flags is that, even as the manufacturing route was closing, the two decades before the pandemic were a strong period for developing country growth. The driver, increasingly, was services. He points to a paper by Fan, Peters and Zilibotti on India which clarifies an often-misunderstood point: India’s service-led growth is not really about IT and business process outsourcing, which employ a tiny share of the labour force. It is about non-tradable consumer services, things like hospitality, retail, personal care, local transport, and food services. The same authors find similar patterns in Africa’s high-growth episodes.
This is the model Rodrik now thinks developing countries should be planning around. It is, he is candid, a less powerful model than manufacturing-led growth. Because these services are non-tradable.
“You can’t have a strategy where you’re sequentially… emphasizing one service after another, because they all have to be sold domestically… You have to do it all at once… that necessarily reduces… the growth ceiling. You cannot grow nearly as rapidly in a services-driven model than in a manufacturing model, because of the role of non-traded versus traded.”
But two developments make him more optimistic than he was even a couple of years ago. The first is that services productivity itself is rising. In the United States over the last two decades, productivity growth in retail, food services and wholesale has actually outpaced manufacturing, reversing a very long-term trend. One recent study finds that the marginal product of labour in services in India is higher than in manufacturing. Mobile money, digital platforms, gig-economy infrastructure and now AI are all contributing to a quiet productivity revolution in sectors that were long dismissed as technologically stagnant.
The second is that AI, in Dani’s view, looks structurally different from earlier automation. Robots in factories directly displace workers. AI, by contrast, “gives the skills and experience and training of much more trained, much more experienced, much more educated professionals” and makes those skills available to those with less training.
I guess I am more pessimistic on this second point than Dani, as we discussed in our AI series of Ideas in Development. But Dani, like myself, is particularly interested in the possibility of low-cost AI-delivered business consulting for micro-enterprises – a productivity boost aimed squarely at the bottom of the labour market rather than the top. As our Training Entrepreneur Lit identifies, this does not just need to target the micro-enterprises, as this type of consulting could help firms move from small to large as well.
Industrial policy for services, learning the correct lessons from East Asia
Dani wants to first dispel a caricature of industrial policy as top-down winner-picking enforced by a strong state. Even in East Asia, successful industrial policy was, as the sociologist Peter Evans put it, embedded – agencies engaged directly with sectors and firms, learning their constraints rather than picking from on high. This is a theme repeatedly emphasised by policymakers in our growth series. Experimental rather than directive.
“Letting the losers go rather than picking the winners.”
And subsidies were only one tool among many. Public inputs like vocational training, coordination across ministries, regulatory assistance, and technology provision, were often more important.
Translated to services, this looks concrete and local. Dani’s favourite example is a programme in the Indian state of Haryana, where the state government partners with Uber and Ola to expand local driver employment. There are no subsidies and no hard conditionality. The firms want to grow their reach, the state wants to create jobs for young people, and the cooperation is about easing the specific constraints, commercial licensing, access to jobseekers, regulatory frictions, that emerge only through dialogue. Another example, from Bogotá, organised street vendors via an app so they could coordinate purchases of supplies, sparing each vendor an early-morning trip to the wholesale market. A third, in Nigeria, used the YouWin entrepreneurship tournament to identify and back dynamic micro-entrepreneurs with finance, training and consulting.
The common thread is that the unit of analysis is small, local and often subnational.
“These services are very small, they require, sort of, you know, addressing the problems of very small scale and local, producers.”
The ministries that traditionally run industrial policy are still oriented towards trade, global value chains and large firms. Their gaze, Dani argues, needs to shift.
What this means for the jobs problem
One of Dani’s key motivations is creating good jobs. According to his own back-of-the-envelope numbers on the future of work, excluding China, roughly three-quarters of workers in developing countries are likely to be in occupations that neither engage with the world economy nor require college education.
“If we don’t have an answer to the question, how do we get those workers more productive… we don’t have an answer to development.”
In response to a question from the audience, Dani drew the comparison between manufacturing today, with its capital- and skill-intensive frontier, and natural resource sectors like oil, or copper. Dani increasingly sees manufacturing as resembling enclaves that might generate exports and tax revenues but does not absorb labour.
So while it can certainly still be worth pursuing manufacturing to benefit from the spillovers, build supply chain resilience or as a national security priority, as a strategy for lifting the majority of a country’s workforce out of low-productivity work, it no longer plays the role it once did. Therefore, the bulk of policymakers’ attention should be on the small firms, micro-enterprises and care workers that already populate the non-tradable service sector in many low- and middle-income countries.
This is a more modest vision of development than the one Dani had previously championed, which Dani makes no bones about. The ceiling is lower, the path is slower, and the policy instruments are potentially messier. But Dani remains hopeful for a new type of bottom-up approach, particularly against the alternative of waiting for an escalator that is not coming back.