Determinants of Industrial Development

Global evidence suggests that, for many countries, manufacturing typically has an inverted U-shaped relationship with development. But unlike the historical experience of most developed countries, for most developing countries the turning point of this relationship is occurring sooner in the development process, and at substantially lower levels of income. This is termed ‘premature deindustrialization’. The consequences of this may be particularly important if such countries can no longer rely on manufacturing-led development. Why are some countries more industrialized, or more deindustrialized, than other comparable countries? To explore these issues, this chapter uses panel-data econometric techniques to analyse the determinants of the share of manufacturing in GDP, across countries and across time. Domestic determinants include investment, government consumption, population size, human capital, democracy, and natural resource endowments. External determinants include trade openness, capital account liberalization, and exchange rate depreciation.