The differential role of manufacturing and non-manufacturing TFP growth in economic growth

Abstract

Applying the methods of growth accounting decomposition and econometric regressions to a sample of developed economies over the period of 1970–2011, this study examines the differential role of manufacturing TFP growth and non-manufacturing TFP growth in the long-run economic growth by affecting aggregate TFP growth and by influencing capital and labour input growth. The results show that manufacturing TFP growth contributes to economic growth directly but also through the contributions of capital input growth and labour input growth indirectly. In contrast, such direct and indirect effects are not observed for non-manufacturing TFP growth. The findings suggest that despite the declining share of manufacturing in GDP, maintaining the growth of manufacturing TFP is critical for economic growth. The study provides a useful explanation of why many developed economies have started to engage in ‘reindustrialization’ strategy after the global financial crisis in 2008 and carries important policy implications.