Disentangling services in developing regions: A test of Kaldor's first and second laws

Abstract

The paper analyses the contribution of services vis-à-vis manufacturing as a driving force of economic growth in developing regions. In doing so, we test Kaldor´s first and second growth laws for different service categories, providing a comparative view across Asia, Latin America, and Africa. The work focuses attention on the importance of sector-level disaggregation in exploring the relationship between productivity and economic growth. Hence, it accounts for services sector heterogeneity to help to disentangle those specific branches that may fuel economic growth in the different regions. Panel data estimations are performed for a sample of 32 countries during 1970–2010. Our findings support the key role of manufacturing for growth. However, they also emphasise how market services (particularly, business service activities) may also enhance productivity and output growth ‘à la Kaldor’. The research supports recent claims for modernising industrial policy in a way that promotes but is not limited to manufacturing.