Neither Manufacturing Nor Services Can Guarantee Rapid Growth Alone

Two Paths, Two Disappointments

For decades, policymakers in developing Asia have debated a fundamental question: should countries prioritize manufacturing or bet on services? China and India, the region's two demographic giants, have spent the past decade testing opposite answers at scale. The results are now in, and they complicate the narrative that either Beijing or New Delhi has cracked the code.

China doubled down on factories. Through the Made in China 2025 program, launched in 2015, the government poured hundreds of billions of dollars into ten strategic industries, aiming to keep manufacturing at roughly 30 percent of GDP while climbing the value ladder. India chose the opposite route. With manufacturing stagnant at 18 percent of GDP and shrinking, New Delhi leaned into its competitive advantage in IT and software exports, allowing services to generate half of national output. Starting in 2014, the Make in India campaign tried to reverse the factory decline, followed by $26 billion in production-linked incentives across 14 sectors from 2020.

A side-by-side look at OECD Trade in Value-Added data from 2012 to 2022 reveals that neither approach delivered the balanced, broad-based prosperity that development economics textbooks promise. Each contains structural weaknesses that other countries must anticipate rather than ignore.

China's Factory Output Stayed High, But Jobs Moved Elsewhere

China succeeded in one narrow sense: manufacturing's share of GDP held at roughly 29 percent by the end of the decade, nearly double the benchmark seen in advanced European economies. Yet automation severed the traditional link between industrial output and employment. Factories kept humming, but they needed fewer people to do so.

Displaced workers moved overwhelmingly into services, which grew from 44 percent of GDP in 2012 to around 50 percent by 2022. Services employment climbed to roughly 48 percent of the workforce. The problem is that most of these new jobs landed in low-productivity segments: retail, hospitality, personal services. Knowledge-intensive activities, the kind that generate high wages and spillovers, absorbed only a fraction of the labor shifting out of factories.

This mismatch creates a policy headache. Beijing can point to advanced manufacturing capacity in electric vehicles, semiconductors, and renewable energy equipment. But the employment payoff is muted. The workers who used to assemble electronics or stitch garments are now driving delivery scooters or waiting tables, occupations with lower productivity and weaker wage growth. The manufacturing-first model, in its contemporary form, no longer guarantees mass upward mobility.

India's Services Bet Left Manufacturing Stranded

India entered the decade with services already generating half of GDP, thanks to globally competitive IT and software exports. Manufacturing languished at 18 percent and continued to shrink. Half the workforce remained in low-productivity agriculture, a symptom of the economy's failure to create enough factory jobs to pull labor out of the fields.

The Make in India campaign and subsequent production-linked incentives aimed to reverse this imbalance. A decade later, the needle has barely moved. Public infrastructure remains underfunded relative to the scale of the challenge. Regulatory reforms remain contested, slowing the pace at which land, labor, and capital can be reallocated. The result is an economy that excels in a narrow band of high-skill services but struggles to generate the volume of middle-skill jobs that manufacturing typically provides.

Without a robust factory base, India faces a dual trap. Agriculture cannot absorb more labor productively, and services cannot absorb it fast enough. The economy grows, but employment growth lags, leaving millions in low-wage informal work. The services-led model, as practiced, has not solved the jobs puzzle.

What This Means for the Rest of Asia

The implications extend beyond Beijing and New Delhi. Across Southeast Asia, South Asia, and frontier markets in Central Asia, governments are drafting industrial strategies and debating whether to prioritize factories or leapfrog into services. The past decade suggests that neither path is a plug-and-play solution.

Manufacturing still matters, but automation has changed the equation. Countries cannot assume that building factories will automatically create mass employment. The labor intensity of manufacturing has declined, and the skill requirements have risen. Governments need complementary policies: technical education, active labor market programs, and investments in sectors that can absorb workers displaced by automation.

Services can drive growth, but not all services are created equal. Low-productivity retail and hospitality generate jobs but not prosperity. High-productivity knowledge work generates prosperity but not enough jobs. The challenge is to build the infrastructure, education systems, and regulatory environments that allow services to scale across the productivity spectrum.

China's experience shows that sustaining a high manufacturing share is possible but insufficient if the employment dividend disappears. India's experience shows that services can lead growth but cannot single-handedly solve the employment challenge in a country with a large agricultural base and weak factory sector.

The Fragmentation Factor

The global economy is fragmenting. Supply chains are shortening, trade is regionalizing, and industrial policy is back in fashion across advanced economies. This environment raises the stakes for getting the growth model right. Countries that bet heavily on export-led manufacturing may find that foreign markets are less open than they were a decade ago. Countries that bet on services may find that digital trade faces new barriers as data localization and cybersecurity concerns proliferate.

The lesson from China and India is not that one model is superior, but that both are incomplete. A viable development path in a fragmented world requires diversification: building manufacturing capacity while investing in high-productivity services, upgrading infrastructure while reforming institutions, and preparing workers for the reality that the old employment escalators no longer move as smoothly as they once did.

No Template, Only Trade-Offs

Policymakers in developing Asia face a choice, but it is not a binary one. The question is not whether to pursue manufacturing or services, but how to sequence investments, manage trade-offs, and adapt as technology and geopolitics reshape the global economy.

China and India have shown what is possible at the extremes. They have also shown the limits. The next wave of Asian growth will depend on whether governments can learn from both experiments and build hybrid models that generate output, create jobs, and distribute the gains broadly. The past decade suggests that no single path guarantees success. The challenge is to navigate the trade-offs with eyes open, rather than assuming that either factories or services alone will deliver prosperity.