The Importance of Manufacturing Sector To a Country’s Economy

The services sector accounts for a major portion of the economy in most developed countries. On the other hand, emerging market economies s are characterized by a mixture of natural resources, services and manufacturing with individual countries having varying portions of each. For example, the U.S. is world’s largest economy at about $15.0 Trillion. But much of the economy is based on the services sector. According to the CIA’s World Factbook site, the services sector accounts for about 79.6% of the economy with agriculture and industry accounting for 1.2% and 19.2% respectively. China’s economy is majority based on manufacturing and less on resource extraction. The Russian economy is heavily dependent on natural resources such as crude oil, natural gas, minerals, etc. and less on services and manufacturing.

In general, the manufacturing sector is very important for a country’s economy. This especially to emerging markets since the sector provides not only stable and well-paying jobs but also helps a country build the necessary infrastructure to help advance to the next level.  For developed economies also the manufacturing sector is important. However since most of the developed countries have switched to service-based economies,  their importance has diminished. Countries such as Germany with strong manufacturing industries have better economies than developed countries with higher reliance on the services sector. In the U.S. the service sector dominates the economy and up until a few years ago the FIRE (Finance, Insurance and Real Estate) sector accounted for a significant part of the economy. The reliance on the services sector leads the U.S. through the boom and bust cycles and generally makes the economy more volatile as we have seen in the past few years.

The following chart shows the world’s top manufacturing economies by decade:

Click to enlarge


The rise of emerging countries such as Brazil and China, India as top manufacturing economies since the 1980s is commendable. Though the UK is in this list, manufacturing accounts for just 10% of the British economy compared to over 33% for the Chinese economy. Similarly manufacturing’s share of the U.S. economy  is just 12% as shown in the chart below:


Source:  Chart of the week: how important is manufacturing to emerging markets?, beyondbrics blog, FT

Emerging countries are more dependent on manufacturing than developed countries with China topping the list among emerging markets. As I noted above, manufacturing is a large component of the German economy. It is interesting to note that all the other European countries (except the UK ) with lower manufacturing experienced severe fiscal issues during the European debt crisis.

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