Asia’s growth needs local innovation

China and India have followed distinct economic strategies over the past decade. One focused on manufacturing, the other on services. Neither approach provides an easy model for other developing nations to copy.

The manufacturing trap

China began the 2010s as the world’s dominant manufacturing hub. Factories contributed 32% of its GDP—more than twice the share seen in advanced European economies. Services represented just 44%, an unusually low portion for a country at its income level.

Beijing’s “Made in China 2025” initiative invested heavily in key industries to maintain that dominance. The strategy succeeded in keeping manufacturing’s GDP share near 29%. However, automation disrupted the connection between industrial growth and employment. Most displaced factory workers transitioned into service jobs, which now employ nearly half the workforce. Many of these positions are in low-productivity retail, hospitality, and personal services rather than the high-value sectors China targeted.

Productivity improvements have been uneven. Gains have centered in capital-heavy areas like water transport and telecommunications, where value added per worker has tripled or more. This has created a widening gap: fewer workers in high-productivity industries while the majority remain in sectors offering little room for advancement.

The services illusion

India pursued a different direction. By 2012, services already generated half its GDP, driven by a thriving IT and software export sector. Manufacturing contributed just 18% and was declining. Meanwhile, half the workforce still worked in low-productivity agriculture, with poor infrastructure and stalled reforms limiting progress.

Prime Minister Narendra Modi introduced the “Make in India” campaign in 2014 to boost manufacturing through subsidies and incentives. By 2020, the government offered $26 billion in production-linked payments across 14 sectors. The effort had little impact. Manufacturing’s GDP share fell to 16% by 2022, and nearly half of Indian workers remained in agriculture.

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The IT sector, often seen as India’s success story, reveals a more complex reality. Value added per worker in computer programming and information services roughly tripled over the decade. The industry’s integration into global value chains grew fivefold. Yet the benefits largely went to capital rather than labor. Workers’ share of total value added in the sector dropped from 26% in 2012 to just 11% in 2022.

India’s knowledge economy, despite its expansion, functions more like an isolated enclave. It produces strong exports but few benefits for the wider domestic economy. Outside of IT, the services sector shows a clear divide: areas that can absorb large numbers of workers offer little productivity potential, while high-productivity fields like finance or telecommunications remain too small to employ workers at scale.

No easy blueprints

China’s manufacturing-driven growth depended on moving hundreds of millions of workers from farms to factories. That opportunity is shrinking. Robotics and artificial intelligence are reducing the need for labor-intensive production that once powered China’s rise. India’s services-led growth, meanwhile, relied on unique advantages—English-language education, diaspora networks, and early dominance in software—that most countries cannot match.

The issue isn’t that manufacturing or services are ineffective. The problem lies in assuming either model works without targeted policies to address market failures. Skills, infrastructure, and institutions must align for success. China’s error wasn’t prioritizing manufacturing but expecting output growth to automatically create better jobs. India’s wasn’t betting on services but failing to distribute those gains beyond a small group. Both cases demonstrate that growth strategies require local solutions, not borrowed templates.

For developing nations today, the real question is whether they can build the institutions to make either approach viable—or risk ending up with neither.

Recent shifts in coconut export markets highlight similar challenges in balancing productivity gains with broad-based employment.