Asian Development Bank working paper Asia’s Structural Transformation: Patterns, Challenges, and New Stylized Facts examines how Asian economies are shifting from agriculture to manufacturing and services, and identifies emerging risks in this transition.
Manufacturing has historically been the main driver of productivity growth in the region. However, the study warns of premature deindustrialization, where economies begin to lose manufacturing share at much lower income levels than earlier industrialisers. While East Asia has sustained manufacturing through export-led growth, South and Southeast Asia are experiencing more uneven transitions.
The report introduces new empirical findings on how this process is unfolding. It identifies a U-shaped relationship between manufacturing productivity and employment. In early stages, technological change reduces labour demand. As industries scale and mature, employment stabilises or recovers.
The study also finds that financial sector development, while helping labour move out of agriculture, can accelerate the decline of manufacturing employment if not supported by targeted industrial policy. Public investment and partnerships, however, have enabled labour shifts without weakening services.
Overall, the findings suggest that sustaining growth now requires balancing productivity gains with employment outcomes, rather than relying on manufacturing expansion alone.
Key Findings
Productivity vs Jobs: Manufacturing raises productivity but does not automatically increase employment.
U-Shaped Employment Curve: Jobs fall during early automation and recover only as industries mature.
Financial Sector Effect: Financial development accelerates structural transition but can weaken manufacturing employment.
Labour Regulation Impact: Employment protection supports job growth in both services and industry in emerging economies.
Public Investment Role: PPPs help shift labour out of agriculture without crowding out services.
Industrial Policy Shift: Growth now depends on GVC integration, skills, and technology adoption rather than subsidies.
India: A Services-Led Transition with Structural Gaps
The ADB paper highlights India as a distinct case of structural transformation that differs from the traditional "East Asian Model".
Services-Led Growth: India has successfully skipped a heavy manufacturing phase, leveraging ICT services to drive 70% of its total service exports.
The "PD" Challenge: India is cited as an example of an economy experiencing premature deindustrialization, with manufacturing shares declining at lower income levels than historical norms.
Labor Transition Mismatch: While India has seen a massive exit from agricultural labor, workers often end up in low-return urban informal jobs rather than high-productivity manufacturing.
ICT and GVCs: India is deeply integrated into Global Value Chains through its tech sector, though this sector struggles to absorb the vast numbers of unskilled workers leaving the rural economy.
Labor Laws: India maintains moderate-to-high employment protection (EPL), which the study notes has supported its pronounced expansion in services.
Policy Evolution: The transition from the "License Raj" (pre-1991) to liberalisation helped the IT boom, but infrastructure and skill gaps remain bottlenecks for the "Make in India" manufacturing goals.
What is "Premature Deindustrialization" (PD)?
Premature Deindustrialization occurs when a developing country's manufacturing sector begins to shrink (in terms of jobs and GDP share) before the country has become wealthy. In the past, countries like Japan or the US became "rich" before their factories started closing.
Today, many Asian nations are seeing their "industrial peak" arrive much earlier and at lower income levels. For policymakers, this is a major concern because manufacturing has traditionally been the best way to provide high-productivity jobs for unskilled workers moving away from farms.
Policy Relevance
Fixes the "Missing Middle": For India, the research suggests that services alone cannot absorb unskilled labor; a balanced push for manufacturing is needed to avoid a permanent informal-sector trap.
Guides Infrastructure Spending: Asia’s unique success with public-private partnerships (PPPs) means India should continue using these to transition farm labor into more productive urban work.
Informs Labor Reform: The finding that employment protection (EPL) supports service jobs suggests that labor reforms should focus on flexibility for manufacturing without stripping protections that help the service sector thrive.
Reorients Industrial Policy: The shift toward a U-shaped employment curve implies that traditional manufacturing expansion is insufficient. Policy must focus on global value chain integration, skills, and technology adoption to ensure manufacturing remains employment-relevant.
Follow the Full Analysis Here: ADB: Asia’s Structural Transformation