S7 Ep57: Skipping the factory

Name a rich country that did not move its farm workers into factories, because Michael Peters says it would be hard to find one. Many years ago, Europe and the US took that road, then Japan and Korea, then China and Vietnam. But when workers in India, Kenya and Ethiopia leave the land, far fewer of them reach a factory. They are more likely to work in shops and restaurants, or sell from a street stall.Many of these countries, Peters argues, never industrialised in the first place, so there are fewer factories to go to. If services themselves become more productive, perhaps a country can grow without them. But hw do you measure the productivity of services?Peters presented the research at STEG's sixth Annual Conference in Nairobi in January 2026. He tells Tim Phillips why a better supermarket in Delhi does little for a rural family, whether a street vendor has a good job or a disguised form of unemployment, and what AI means for countries that hope to export services.The research behind this episodePeters, Michael, Youdan Zhang, and Fabrizio Zilibotti. 2026. "Skipping the Factory: Service-Led Growth and Structural Transformation in the Developing World." NBER Working Paper 34692, prepared for the Handbook of Development Economics. The authors summarise the research in a VoxEU column, "Skipping the factory: Service-led growth in sub-Saharan Africa."To cite this episodePhillips, Tim, and Michael Peters. 2026. "Skipping the factory." Conversations on Transformation (podcast).About the guestMichael Peters is Associate Professor of Economics and Associate Chair of the Department of Economics at Yale University. He is a Research Associate of the National Bureau of Economic Research and a Research Fellow of the Centre for Economic Policy Research. He holds a PhD from MIT, and taught at the London School of Economics before he joined Yale. His research spans economic growth, firm dynamics, the long-run effects of migration, and structural change, with a focus on inequality between people and places.Research cited in this episodeThe canonical model of structural change describes development in stages. Agriculture sheds workers, manufacturing grows, and services then overtake manufacturing, so that manufacturing's share of jobs rises and falls in a hump. Peters says this fits the US and Europe in the 19th and early 20th centuries, Japan and Korea after the Second World War, and more recently China and Vietnam. The countries in his paper look different. In 16 fast-growing East and West African economies that do not depend on oil, agriculture's share of employment fell by an average of 18 percentage points between 2000 and 2019. Services took 15 of those points and industry took 3.The agricultural productivity gap is one reason why moving workers off the land can raise output. W. Arthur Lewis described an economy split between a subsistence sector and a modern sector in "Economic Development with Unlimited Supplies of Labour" (The Manchester School, 1954), and shared the 1979 Nobel Prize in economics. Douglas Gollin, David Lagakos and Michael Waugh measured the gap in "The Agricultural Productivity Gap" (Quarterly Journal of Economics, 2014). In national accounts, value added per worker outside agriculture is about three times the level inside it. A large gap remains after they adjust for hours worked and human capital.Innovation in manufacturing is the second link that Peters draws between factories and growth. The 2025 Nobel Prize in economics went to Joel Mokyr, Philippe Aghion and Peter Howitt for explaining innovation-driven growth. If innovation matters most in manufacturing, Peters argues, a large manufacturing sector gives firms the right incentives to invent and adopt new technology.Premature deindustrialisation describes countries that lose manufacturing jobs and output at much lower incomes than the early industrialisers did. Dani Rodrik documented the trend in "Premature Deindustrialization" (Journal of Economic Growth, 2016). Rodrik notes that the term seems to have first appeared in a <a href="https://wider.unu.edu/publication/manufacturing-services-and-premature-deindustrialization-developing-coun