I argued in chapter 6 that a key policy to achieve full employment is to spend on investment to increase the investment-to-output ratio. This has been the basis for the policy of industrialization followed by a number of successful East and Southeast Asian economies, including the People's Republic of China (PRC). The result is that the expansion of the manufacturing sector has been the catalytic force underlying the economic transformation that East and Southeast Asia has undergone during the last three decades. As the Asian Development Bank (ADB 2007b), Felipe and Estrada (2008), and Felipe et al. (2007) document, the newly industrialized economies (NIEs), Malaysia, Thailand, Indonesia, and the PRC, have seen their economies transform in the direction of industrialization. And the structures of output and exports have changed in the direction of a higher sophistication, e.g., larger shares of electrical machinery and transport equipment. In this chapter, I provide an in-depth empirical analysis of the transformation of developing Asia's manufacturing sector. Box 9.1 presents the empirical regularities that recent research on the patterns of economic growth has highlighted. These regularities highlight the importance of the manufacturing sector. This has been well known since the work of the British economist Nicholas Kaldor in the 1960s labeled “Kaldor's Laws” (Box 9.2).

Figure 9.1 shows the scatter plot of the annual growth rate of output vis-à-vis the absolute change in the share of manufacturing in total output for the 1970s through 2000–2004. The figure documents the positive correlation between both variables. Among the countries in the first quadrant with the highest increases in the manufacturing share and in the output growth rate are Cambodia, Indonesia, the Republic of Korea, Lao People’s Democratic Republic (Lao PDR), Malaysia, and Thailand. ADB (2007b) provides evidence that growth accelerations are associated with increases in the manufacturing sector.