By Ejaz Ghani, Economic Advisor at the World Bank

Mention China and India to economists and their first thought will be rapid growth. Their second thought might be how differently the two economies are achieving this: China through manufacturing, India through services. This column asks whether that stereotype may be changing.

Both China and India have attracted global attention for rapid growth, but their growth patterns are very different (Rajan 2006, Pack 2008, Bosworth and Maertens 2010). China took the conventional route of manufacturing-led growth and is recognised as a global leader in manufactured exports. India followed the unconventional route of service-led growth and has acquired a global reputation for service exports. Are their growth patterns converging? Is China catching up in services? Is India catching up in manufacturing? Or has hysteresis kept their growth patterns different?

Growth

China's Tenth Five Year Plan (2001-2005) called for greater efforts to develop the service sector. India's Tenth Five Year Plan (2003-2007) emphasised the importance of doubling the growth rate in the manufacturing sector. Policymakers in both countries have taken proactive measures to develop their underdeveloped sectors.

In the post-crisis global economy, countries have started to rebalance their growth strategies, to reduce export fetish and to reduce global imbalances. For China, this has meant developing the service sector, and for India, developing its manufacturing sector.

We examine whether India remains an outlier in services, and China in manufacturing, by regressing the relative share of service and manufacturing sectors in GDP on the level of per capita income, after controlling for non-linearities in development and country size. There is no evidence of growth convergence.

In 1991, India's share of service sector in GDP was five percentage points above the global norm, controlling for other factors (Table 1). China's share was six percentage points below the global norm. By 2005, India had become a slightly larger positive outlier compared to the global norm, while China had become an even larger negative outlier - China's relative share of services was nearly eight percentage points below the global norm. So services have continued to be a more important sector for India, and less important for China, controlling for other things.

What about the manufacturing sector? In 1991, China was a large positive outlier in manufacturing ? its manufacturing share in GDP was 18 percentage points above the global norm. India's share was three percentage points above the global norm. In 2005, China's share of manufacturing in GDP was 19 percentage points above the global norm. India's relative share of manufacturing had not changed much.

Productivity

The competiveness of a sector may be associated with its size. A large sector may enable many more firms to take advantage of scale economies, knowledge spillovers, and better risk management. These, in turn, can increase productivity and make more firms competitive globally.

Is the service sector more productive in India than in China, and the manufacturing sector more productive in China compared to India? Figure 1 compares service labour productivity and industry labour productivity for a large sample of countries, after controlling for initial GDP per capita and GDP growth. India is way above the line. It shows much higher labour productivity in the service sector compared to industry. On the other hand, China shows much higher labour productivity in industry compared to services.

There are two tipping points that are driving higher service labour?productivity growth rates. First,