For more than half a century, the playbook for how developing countries can get rich hasn’t changed much: Move surviving farmers into jobs in industry, then sell what they produce to the rest of the world.
The recipe — adapted in various ways by Hong Kong, Singapore, South Korea, Taiwan and China — has produced the most powerful engine the world has ever known for generating economic growth. It has helped lift hundreds of millions of people out of poverty, create jobs and improve living standards.
The Asian Tigers and China succeeded by combining vast pools of cheap labor with access to international know-how and finance, and buyers who reached from Kalamazoo to Kuala Lumpur. Governments provided the scaffolding: They built roads and schools, offered business-friendly rules and incentives, developed competent administrative institutions, and started industries.
But technology is advancing, supply chains are changing and political tensions are reshaping trade patterns. And with that, doubts are growing about whether industrialization can still deliver the miraculous growth it once did. For developing countries, which contain 85 percent of the earth’s population — 6.8 billion people — the implications are profound.
Today, manufacturing accounts for a smaller share of global output, and China already does more than a third of that. At the same time, more emerging countries are selling cheap products abroad, increasing competition. There aren’t that many profits to be split: Not everyone can be a net exporter or offer the lowest wages and overheads in the world.
There are doubts that industrialization can produce the game-changing benefits it has in the past. Factories today tend to rely more on automated technology and less on cheap workers with little training.
“You can’t create enough jobs for the vast majority of workers who are not highly educated,” said Dani Rodrik, a leading development economist at Harvard.
The process can be seen in Bangladesh, which the World Bank’s managing director called “one of the world’s greatest growth stories” last year. The country built its success by turning farmers into textile workers.
Last year, however, Rubana Huq, president of the Mohammadi Group, a family-owned conglomerate, replaced 3,000 employees with automated jacquard machines to make complex weaving designs.
Women found similar jobs elsewhere in the company. “But what comes next when this happens on a large scale?” asked Ms Huq, who is also president of the Bangladesh Garment Manufacturers and Exporters Association.
These workers have no training, he said. “They’re not going to become coders overnight.”
Recent global developments have accelerated the transition.
Supply chain collapse related to the Covid-19 pandemic and sanctions caused by Russia’s invasion of Ukraine have pushed up the price of essential items such as food and fuel, affecting incomes. High interest rates, imposed by central banks to suppress inflation, triggered another series of crises: developing countries’ debts fell and investment capital dried up.
Last week, the International Monetary Fund warned of the harmful combination of lower growth and higher debt.
The supercharged globalization that had encouraged companies to buy and sell anywhere on the planet has also shifted. Rising political tensions, especially between China and the United States, are affecting where businesses and governments invest and trade.
Companies want supply chains to be secure as well as cheap and look to neighbors or political allies to provide them.
In this new era, Mr. Rodrik said, “the industrialization model – on which almost every country that has become rich has been based – is no longer capable of producing rapid and sustained economic growth.”
Nor is it clear what might replace it.
There is a future in service jobs.
An alternative can be found in Bengaluru, a high-tech hub in the Indian state of Karnataka.
Multinationals such as Goldman Sachs, Victoria’s Secret and the Economist magazine have flocked to the city and set up hundreds of business hubs – known as global competence centers – to handle accounting, design products, develop cyber security and artificial intelligence systems and more.
Such centers are expected to create 500,000 jobs nationwide in the next two to three years, according to consulting firm Deloitte.
They are involved in hundreds of biotech, engineering and information technology companies, including domestic giants such as Tata Consultancy Services, Wipro and Infosys Limited. Four months ago, American chip company AMD unveiled its largest global design center there.
“We need to move away from the idea of classic stages of development, that you go from the farm to the factory and then from the factory to the office,” said Richard Baldwin, an economist at the International Institute for Management Development in Geneva. “This whole development model is wrong.”
Two-thirds of global output now comes from the service sector — a patchwork that includes dog walkers, manicurists, food preparers, cleaners and drivers, as well as highly trained chip designers, graphic designers, nurses, engineers and accountants.
In Bengaluru, formerly known as Bangalore, a general rise in middle-class living attracted more people and more businesses which, in turn, attracted more people and businesses, continuing the cycle, Mr Baldwin explained.
Covid accelerated this transition, forcing people to work remotely — from a different part of town, a different city or a different country.
In the new model, countries can focus development around cities rather than a specific industry. “This creates economic activities that are quite different,” Mr Baldwin said.
“Think Bangalore, not South China,” he said.
Free markets are not enough.
Many developing countries remain focused on building export-oriented industries as the path to prosperity. And so it should be, said Justin Yifu Lin, dean of the Institute of New Structural Economics at Peking University.
Pessimism about the classic growth formula, he said, has been fueled by a mistaken belief that the growth process was automatic: Just make way for the free market and the rest will take care of itself.
Countries were often pressured by the United States and international institutions to embrace open markets and governance.
Export-led growth in Africa and Latin America has stumbled because governments have failed to protect and subsidize infant industries, said Mr. Lin, a former chief economist at the World Bank.
“Industrial policy was taboo for a long time,” he said, and many who tried failed. But there were also success stories like China and South Korea.
“You need the state to help the private sector overcome market failures,” he said. “You can’t do it without industrial policy. “
It won’t work without training.
The overarching question is whether anything — services or manufacturing — can generate the type of growth it desperately needs: large-scale, large-scale and sustainable.
Business service jobs are proliferating, but many offer middle and high incomes in fields such as finance and technology, which tend to require advanced skills and levels of education far beyond what most people in developing countries have.
In India, nearly half of college graduates lack the skills needed for these jobs, according to Wheelbox, an educational testing service.
Mismatch is everywhere. The Future of Jobs report, published last year by the World Economic Forum, found that six in 10 workers will need retraining in the next three years, but the vast majority will not have access to it.
Other types of jobs are also increasing, but many are neither well-paid nor exportable. A barber in Bangalore can’t cut your hair if you’re in Brooklyn.
That could mean less—and more uneven—growth.
Researchers at Yale University found that in India and several countries in sub-Saharan Africa, farm workers began working in consumer service jobs and increased their productivity and incomes.
With the global economy weakening, developing countries will have to extract what they can from every corner of their economies. Industrial policy is needed, Harvard’s Rodrik said, but it should focus on smaller service firms and households because that will be the source of most future growth.
He and others warn that even so, gains are likely to be modest and hard-earned.
“The envelope has shrunk,” he said. “How much growth we can have is definitely less than in the past.”
