Poor nations are writing a new handbook for getting rich

For more than half a century, the playbook for how developing countries can get rich hasn’t changed much: move subsistence farmers into production and then sell what they produce to the rest of the world.

The recipe, adapted in different ways by Hong Kong, Singapore, South Korea, Taiwan and China, has produced the most powerful engine the world has ever seen 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 has succeeded by combining vast pools of cheap labor with access to international know-how and financing and buyers from Kalamazoo to Kuala Lumpur. Governments provided the framework: they built roads and schools, offered business-friendly rules and incentives, developed powerful administrative institutions, and supported emerging industries.

But technology is advancing, supply chains are shifting and political tensions are changing trade patterns. And with this doubts are growing as to whether industrialization can still bring about the miraculous growth of yesteryear. For developing countries, home to 85 percent of the world’s population – 6.8 billion people – the impact is profound.

Today there is no production smaller share of world production and China is already providing more than a third of this. At the same time, more and more emerging countries are selling inexpensive goods abroad, which is increasing competition. There aren’t that many profits to squeeze out: not everyone can be a net exporter or offer the lowest wages and overheads in the world.

There are doubts that industrialization can bring the breakthrough benefits it has had in the past. Today, factories tend to rely more on automated technology and less on cheap, poorly trained labor.

“You can’t create enough jobs for the vast majority of workers who are not very educated,” said Dani Rodrik, a leading development economist at Harvard.

The process can be observed in Bangladesh, said the managing director of the World Bank called “one of the world’s greatest development stories” last year. The country built its success on turning farmers into textile workers.

However, last year Rubana Huq, chairwoman of the Mohammadi Group, a family conglomerate, replaced 3,000 employees with automated jacquard machines to produce complex weave patterns.

The women found similar jobs elsewhere in the company. “But what happens if 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, she said. “You don’t become programmers overnight.”

Recent global developments have accelerated the transition.

Supply chain breakdowns related to the Covid-19 pandemic and sanctions stemming from Russia’s invasion of Ukraine drove up prices for essential goods such as food and fuel and reduced incomes. High interest rates introduced by central banks to curb inflation triggered another series of crises: developing countries’ debts exploded and investment capital dried up.

Last week the International Monetary Fund warned the damaging combination of lower growth and higher debt.

Accelerated globalization, which had encouraged companies to buy and sell from anywhere in the world, has also changed. Rising political tensions, particularly between China and the United States, are impacting where companies and governments invest and trade.

Companies want secure, cost-effective supply chains and are looking to neighbors or political allies to provide them.

In this new era, Mr. Rodrik said, “the industrialization model – on which virtually every country that has grown rich has relied – is no longer capable of generating rapid and sustainable economic growth.”

It’s also not clear what could replace it.

An alternative could be in Bengaluru, a high-tech hub in the Indian state of Karnataka.

Multinational companies like Goldman Sachs, Victoria’s Secret and The Economist magazine flocked to the city, setting up hundreds of operational centers – called Global Capability Centers – to manage accounting, design products, develop cybersecurity systems and artificial intelligence, and more more.

According to the consulting firm, such centers are expected to create 500,000 jobs across the country in the next two to three years Deloitte.

They join hundreds of biotech, engineering and information technology companies, including homegrown giants such as Tata Consultancy Services, Wipro and Infosys Limited. Four months ago, the American chip company AMD opened its largest global design center there.

“We need to move away from the idea of ​​the classic development phases, that you go from farm to factory and then from factory to offices,” he said Richard Baldwina economist at the International Institute for Management Development in Geneva. “The whole development model is wrong.”

Two-thirds of global production now comes from the service sector – a mishmash that includes dog handlers, manicurists, food preparers, cleaners and drivers, as well as highly trained chip designers, graphic artists, 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 by forcing people to work remotely – from another part of the city, another city or another country.

In the new model, countries can concentrate their growth in cities rather than a specific industry. “This creates economic activity that is quite diverse,” Mr. Baldwin said.

“Think Bangalore, not southern China,” he said.

Many developing countries continue to focus on building export-oriented industries as a path to prosperity. And that’s how it should be, he said Justin Yifu LinDean of the Institute for New Structural Economics at Peking University.

The pessimism about the classic development formula has been fueled by the mistaken assumption that the growth process is automatic: just clear the way for the free market and the rest will take care of itself.

Countries have often been pressured by the United States and international institutions to accept open markets and easy governance.

Export-led growth in Africa and Latin America stalled because governments failed to protect and subsidize fledgling industries, said Mr. Lin, a former World Bank chief economist.

“Industrial policy has been taboo for a long time,” he said, and many of those who tried failed. But there were also success stories like China and South Korea.

“The government must help the private sector overcome market failures,” he said. “It doesn’t work without industrial policy. ”

The crucial question is whether anything – services or manufacturing – can generate the growth that is urgently needed: broad-based, large-scale and sustainable.

Corporate service jobs are increasing, but many middle- and high-income jobs are in fields such as finance and technology, which tend to require advanced skills and education levels well above what most people in developing countries have.

In India, almost half of university graduates do not have the skills they need for these jobs Wheeboxan educational testing service.

The disproportion is everywhere. The Future of Jobs ReportResearch released 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 service jobs are also increasing, but many are neither well paid nor exportable. A barber in Bengaluru cannot cut your hair if you are in Brooklyn.

That could mean lower – and more uneven – growth.

Researcher at Yale University found that in India and several countries in sub-Saharan Africa, agricultural workers moved into consumer service jobs and increased their productivity and income.

With a weakening global economyDeveloping countries must achieve the greatest possible growth from all areas of their economies. Industrial policy is essential, Harvard’s Mr. Rodrik said, but it should focus on smaller service companies and households because they will be the source of the greatest future growth.

He and others warn that the gains will still be modest and hard-fought.

“The envelope has shrunk,” he said. “The growth we can achieve is definitely lower than in the past.”

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