Poor countries write a new manual for getting rich

LONDON – For more than half a century, strategies for how developing countries can get rich have not changed much:

move subsistence farmers into manufacturing jobs and then sell what they produce to the rest of the world.

The recipe, variously adapted from Hong Kong, Singapore, South Korea, Taiwan and Chinait 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 raise living standards.

THE Asian tigers and China They achieved this by combining vast reserves of cheap labor with access to international knowledge and financing, and to buyers ranging from Kalamazoo to Kuala Lumpur.

Governments provided the scaffolding:

They built roads and schools, offered business-friendly rules and incentives, developed capable administrative institutions and encouraged emerging industries.

But technology is advancing, supply chains are changing and political tensions are reshaping business models.

And with this, doubts grow about the possibility that industrialization can still generate the miraculous growth of the past.

For developing countries, home to 85% of the world’s population (6.8 billion people), the implications are profound.

Today, the manufacturing sector represents a smaller percentage of global output, with China already producing more than a third.

At the same time, more and more emerging countries are selling low-cost products abroad, increasing competition.

There are not that many profits to be made:

not everyone can be net exporter or offer the lowest salaries and overheads in the world.

There are doubts that the industrialization it can generate the revolutionary benefits it has generated in the past.

Today, factories tend to rely more on automated technology and less on cheap workers who have little training.

“You can’t create enough jobs for the vast majority of workers who don’t have a very high level of education,” said Dani Rodrik, a leading development economist at the University of Washington. Harvard University.

The process can be seen on Bangladeshwhich the World Bank CEO last year called “one of the world’s most important development stories.”

The country built its success by turning farmers into garment workers.

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

Women have found similar jobs elsewhere in the company.

“But what will happen next when this happens on a large scale?” asked Huq, who is also president of the Bangladesh Garment Manufacturers and Exporters Association.

These workers have no training, he said.

“They won’t become programmers overnight.”

Recent world events have done so accelerated the transition.

Changes

The collapse of the supply chain linked to the Covid-19 pandemic and sanctions triggered by Russia’s invasion of Ukraine have driven up the price of raw materials such as food and fuel, hitting revenues.

High interest rates, imposed by central banks to suppress inflation, triggered another series of crises:

THE debts of developing countries has skyrocketed and investment capital has 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 in all parts of the planet is also changing.

The crescents political tensionsparticularly between China and the United States, they are influencing where companies and governments invest and trade.

Companies want supply chains to be safe and affordable, and they look to their neighbors or political allies to provide them.

In this new era, Rodrik said, “the model of industrialization, on which virtually all countries that have become rich have relied, he is no longer capable generate rapid and sustained economic growth.”

It is also unclear what could replace it.

There is a future in service jobs.

An alternative could be found in Bangalore, 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 created hundreds of operations centers – known as global capacity centers – to manage accounting, product design, development of cybersecurity and artificial intelligence systems, and more.

These centers are expected to generate 500,000 jobs across the country over the next two to three years, according to consulting firm Deloitte.

They are joining hundreds of biotech, engineering and IT 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 abandon the idea of ​​classic stages of development, which go from farm to factory and then from factory to office,” said Richard Baldwin, an economist at the International Institute for Management Development in New York. Geneva.

“The whole development model is wrong.”

Two thirds of world production today comes from sector Dand servicesa mix that includes dog walkers, manicurists, food preparers, cleaners and drivers, as well as highly skilled chip designers, graphic artists, nurses, engineers and accountants.

It’s possible to make the leap into the service industry and grow by selling to companies around the world, Baldwin said.

That’s what helped India become the fifth largest economy in the world.

In Bengaluru, formerly known as Bangalore, an overall increase in middle-class living attracted more people and more businesses, which in turn attracted more people and businesses, continuing the cycle, Baldwin explained.

COVID has accelerated this transition by forcing people to work at a distancefrom a different part of the city, from a different city or from a different country.

In the new model, countries can focus growth on cities rather than on a particular sector.

“This creates some pretty diverse economic activity,” Baldwin said.

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

Free markets are not enough.

Many developing nations continue to focus on creating export-oriented industries as a 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 classical development formula, he said, was fueled by the mistaken belief that the growth process was automatic:

Just pave the way for the free market and the rest will follow.

The United States and international institutions have often pressured countries to adopt open markets and governance without intervention.

Export-led growth in Africa and Latin America has stumbled because governments have failed to protect and subsidize infant industries, said Lin, a former chief economist at the World Bank.

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

“The state must help the private sector overcome market failures,” he said.

“It cannot be achieved without an industrial policy. “

It won’t work without education.

The big question is whether something – services or manufacturing – can generate the kind of growth that is desperately needed: large, large-scale and sustainable.

Business services jobs are multiplying, but many that offer middle and high incomes are found in areas such as finance and technologywhich tend to require advanced skills and levels of education well above those possessed by most people in developing countries.

In India, nearly half of graduates lack the skills needed for these jobs, according to Wheelbox, an educational testing service.

The discrepancy is everywhere.

The report The future of employmentpublished last year by World Economic Forumfound that 6 out of 10 workers will need it retraining over the next three years, but the vast majority will not have access to it.

Other types of jobs are also proliferating in the service sector, but many of them are neither well-paid nor exportable.

A barber in Bangalore cannot cut your hair if you are in New York.

This could mean lower (and more uneven) growth.

Researchers at Yale University have found that in India and several sub-Saharan African countries, agricultural workers have become agricultural workers jobs in consumer services and they increased their productivity and income.

But there was a problem: The earnings were “shockingly unequal” and disproportionately benefited the wealthy.

With a weakened global economy, developing countries will have to extract all the growth they can from every corner of their economies.

Industrial policy is essential, Harvard’s Rodrik said, but it should focus on smaller service firms and families because they will be the source of most future growth.

He and others warn that, even so, the gains will likely be modest and difficult to achieve.

“The envelope has shrunk,” he said.

“The growth we can achieve is certainly lower than in the past.”

c.2024 The New York Times Company