For more than half a century, the handbook for how developing countries get rich hasn’t changed much: Move subsistence farmers to manufacturing jobs, and then sell what they make to the rest of the world.
The recipe — customized in various ways by Hong Kong, Singapore, South Korea, Taiwan and China — has produced the most efficient engine known to the world 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 succeeded by combining a vast pool of cheap labor with access to international know-how and financing, and consumers that stretched from Kalamazoo to Kuala Lumpur. Governments provided the scaffolding: They built roads and schools, offered business rules and incentives, built competent administrative institutions and nurtured fledgling industries.
But technology is advancing, supply chains are changing, and political tensions are reshaping trade patterns. And with it, doubts are growing about whether industrialization can still deliver the growth miracle it once did. For developing countries, which contain 85 percent of the world’s population — 6.8 billion people — the implications are profound.
Now, the manufacturing account for a smaller portion of world output, and China already produces more than a third of this. At the same time, more emerging countries are selling cheap goods abroad, increasing competition. There’s not as much to earn: Not everyone can be a net exporter or offer the lowest wages and overhead in the world.
There are doubts that industrialization can create the game-changing benefits it has done in the past. Today’s factories rely more on automated technology and less on cheap workers with little training.
“You can’t generate enough jobs for the majority of workers who are not very educated,” said Dani Rodrik, a leading development economist at Harvard.
The process can be seen in Bangladesh, which is the managing director of the World Bank called “one of the world’s greatest growth stories” last year. The country built its success on turning farmers into textile workers.
However, last year Rubana Huq, chairman of the Mohammadi Group, a family-owned conglomerate, replaced 3,000 employees with automated jacquard machines to produce complex weaving patterns.
The women found similar jobs elsewhere in the company. “But what happens next when it happens on a large scale?” asked Ms. Huq, who is also the president of the Bangladesh Garment Manufacturers and Exporters Association.
These workers have no training, he said. “They won’t become coders overnight.”
Recent global developments have accelerated the transition.
Supply chain disruptions related to the Covid-19 pandemic and the sanctions imposed by Russia’s invasion of Ukraine have driven up prices of essential items such as food and fuel, eating into profits. High interest rates, imposed by central banks to suppress inflation, caused another series of crises: The debts of developing countries ballooned, and investment capital dried up.
Last week, the International Monetary Fund warned of the harmful combination of lower growth and higher debt.
The rapid globalization that has prompted companies to buy and sell from place to place across the planet is also changing. 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 and cheap, and they look to neighbors or political allies to provide them.
In this new era, Mr. Rodrik said, “the model of industrialization – which almost all rich countries have relied on – is no longer capable of generating rapid and sustainable economic growth.”
It’s also unclear what could replace it.
There is a future in service jobs.
An alternative may be found in Bengaluru, a high-tech center in the Indian state of Karnataka.
Multinationals like Goldman Sachs, Victoria’s Secret and the Economist magazine have flocked to the city and set up hundreds of operational hubs — known as global capability centers — to handle accounting, design products, develop cybersecurity systems and artificial intelligence, and more.
Such centers are expected to generate 500,000 jobs nationwide in the next two to three years, according to the consulting firm. Deloitte.
They join hundreds of biotech, engineering and information technology companies including homegrown giants like Tata Consultancy Services, Wipro and Infosys Limited. Four months ago, the American chip company AMD announced the 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 offices,” he said. Richard Baldwina economist in IMD in Lausanne. “The whole development model is wrong.”
Two-thirds of the world’s output now comes from the service sector — a mishmash that includes dog walkers, manicurists, food preparers, cleaners and drivers, as well as highly trained chip designers, graphic artists, nurses, engineer and accountant.
In Bengaluru, formerly known as Bangalore, the general rise in middle-class living attracted more people and more businesses which, in turn, attracted more people and businesses, continuing the cycle, explained G .Baldwin.
Covid accelerated this transition, by forcing people to work remotely — from another part of town, another city or another country.
In the new model, countries can focus growth around cities rather than a specific industry. “That creates economic activities that are quite diverse,” Mr. Baldwin said.
“Think Bangalore, not South China,” he says.
Free markets are not enough.
Many developing countries remain focused on developing export-oriented industries as a path to prosperity. And so it should be, said Justin Yifu Lindean of the Institute of New Structural Economics at Peking University.
Pessimism about the classic development formula, he says, is fueled by a false belief that the growth process is automatic: Just clear the way for the free market and the rest will take care of itself.
Countries are often pressured by the United States and international institutions to embrace open markets and hands-off governance.
Export-led growth in Africa and Latin America has stumbled because governments failed to protect and subsidize infant industries, said Mr. Lin, a former chief economist at the World Bank.
“Industrial policy has been taboo for a long time,” he says, and many of those who have tried have failed. But there are 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 this without industrial policy.”
It will not work without education.
The key question is whether anything — services or manufacturing — can generate the kind of growth that is so desperately needed: broad-based, large-scale and sustainable.
Business service jobs are on the rise, but many that offer moderate and high incomes are in areas such as finance and technology, which tend to require advanced skills and education levels beyond what most developing countries have.
In India, nearly half of college graduates don’t have the skills they need for these jobs, according to Wheelboxan educational testing service.
Incompatibility is everywhere. The Report on the Future of Workpublished last year by the World Economic Forum, found that six out of 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 on the rise, but many are poorly paid or exported. A barber in Bengaluru cannot cut your hair if you are in Brooklyn.
That could mean smaller — and more uneven — growth.
Researchers at Yale University found that in India and some countries in sub-Saharan Africa, agricultural workers jumped into consumer service jobs and raised their productivity and income.
With weakness global economy, developing countries will need to squeeze every bit of growth they can from every corner of their economy. Industrial policy is important, Harvard’s Mr. 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 caution that even so, the gains are likely to be modest and elusive.
“The envelope has shrunk,” he said. “How much growth we can get is certainly less than in the past.”