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Poor nations write a new playbook 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 manufacturing jobs, 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 their standards of living.

The Asian Tigers and China have succeeded by combining vast reserves of cheap labor with access to international know-how and financing, as well as combining buyers from Kalamazoo to Kuala Lumpur. Governments provided the scaffolding: they built roads and schools, provided business-friendly rules and incentives, developed competent administrative institutions, and supported infant industries.

But technology advances, supply chains evolve, and political tensions are reshaping business structures. And with that, doubts grow about whether industrialization can still generate the miraculous growth it once did. For developing countries, home to 85% of the world’s population, or 6.8 billion people, the implications are profound.

Today, the manufacturing industry represents a smaller share of global production, and China already provides more than a third. At the same time, more and more emerging countries are selling cheap products abroad, increasing competition. There aren’t as many gains to exploit: not everyone can be a net exporter or offer the lowest wages and overheads in the world.

There are doubts about whether industrialization can create the revolutionary benefits it has brought in the past. Today’s factories tend to rely more on automated technology and less on cheap, poorly trained workers. “You can’t create enough jobs for the vast majority of workers who are not highly educated,” said Dani Rodrik, a development economist at Harvard University. This process can be seen in Bangladesh, which the World Bank’s managing director last year called “one of the world’s greatest development stories.” The country built its success by transforming farmers into textile workers.

Last year, Rubana Huq, chairman of the Mohammadi Group, a family-owned conglomerate, replaced 3,000 employees with automated Jacquard machines to make complex weaving patterns.

The women found similar jobs elsewhere in the company. “But what happens when it happens on a large scale?” asked Huq, who is also president of the Bangladesh Garment Manufacturers and Exporters Association.

These workers have no training, she said. “They’re not going to become coders overnight.”

Recent global developments have accelerated the transition.

The collapse of supply chains linked to the COVID-19 pandemic and sanctions imposed by Russia’s invasion of Ukraine have driven up the prices of basic necessities such as food and fuel, which which affected revenues. High interest rates, imposed by central banks to curb inflation, triggered another round of crises: developing countries’ debts ballooned 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 all over the world has also changed. Growing political tensions, particularly between China and the United States, are affecting the areas in which companies and governments invest and trade.

Businesses want supply chains to be secure and cheap, 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 – is no longer capable of generating rapid and sustainable economic growth.”

We also don’t know what could replace it.

There is a future in service jobs.

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

Multinational corporations like Goldman Sachs, Victoria’s Secret and The Economist magazine have flocked to the city and set up hundreds of operations centers – known as global capability centers – to handle accounting, design products, develop systems cybersecurity and artificial intelligence, and much more.

Such centers are expected to generate 500,000 jobs nationwide over the next two to three years, according to consultancy Deloitte.

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

“We need to move away from the idea of ​​classic stages of development, where you go from farm to factory, then from factory to office,” said Richard Baldwin, an economist at IMD. “This whole development model is wrong.”

Two-thirds of global production now comes from the service sector – a hodgepodge that includes dog walkers, manicurists, food preparers, cleaners and drivers, as well as chip designers, graphic designers, nurses , highly qualified engineers and accountants.

It’s possible to quickly move into the service sector and grow by selling to companies around the world, Baldwin argued. This is what helped India become the fifth largest economy in the world.

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

COVID has accelerated this transition, forcing people to work remotely – from another part of town, another city or another country.

In the new model, countries can focus their growth on cities rather than on a particular industry. “It creates some pretty diverse economic activities,” Baldwin said.

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

Free markets are not enough.

Many developing countries remain focused on creating export-oriented industries as a path to prosperity. And that’s the way it should be, said Justin Yifu Lin, dean of the Institute of New Structural Economics at Peking University.

Pessimism about the classic development formula, he said, was fueled by a mistaken belief that the growth process was automatic: just pave the way for the free market and the rest would happen. will do it alone.

The United States and international institutions have often pressured countries to adopt open markets and hands-off governance.

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

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

“The state must help the private sector overcome market failures,” he said. “We cannot achieve this without industrial policy.”

It won’t work without education.

The overarching question is whether anything – services or manufacturing – can generate the kind of growth that is desperately needed: broad-based, large-scale, sustainable growth.

Service jobs for businesses are increasing, but many offer middle and high incomes in fields like finance and technology, which tend to require advanced skills and education levels far beyond those of most. inhabitants of developing countries.

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

The gap is everywhere. The Future of Jobs report, released last year by the World Economic Forum, reveals that 6 in 10 workers will need career reskilling in the next three years, but the overwhelming majority do not will not have access to it.

Other types of service jobs are also proliferating, but many of them are neither well-paid nor exportable. A hairdresser in Bangalore cannot cut your hair if you are in New York.

This could mean lower – and more uneven – growth.

Researchers at Yale University found that in India and several sub-Saharan African countries, agricultural workers shifted to consumer service jobs and increased their productivity and income.

But there was a catch: The gains were “remarkably unequal” and disproportionately benefited the wealthy.

Faced with a weakening global economy, developing countries will need to make the most of growth in all sectors of their economies. Industrial policy is essential, Harvard’s Rodrik said, but it should focus on small service businesses and households, because they will be the main source of future growth.

He and others caution that despite this, the gains will likely be small and hard-won.

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

This article was originally published in the New York Times.

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