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Poor nations are writing a new manual to get rich

by SuperiorInvest

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 and then sell what they produce to the rest of the world.

The recipe, variously adapted 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 raise living standards.

The Asian Tigers and China succeeded by combining vast reserves of cheap labor with access to international knowledge and financing, and buyers ranging from Kalamazoo to Kuala Lumpur. Governments provided the scaffolding: they built roads and schools, offered business-friendly regulations and incentives, developed capable administrative institutions, and fostered nascent industries.

But technology is advancing, supply chains are changing, and political tensions are reshaping trade patterns. And with that, doubts grow about whether industrialization can still generate the miraculous growth it once did. For developing countries, which contain 85 percent of the world's population (6.8 billion people), the implications are profound.

Today, manufacturing accounts for a smaller proportion of global output, with China already producing more than a third of it. At the same time, more and more emerging countries sell cheap products abroad, increasing competition. There are not so many profits to be extracted: not everyone can be a net exporter or offer the lowest wages and overheads in the world.

There are doubts whether industrialization 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 prominent development economist at Harvard.

The 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 turning farmers into textile workers.

However, last year, Rubana Huq, president of the Mohammadi Group, a family-owned conglomerate, replaced 3,000 employees with automated jacquard machines to make complex knitting patterns.

The women found similar jobs in other parts of the company. “But what happens 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 won't become coders overnight.”

Recent world events have accelerated the transition.

Supply chain collapses related to the Covid-19 pandemic and sanctions triggered by Russia's invasion of Ukraine drove up the price of staples such as food and fuel, hitting revenues. High interest rates, imposed by central banks to quell inflation, triggered another series of crises: debts in developing countries soared and investment capital dried up.

Last week, the International Monetary Fund warned about 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 has also been changing. Rising political tensions, especially between China and the United States, are affecting where companies and governments invest and trade.

Companies 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 industrialization model, on which virtually all countries that have become rich have relied, is no longer capable of generating rapid and sustained economic growth.”

It is also unclear what could replace it.

An alternative could 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 established hundreds of operational centers (known as global capability centers) to handle accounting, design products, develop cybersecurity and artificial intelligence systems, and more.

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

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

“We have to move away from the idea of ​​classical 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. “That whole development model is wrong.”

Two-thirds of the world's output now comes from the service sector, a hodgepodge that includes dog walkers, manicurists, food preparers, cleaners and drivers, as well as highly skilled chip designers, graphic artists, nurses, engineers and accountants.

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

Covid accelerated this transition by 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 growth on cities rather than on a particular industry. “That creates economic activities that are quite diverse,” Baldwin said.

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

Many developing nations remain focused on building 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, has been fueled by a mistaken belief that the growth process was automatic: just clear the way for the free market and the rest will take care of itself.

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

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

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

“The State needs to help the private sector overcome market failures,” he said. “It cannot be achieved without an industrial policy. “

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

Business service jobs are multiplying, but many of them that offer middle and high incomes are in areas such as finance and technology, which tend to require advanced skills and levels of education far higher than those of most. of people in developing countries.

In India, nearly half of college graduates don't have the skills needed for these jobs, according to Wheebox, an educational testing service.

The mismatch is everywhere. The Future of Jobs report, released last year by the World Economic Forum, found that six in 10 workers will need retraining in the next three years, but the overwhelming 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 Bengaluru cannot cut your hair if you are in Brooklyn.

That could mean lower (and more uneven) growth.

Researchers 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 weakened global economy, developing countries will need to extract all the growth they can from every corner of their economies. Industrial policy is essential, said Harvard's Rodrik, but it should focus on smaller service businesses and households because they will be the source of most future growth.

He and others caution that, even so, gains are likely to be modest and difficult to achieve.

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

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