The handbook on how developing countries get rich hasn't changed much in more than half a century. It means moving subsistence farmers into manufacturing jobs and selling what they produce to the world.
This recipe, customized in different ways by Hong Kong, Singapore, South Korea, Taiwan, and China, has created the most powerful engine for generating economic growth the world has ever known. It has helped lift hundreds of millions of people out of poverty, create jobs and improve living standards.
The Asian Tigers and China succeeded by combining international know-how, access to capital, and a vast and cheap labor force with buyers reaching from Kalamazoo to Kuala Lumpur. Government provided scaffolding, built roads and schools, provided business-friendly regulations and incentives, developed competent government institutions, and fostered nascent industry.
But technology is advancing, supply chains are changing, and political tensions are reshaping trade patterns. With that comes doubts about whether industrialization can still achieve the miraculous growth it once did. The impact is severe for developing countries, where 6.8 billion people, or 85 percent of the world's population, live.
Manufacturing now accounts for a smaller share of global output, with China already producing more than a third of it. At the same time, more emerging countries are selling cheaper products overseas, 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.
It is questionable whether industrialization will be able to generate the same innovative benefits as in the past. Today's factories tend to rely on automated technology rather than low-wage workers with little training.
“You can't create enough jobs for the vast majority of workers who are not well-educated,” said Dani Rodrik, a leading 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 on converting farmers into textile workers.
But last year, Rubana Haq, chairman of the family-owned conglomerate Mohammadi Group, replaced 3,000 employees with automatic jacquard machines to create intricate weaving patterns.
Women found similar jobs elsewhere within the company. “But what if this happens on a large scale?” asked Ms. Huk, who is also the president of the Bangladesh Apparel Manufacturers and Exporters Association.
These workers are not trained, she said. “They don't become programmers overnight.”
Recent global developments have accelerated the transition.
Supply chain meltdowns related to the coronavirus pandemic and sanctions stemming from Russia's invasion of Ukraine have pushed up prices for essentials like food and fuel, squeezing incomes. High interest rates imposed by central banks to curb inflation have triggered a new series of crises as developing countries' debts balloon and investment capital dries up.
The International Monetary Fund last week warned of a toxic combination of slowing growth and rising debt.
The rapid globalization that has facilitated the buying and selling of businesses in every corner of the globe is also changing. Rising political tensions, particularly between China and the United States, are impacting where businesses and governments invest and trade.
Companies want their supply chains to be both secure and cheap, and they are looking to neighboring countries and political allies to provide them.
In this new era, Rodrik said, “the industrialization model that almost every rich country has relied on is no longer capable of producing rapid and sustained economic growth.”
It's also not clear what will replace it.
The service industry has a future.
One alternative could be in Bengaluru, a high-tech center in India's Karnataka state.
Multinational companies such as Goldman Sachs, Victoria's Secret, and The Economist have flocked to the city to build global capabilities to process accounts, design products, develop cybersecurity systems and artificial intelligence, and more. It has established hundreds of operational hubs known as centers.
These centers are expected to create 500,000 jobs nationwide over the next two to three years, according to consulting firm Deloitte.
They join hundreds of biotech, engineering and IT companies, including homegrown giants such as Tata Consultancy Services, Wipro and Infosys Limited. Four months ago, American chip company AMD unveiled its largest global design center here.
“We need to move away from the classic stage-of-development mentality of going from farm to factory and from factory to office,” said Richard Baldwin, an economist at the International Institute for Management Development in Geneva. “That whole development model is wrong.”
Currently, two-thirds of global output comes from the services sector, which includes dog walkers, manicurists, meal preparers, cleaners and drivers, as well as highly trained workers. They also include chip designers, graphic artists, nurses, engineers, and accountants.
Bengaluru, formerly known as Bangalore, has seen an overall rise in middle-class living, attracting more people and more businesses, which in turn attracts even more people and businesses, and the cycle continues. Baldwin explained.
COVID-19 has accelerated this transition by forcing people to work remotely from different parts of town, different cities, and different countries.
The new model allows countries to focus on growth around cities rather than specific industries. “This creates quite a variety of economic activity,” Baldwin said.
“Think Bangalore, not southern China,” he said.
Free markets alone are not enough.
Many developing countries remain focused on building export-oriented industries as a path to prosperity. And that's how it should be, said Justin Yifu Lin, director of the Institute for New Structural Economics at Peking University.
He says that pessimism about the classical mode of development is fueled by the mistaken belief that the growth process is automatic, that all you have to do is pave the way for free markets and the rest will take care of itself. .
Countries were often pressured by the United States and international organizations to embrace open markets and non-interventionist governance.
Lin, a former World Bank chief economist, said export-led growth in Africa and Latin America stumbled because governments failed to protect and subsidize infant industries.
“Industrial policy has been taboo for a long time,” he said, and many who have tried it have failed. But there were also success stories like China and South Korea.
“The state needs to help the private sector overcome market failures,” he said. “You can't do that without industrial policy.”
Without education, things don't work.
The most important question is whether we can generate the kind of growth that is sorely needed, whether in services or manufacturing, that is broad-based, large-scale, and sustainable.
Corporate service jobs are booming, but many of the jobs that offer medium-to-high incomes are in fields such as finance and technology, with highly skilled jobs that are much higher than those held by most people in developing countries. They tend to require skill and education levels.
According to educational testing service Wheebox, nearly half of college graduates in India lack the skills needed for these jobs.
Mismatches are everywhere. The Future of Work report released by the World Economic Forum last year found that six in 10 workers will need retraining over the next three years, but the overwhelming majority will not be able to do so.
Other types of service jobs are also proliferating, but many of them are neither well-paid nor exportable. If you're in Brooklyn, you can't get your hair cut at a barber in Bangalore.
That can mean growth will be smaller and more uneven.
Researchers at Yale University found that agricultural workers in India and several countries in sub-Saharan Africa are jumping into consumer service jobs, increasing their productivity and incomes.
As the global economy slumps, developing countries need to squeeze as much growth as possible from every corner of their economies. Harvard University's Rodrick said industrial policy is essential, but should focus on small service businesses and households. This is because it will be the source of most of our future growth.
Even then, he and others warn, the gains will be modest and difficult to win.
“The envelope has shrunk,” he said. “The amount of growth we can achieve is clearly reduced compared to the past.”