Economic development, an illusion for poor countries

Then many things happened. From Buenos Aires to Mexico City, governments have given a 180-degree turn to half a century of statist and introspective economic policy. They cut budgets, sold public companies, and opened up to trade and foreign capital. Mexico tied its economy to the United States through NAFTA. Brazil and Argentina said “yes” (more or less) through Mercosur cooperation. And China launched itself without restraint in the purchase of raw materials from the region.

Now fast forward to 2022. GDP per person in Latin America was 29% of that of the G7 nations.

But before you lay the blame and say that the region was incompetent, consider this: the economic output of the average citizen of Africa fell from 17% to 10% of that of the average citizen of the rich world during those 42 years, measured on the basis of purchasing power parity. Average GDP per capita in the Middle East plummeted from 114% to 41% of the G7 figure.

In fact, with the exception of South Asia and East Asia, development over the last generation has regressed in most of the countries that are not yet rich. Economists used to imagine that economic convergence would be the inevitable fruit of the encounter between the capital of the rich world and the cheap labor of the poor world. But we cannot consider that it is a coincidence if this famous convergence has not materialized in many places.

Periods of euphoria, such as the decade when China seemed to buy all the iron, copper, soybeans and meat South America could produce, basically ended with a bang. The great arguments in which they linked the Mexican economy to the largest and richest consumer market in the world, did not lead to widespread prosperity either.

Even some of the more positive stories seem kind of… boring. India’s GDP per capita increased from 5% of the G7 to 13% and Vietnam’s from 5% to 21%. GDP per capita in China, the symbol of recent export-led economic success, rose from 3% to 33% of the G7 average. That’s progress, but it didn’t quite make China rich.

The sad and long history of attempts to reach the “development” raises questions that economists should try to answer honestly, instead of hesitating so much: Is there a feasible path to development for the world’s poor? How is? And what do we do if we can’t find it?

Another thing, let’s not do the McKinsey. The famous consulting topic that talks about “investing in human capital is essential to be more productive and join global value chains“It won’t help countries that can’t afford to have all of their children finish high school, let alone go to college. As Donald Rumsfeld would say, poor countries need development strategies for the workers they have, not for the ones consulting firms prefer.

The problem for economists undecided about how to approach the issue—even though they talk a lot about “free trade” and “better governance”—is that the development record and the measures implemented in the last two decades present few precedents that are useful in the future. new world that opens

You might wonder what about manufacturing. Let’s go to Japan and KoreaThink of the East Asian tigers and China, in post-war Germany: for the better part of a century, manufacturing for export was pretty much the only successful strategy for achieving more widespread prosperity in the world’s poor countries. .

This is not a coincidence. Manufacturing has that unique ability to increase productivity. To increase productivity—even for the least educated farm workers—all it takes is opening a T-shirt or plastic toy factory in the middle of a field. Exports help overcome the small domestic consumer market. And the income from these businesses can pay for investment in human capital and other inputs to move up the value chain.

However, even the most successful strategies of the past seem doomed to fail. The reason is simple: automation. The industrial economy no longer has as much need for labor, especially cheap and unskilled labor.

It’s not just happening in America, where President Joe Biden is doing everything he can to boost manufacturing jobs. The manufacturing industry is shrinking globally. In South Africa, for example, manufacturing jobs fell to 9% of total employment in 2018, before COVID-19 hit, from 14% in 1990. In Nigeria, they dropped from 12% to 7%.

Despite the promise of NAFTAin 2018 only 17% of Mexican workers were engaged in manufacturing, up from 20% in 1990. Even in China, the share of manufacturing employment fell from a peak of 22% in 1995 to 19.5% in 2018.

Unfortunately, what developing countries have to offer is — for the most part — cheap and less-skilled labor. And if the returns of the last 40 years for this resource seem mediocre, new generations of labor-saving technology powered by artificial intelligence will make the next 40 years much more difficult.

Let’s also forget about agriculture. Due to the faith that Brazil has invested in soybeans and beef, increased productivity in agriculture pushes people to leave the countryside for jobs in the urban economy. Economies built around raw materials are not the answer, a lesson that Latin American countries never tire of re-learning. They employ few people and offer few links to other sectors of the economy. They may stimulate exports and benefit a few, but the majority of workers, especially the less educated, will be left behind.

Although legislators from Africa to Latin America have high hopes that the battle against climate change will open up new development paths, the phrase “why export lithium if we can export lithium ion batteries” will not only run up against the old obstacles of lack of capital and know-how that dependency theory gave us in the 1960s, but also with the new difficulties posed by automation.

Indeed, the rich world’s push for decarbonisation is more likely to undermine development options for the poor world, limiting their access to cheap energy and restricting imports from developed markets of what they may consider “dirty” sources.

Let’s add to the mix the slogan “buy american products”, nearshoring and other US attempts to move away from the globalized economy, leaving workers in the developing world on the brink.

At Harvard, Dani Rodrik has reflected more than most on this nexus of problems. He has written about what he calls “premature deindustrialization”, explored growth spurts in some African countries, which failed to create many highly productive jobs, and assessed how global supply chains have been of little use to their abundant cheap labor.

His conclusion, after examining the alternatives, is not particularly optimistic: developing countries must figure out how to build development around their national service companies, which employ most of their workers. Because there is little else out there. As he himself said: “It’s the only possible answer I can think of.”.

The path is not obvious: policies are needed to increase the productivity of a relatively unproductive sector that has little incentive to improve. These businesses are generally small and often informal (retailers, restaurants, perhaps clinics and hotels) constrained by a poor domestic consumer base and limited foreign or domestic investment.

The governments of the poor world must essentially develop industrial policies, but for services. If enough of these micro-enterprises find the means to enter the formal economy and grow, boosting employment, they could anchor a national middle class which, in turn, would provide a larger internal market for their services.

In terms of possibilities, this seems very unlikely. “It doesn’t make growth and development impossible.” Rodrik commented. “What is impossible are the miracles of very rapid growth that we have witnessed”. However, what he hits the nail on the head is his warning: “If they don’t do that, it will be even worse.”. How would the world face poverty if it is an inescapable destiny?

By Edward Porter