A New Growth Strategy for Developing Nations

Not long ago, the development community was brimming with optimism about the developing world’s economic prospects. Economic growth was up, extreme poverty was sharply down, and a clear consensus seemed to have emerged on a broad growth strategy based on integration into the world economy. There were plenty of debates on the particulars of the strategy, of course. The experience of China, which had engineered history’s most spectacular poverty reduction, gave ammunition to advocates of both market-oriented and more state-directed approaches to development alike. Yet both sides agreed that, however achieved, export-oriented industrialisation was the right path.This consensus has been recently shattered by several developments, however. In particular, technological changes have made manufacturing skills- and capital-intensive—and less and less labour-absorbing—undercutting the efficacy of industrialisation as a growth strategy. The ability to absorb labour was reduced at the same time as the comparative advantage of developing countries was attenuated. As Figure7.1 shows, economic growth rates in the developing world were already dropping in the years preceding the COVID-19 pandemic.The pandemic itself accelerated and exposed other, more subtle trends. With lower growth, the debt problems of developing countries became crushing, and low- and lower-middle-income countries lost precious access to financial markets. Geopolitical competition between the United States and China as well as the creeping backlash against hyper-globalisation transformed the global economic landscape and rendered the world economy less hospitable to growth through trade. As incomes in developed countries increased, there was a shift away from manufactured goods to services, so the share of global output in manufacturing was in decline. The impending climate-change crisis, and the requisite green transition, affected agricultural sectors in many developing countries adversely. It also reduced global demand for material goods, especially those with a high carbon footprint, and made the development of new technologies imperative—further disadvantaging developing countries.