PPoliticians and politicians around the world have a common concern: how can they make their countries richer? The problem is that the path to wealth seems increasingly daunting. The global economy is changing as new, green technologies emerge and trade relationships fragment. In countries that are already rich, the state is back in a big way after decades of free-market rhetoric. Governments spend hundreds of billions on handouts for industries they deem strategically important.
Given this, the growth expectations of many developing countries are surprisingly ambitious. India and Indonesia hope to become high-income countries within 25 years. Muhammad bin Salman, the crown prince of Saudi Arabia, wants to diversify and develop his economy just as quickly. Refreshingly, such plans are more outward-looking than many previous development strategies. But they also have pitfalls.
In many ways, developing countries are relying on globalization. Indonesia wants a larger role in green supply chains. The company aims to do everything from mining and refining nickel to building the electric vehicles that run on it. The finished products then want to be exported to the rest of the world. The Gulf states want to become attractive locations for global companies and are opening themselves up to passenger, freight and cash traffic. Narendra Modi envisions India as a high-tech manufacturer for the world, making microchips and smartphones.
This is a welcome change. Less than 50 years ago, India hoped to grow by isolating itself from the global economy. It turned out to be an approach that failed miserably. Some still believe India's domestic demand could support its growth.
But serving foreign markets plays a crucial role in development. It keeps companies honest by forcing them to compete in markets that their governments do not control. This allows them to achieve the largest possible scale. And foreign customers can teach companies how to better serve them. In East Asia, too, export performance was a useful measure for policymakers because it showed which industries deserved their continued support.
However, today's development strategies also harbor dangers. In many countries, governments risk distorting the economy in the name of promoting it. Saudi Arabia's attack on industrial policy, paid out largely as a handout from the Public Investment Fund, even exceeds the expenditures of the American Inflation Reduction Act. To support the growth of exporters, India is trying to isolate its high-tech manufacturers through tariffs and subsidies. Indonesia's all-in bet on nickel puts the country at risk of opting out if other battery chemistries take hold.
The rich world's newfound eagerness for protectionism could make it tempting for poorer countries to follow suit. But the flood of money and protection from foreign competition make it impossible to know whether a government's development bets will pay off. A bet on one technology could go wrong if others emerge.
Parts of the developing world have paid dearly to learn these lessons before. In the 1960s, African policymakers had largely the same ideas as East Asia, and the continent grew just as quickly until it languished between 1975 and 1985 due to the election of the wrong champions. It is now the poorest region in the world.
Selecting the winners is also more difficult today than it was 60 years ago. Then it was a matter of deciding which form of production should be supported. Cheap and abundant labor gave poor countries an advantage. Manufacturing was the only sector in which poor countries progressed faster than rich countries.
However, today factories have become more capital intensive. Although manufacturing still offers a way to increase a country's productivity, it is less certain that it will become a poor country's comparative advantage. That makes it even harder for policymakers to find a good industry to place their bets on. Instead of gambling with the public's money, it would be better to leave it off the table.
After all, there are plenty of other worthwhile things to spend it on. Government plays a crucial role in providing public goods, investing in infrastructure to hold regions together or in education to improve workforce skills. That could still favor some industries over others. But if economies remain open, they will at least experience the disciplines and benefits of trade.
Vision 2050
It's about a lot. Developing countries are home to over 6 billion people and some of the most fragile democracies. Improper growth would cause such places to remain poorer for longer. This would not only be a human tragedy, but also a potential source of political instability. To avert this, developing countries must be brave – and resist the urge to build walls around themselves. ■
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