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Latin America was a pretty poor country in 1980. Its gross domestic product per person was only 42% of the average citizen of the then ruling group of the seven rich nations.
Then many things happened: Governments from Buenos Aires to Mexico City turned on their heads half a century of statist, inward-looking economic policies. They cut budgets and sold public companies; open to trade and foreign capital. Mexico tied its economy to the United States through NAFTA. Brazil and Argentina have (so to speak) tied the knot via Mercosur. China rushed in to buy the region’s commodities.
And last year, Latin America’s per capita domestic product was 29% of the G7’s domestic product.
But before you blame Latin American incompetence, consider this: the economic output of the average African citizen fell from 17% to 10% of that of the average rich-world citizen in purchasing power parity terms over those 42 years; average GDP per capita in the Middle East fell from 114% to 41% in the G7.
Outside of South Asia and East Asia, development has actually declined in the last generation in most countries that are not yet wealthy. The economic convergence that economists once saw as the inevitable fruit of the encounter between rich-world capital and poor-world cheap labor has failed to materialize in too many places to be considered accidental.
Bouts of euphoria — like the decade in which China seemed to buy all the iron, copper, soybeans and steak that South America could produce — mostly ended with a thud. Even the headline arguments – such as linking the Mexican economy to the richest and largest consumer market in the world – failed to create widespread prosperity.
Even some of the more positive stories feel a little, well, meh. India’s GDP per capita rose to 13% from 5% of G7 GDP, Vietnam’s from 5% to 21%. GDP per capita in China, the poster child for recent export-led economic success, rose to 33% of the G7 average from 3%. That’s progress. But it didn’t really make China rich.
The depressing track record of so many shots at “development” raises questions that economists should try to answer honestly, rather than hesitate and howl: Is there a viable path to development for the world of the poor? How does it look like? And what do we do if we can’t find it?
And let’s not do the McKinsey thing. The guide “Investing in human capital is essential to become more productive and join global value chains” will not help countries that cannot afford to send all their children to secondary school, let alone college. As Donald Rumsfeld might put it, poor countries need development strategies for the workers they have, not for those who may favor consultancies.
The problem for economists mulling over the issue — and tossing admonitions about “free trade” and “better governance” — is that the track record of development and the guides used over the past few decades offer few precedents that could prove helpful in the new world that is unfolding.
You may be wondering: what about manufacturing? Think of Japan and Korea, of the East Asian Tigers and China, of post-war Germany: for the best part of a century, manufacturing for export was about the only successful strategy for bringing broad-based prosperity to the poor countries of the world.
This is no coincidence. Manufacturing has a unique ability to increase productivity. Build a factory in the middle of a field that makes T-shirts or plastic toys to increase the productivity of even the least educated farmhand. Exports help leapfrog the small domestic consumer market. And the revenues from these companies can fund the investments in human capital and other inputs to move up the value chain.
But 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 labour, especially cheap unskilled labour.
It’s not just happening in the US, where President Joe Biden is pulling out all the stops to boost manufacturing jobs. The employment footprint of the manufacturing sector is shrinking worldwide. In South Africa, for example, manufacturing jobs fell from 14% in 1990 to 9% of total employment in 2018 before Covid struck; in Nigeria they fell from 12% to 7%.
Despite all of Nafta’s promises, only 17% of Mexico’s workers were in manufacturing in 2018, down from 20% in 1990. Even in China, the manufacturing employment share fell from a peak of 22% in 1995 to 19.5% in 2018.
Unfortunately, what developing countries have to offer is mostly cheap, less-skilled labor. And if the fruits of the last 40 years look mediocre for this resource, new generations of labor-saving, artificial intelligence-based technology will make the next 40 years much more difficult.
Forget farming too. Despite all the faith Brazil has placed in soy and beef, rising agricultural productivity is driving people off the fields to seek jobs in the urban economy. Economies based on commodities cannot afford this – a lesson Latin American countries never tire of learning. They employ few people and offer few links to other economic sectors. They may boost exports and benefit a few, but most workers, especially the least educated, are left behind.
Even if politicians from Africa to Latin America may have high hopes that the fight against climate change will open up new development paths, the cry “why export lithium when we can export lithium-ion batteries” is not only heard at the old roadblocks are encountering the lack of capital and know-how that gave us dependency theory in the 1960s, but also new ones that have arisen with automation.
In fact, the rich world’s drive to decarbonize is more likely to erode development options for the poor world – by restricting their access to cheap energy and restricting developed markets’ imports from sources they see as “dirty”.
Add Buy American, nearshoring and other US attempts to withdraw from the globalized economy to the mix and workers in the developing world are in a bit of a bind.
Dani Rodrik at Harvard has thought about this set of problems more than most. He has written about what he calls premature deindustrialization, examining spurts of growth in some African countries that have not created many high-productivity jobs, and assessing how global supply chains have shown little benefit to their abundant cheap labor force.
His conclusion, after examining the alternatives, is not particularly optimistic: developing countries need to figure out how to build development around their domestic service companies, which employ most of their workers. Because there is hardly anything else out there. As he put it, “It’s the only possible answer to the question you can think of.”
The path is not obvious: action is needed to increase productivity in a relatively unproductive sector that has few incentives to improve. These businesses are generally small and often informal — retailers, restaurants, perhaps clinics and hotels — constrained by a weak domestic consumer base and limited foreign or domestic investment.
Governments in the poor world essentially need to develop industrial policies, but for services. If enough of these micro-enterprises find the means to enter the formal economy and grow and boost employment, they could entrench a domestic middle class, which in turn would provide a larger domestic market for their services.
As shots go, this one looks very long. “It doesn’t make growth and development impossible,” Rodrik said. “What’s impossible is the very rapid growth miracles that we’ve seen.” But what resonates is his warning: “If you don’t do this, it will only get worse.” How would the world deal with poverty as an inevitable fate?
More from the Bloomberg Opinion:
How to Win the Geoeconomic Revolution: Adrian Wooldridge
Progressives beat populists again but don’t celebrate: Niall Ferguson
China’s economic development model shows some cracks: Tyler Cowen
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Eduardo Porter is a columnist for the Bloomberg Opinion, covering Latin America, US economic policy and immigration. He is the author of American Poison: How Racial Hostility Destroyed Our Promise and The Price of Everything: Finding Method in the Madness of What Things Cost.
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