For over 50 years, the traditional formula for economic growth in developing countries has involved moving subsistence farmers into manufacturing jobs that cater to the global market. This model, famously implemented by the Asian Tigers and China, has successfully raised millions out of poverty by capitalizing on cheap labor, international expertise, and supportive government policies. However, the landscape is changing with advancing technology, evolving supply chains, and shifting global tensions. As a result, doubts are emerging about the efficacy of industrialization as a means of achieving sustained economic growth for developing nations, which are home to 85% of the world’s population.
Manufacturing, which used to hold a significant share of global output, is now facing challenges such as increased competition from emerging countries, a reliance on automated technology over cheap labor, and a diminishing effect on job creation for unskilled workers. Recent global events, including supply chain disruptions due to the Covid-19 pandemic and geopolitical tensions, have further accelerated the uncertainties surrounding the traditional industrialization model. The International Monetary Fund has highlighted the growing risk of lower growth coupled with mounting debt for developing nations, underscoring the need for alternative strategies to drive economic progress.
While the industrialization model is showing signs of limitations, service jobs are emerging as a potential alternative for fostering economic growth in developing countries. Cities like Bengaluru in India have become hubs for multinational corporations and IT firms, generating hundreds of thousands of jobs in areas such as accounting, cybersecurity, and artificial intelligence. This shift towards service-oriented economic activities reflects a broader global trend, with two-thirds of the world’s output now originating from the service sector. The pandemic has further spurred the transition by necessitating remote work arrangements, paving the way for cities to become focal points of economic development.
The perception that free markets alone can spur growth is being challenged by experts who advocate for a more nuanced approach involving a mix of market mechanisms and government intervention. Justin Yifu Lin, dean of the Institute of New Structural Economics at Peking University, emphasizes the importance of industrial policy and state support in nurturing infant industries and overcoming market failures. The experiences of countries like China and South Korea demonstrate the potential of strategic government involvement in spurring economic development. Education also remains a crucial factor in ensuring that developing nations can capitalize on the rising demand for skilled service workers in sectors such as finance and technology.
Despite the potential of service jobs to drive growth, challenges persist in terms of skill mismatches, limited access to training, and the uneven distribution of economic gains. While some countries have successfully transitioned from agriculture to consumer service jobs, the future trajectory of economic growth in developing nations remains uncertain. Researchers caution that while industrial policy focused on nurturing smaller service firms and households may yield modest growth, the overall envelope for economic expansion has shrunk compared to previous decades. Developing countries will need to maximize growth opportunities across all sectors of their economies to address the constraints imposed by shifting global dynamics and evolving economic landscapes.
