From The Economist, January 2, 2024:
How to get rich in the 21st century
By 2050 there will be a new crop of economic powers—if things go to plan. Narendra Modi, India’s prime minister, wants his country’s GDP per person to surpass the World Bank’s high-income threshold three years before then. Indonesia’s leaders reckon that they have until the mid-century mark, when an ageing population will start to drag on growth, to catch up with rich countries. The middle of the century is also the ultimate finale for many of Muhammad bin Salman’s “Vision 2030” reforms. Saudi Arabia’s crown prince wants to transform his country from an oil producer into a diversified economy. Other smaller countries, including Chile, Ethiopia and Malaysia, have schemes of their own.
These vary widely, but all have something in common: breathtaking ambition. India’s officials think that GDP growth of 8% a year will be required to meet Mr Modi’s goal—1.5 percentage points more than the country has managed on average over the past three decades. Indonesia will need growth of 7% a year, up from an average of 4.6% over the same period. Saudi Arabia’s non-oil economy will have to grow by 9% a year, up from an average of 2.8%. Although 2023 was a good year for all three, none experienced growth at this sort of pace. Very few countries have maintained such growth for five years, let alone for 30.
Nor is there an obvious recipe for runaway growth. To boost prosperity, economists typically prescribe liberalising reforms of the sort that have been advanced by the IMF and the World Bank since the 1980s under the label of the “Washington consensus”. Among the most widely adopted are sober fiscal policies and steady exchange rates. Today technocrats urge looser competition rules and the privatisation of state-owned firms. Yet these proposals are ultimately concerned with removing barriers to growth, rather than supercharging it. Indeed, William Easterly of New York University has calculated that, even among the 52 countries which had policies most consistent with the Washington consensus, GDP growth only averaged 2% a year from 1980 to 1998. Mr Modi and Prince Muhammad are unwilling to wait—they want to develop, fast.
The aim is to achieve the sort of meteoric growth that East Asian countries managed in the 1970s and 1980s. As globalisation spread, they made the most of large and cheap workforces, gaining an edge in markets for cars (Japan), electronics (South Korea) and pharmaceuticals (Singapore). Industries were built behind protectionist walls, which restricted imports, then thrived when trade with the rest of the world was encouraged. Foreign companies later brought the know-how and capital required to churn out more complex and profitable goods, increasing productivity.
Little surprise, then, that leaders across the developing world remain enthusiastic about manufacturing. In 2015 Mr Modi announced plans to increase industry’s share of Indian GDP to 25%, from 16%. “Sell anywhere, but make in India,” he urged business leaders. Cambodia hopes to double the exports of its factories, excluding clothing, by 2025. Kenya wants to see its manufacturing sector grow by 15% a year.
There is a snag, however. Industrialisation is even more difficult to induce than it was 40 or 50 years ago. As a result of technological advances, fewer workers than ever are needed to produce, say, a pair of socks. In India five times fewer workers were required to operate a factory in 2007 than in 1980. Across the world, industry now runs on skill and capital, which rich countries have in abundance, and less on labour, meaning that a large, cheap workforce no longer offers much of a route to economic development. Mr Modi and others therefore have a new game plan: they want to leap ahead to cutting-edge manufacturing. Why bother stitching socks when you can etch semiconductors?
This “extraordinary obsession with making stuff right on the technological frontier”, as a former adviser to the Indian government puts it, sometimes leads to old-fashioned protectionism. Indian companies may be welcome to sell anywhere, but Mr Modi wants Indians to buy Indian. He has announced import bans on everything from laptops to weapons.
But not all the protectionism is old-fashioned. Since the last outbreak in India, in the 1970s, subsidies and tax breaks have mostly replaced import bans and licensing. Back then every investment above a certain threshold had to be cleared by a civil servant. Now senior officials are under orders from Mr Modi to drum up $100bn-worth of investment a year, and the prime minister has declared luring chipmakers to be among his main economic goals. “Production-linked incentives” give tax breaks for each computer or missile made in the country, as well as for other high-tech products. In 2023 such subsidies carried a bill of $45bn, or 1.2% of GDP, up from $8bn or so when the scheme was launched three years earlier. Similarly, Malaysia is offering handouts to firms that establish cloud-computing operations, and helps with the cost of factories set up in the country. Kenya is building five tax-free industrial parks, which will be ready in 2030, and has plans for another 20.
In some places, there has been early success. Cambodia’s manufacturing sector produced three percentage points more of the country’s GDP last year than it did five years ago. Firms that are looking to diversify from China have been lured by low costs, subsidies for high-tech manufacturing and state investment. Elsewhere, though, things are proving harder. In India manufacturing has stayed steady as a share of GDP—Mr Modi is not going to hit his 25% target by next year. Big names like Apple and Tesla have put their brands on a factory or two, but show little desire to make the sort of investments they once lavished on China, which offers superior infrastructure and a better-educated workforce.....
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