In 2050 there will be a new batch of economic powers... if nothing goes wrong. Narendra Modi, Prime Minister of India, wants his country's GDP per capita to exceed the high-income threshold established by the World Bank three years before then. Indonesian leaders estimate they have until mid-century (when an aging population begins to slow growth) to catch up with rich countries. Mid-century is also the definitive end for many of Mohamed bin Salman's Vision 2030 reforms. The crown prince of Saudi Arabia wants to transform his country from an oil producer into a diversified economy. Other smaller countries, such as Chile, Ethiopia and Malaysia, have their own plans.
They are very varied, but they all have something in common: a surprising ambition. Indian authorities believe that GDP growth of 8% per year will be needed to reach Modi's goal: 1.5 percentage points above the national average over the last three decades. Indonesia will need to achieve growth of 7% annually, from an average of 4.6% over the same period. Saudi Arabia's non-oil economy should grow 9% annually, starting from an average of 2.8%. Although 2023 has been a good year for all three countries, none has experienced growth at that rate. Very few countries have maintained such growth over five years, let alone 30.
And there is no clear recipe for runaway growth either. To boost prosperity, economists often prescribe liberalizing reforms of the kind promoted by the IMF and World Bank since the 1980s under the label of the Washington Consensus. Among the most adopted are sober fiscal policies and stable exchange rates. Today, technocrats advocate for looser competition rules and the privatization of state-owned companies. However, these proposals ultimately focus on removing barriers to growth rather than enhancing it. William Easterly of New York University has calculated that, even among the 52 countries with policies most consistent with the Washington Consensus, GDP growth only averaged 2% annually between 1980 and 1998. Modi and the prince Mohamed are not willing to wait: they want to develop, and develop quickly.
Their goal is to achieve the kind of meteoric growth that East Asian countries achieved in the 1970s and 1980s. As globalization spread, they took full advantage of a large, cheap, low-skilled labor force to corner global markets. automobile (Japan), electronics (South Korea) and pharmaceuticals (Singapore). The sectors were built behind protectionist walls that restricted imports and then prospered when trade with the rest of the world was encouraged. Later, foreign companies provided the technical knowledge and capital necessary to produce more complex and profitable goods, thereby increasing productivity.
It is not surprising, then, that leaders in developing countries remain enthusiastic about manufacturing production. In 2015, Modi announced plans to increase the industry's share of Indian GDP from 16% to 25%. "Sell anywhere, but make in India," he urged business leaders. Cambodia hopes to double exports from its factories, excluding textiles, by 2025. Kenya wants its manufacturing sector to grow 15% a year.
However, there is an obstacle. Industrialization is more difficult to induce today than it was 40 or 50 years ago. Technological advances mean that fewer workers than ever are needed to produce, for example, a pair of socks. In India, five times fewer workers were needed to run a factory in 2007 than in 1980. Across the world, industry is now based on skills and capital, two abundant resources in rich countries, rather than on labor, meaning that a large, cheap workforce is no longer a good option. avenue for economic development. So Modi and others have a new game plan: They want to make the leap into cutting-edge manufacturing. Why bother sewing socks when you can etch semiconductors?
The "extraordinary obsession with making things that are right on the technological frontier," as a former Indian government adviser puts it, sometimes leads to old-fashioned protectionism. It will be great if Indian companies can sell anywhere, but Modi wants Indians to buy Indian products. Import bans have been announced on everything from laptops to weapons.
However, not all protectionism is old-fashioned. Since their last appearance in India in the 1970s, subsidies and tax reliefs have largely replaced import bans and licensing. At that time, any investment that exceeded a certain threshold had to be authorized by an official. Now, top officials are ordered by Modi to raise investments worth $100 billion a year, and the prime minister has declared that one of his main economic goals is to attract chipmakers. "Production-linked incentives" provide tax breaks for every computer or missile made in India, as well as other high-tech products. In 2023, these subsidies will cost $45 billion, or 1.2% of GDP, up from about $8 billion when the scheme was launched in 2020. Similarly, Malaysia offers subsidies to companies that establish cloud computing operations, and helps with the cost of factories that are set up in the country. Kenya is building five duty-free industrial parks scheduled for completion by 2030 and has plans for another 20.
In some places, there have been early successes. Cambodia's manufacturing sector produced three percentage points more of national GDP last year than five years ago. Companies seeking to diversify from China have been attracted by low costs, subsidies for high-tech manufacturing and state investment. Now, in other places, things are proving more difficult. In India, the share of manufacturing in GDP has remained stable: Modi will miss his target of 25% next year. Big names like Apple and Tesla have put their brands on one or two factories, but show little desire to make the kind of investments they once lavished on China, which offers superior infrastructure and a better-trained workforce.
The danger is that, in trying to attract high-tech manufacturing, countries will end up repeating the disasters of the past. From 1960 to 1991, the share of manufacturing in Indian GDP doubled. However, when protective barriers were removed in the 1990s, nothing was cheap enough to be exported to the rest of the world. The risk is especially great this time, since Modi considers the manufacturing industry to be synonymous with "self-reliance", that is, India's ability to produce whatever it needs (especially weapons-related technology). Along with Indonesia and Turkey, India is among a group of countries that see getting richer as a path to a stronger geopolitical position, increasing the possibility of misdirecting investments.
These drawbacks of basic manufacturing and attempts to leapfrog are helping to convince some countries that they should try another approach: attracting industries that use their natural resources; especially, the metals and minerals that drive the ecological transition. The governments of Latin America are very interested in this direction. So are the Democratic Republic of the Congo and Zimbabwe. Although Indonesia is the country that is leading the way, and it is doing so with surprising rigidity. Since 2020, the country has banned exports of bauxite and nickel, of which it produces 7% and 22% of the world's supply. By maintaining tight control over them, the authorities hope to get the refineries to move to the country. Then they want to repeat the game and convince all stages of the supply chain to do the same, until they have Indonesian workers manufacturing everything from battery components to wind turbines.
Officials also offer carrots, both in the form of money and facilities. Indonesia is in the midst of an infrastructure boom: spending between 2020 and 2024 should reach $400 billion, up more than 50% a year from 2014. That includes financing at least 27 multibillion-dollar industrial parks, including the of Kalimantan, built on 13,000 hectares of ancient Borneo rainforest at a cost of 129 billion dollars. Other countries are also offering treats. Companies that want to install solar panels in Brazil will receive subsidies if they also build them in the country. Bolivia nationalized the lithium industry, but its new state conglomerates will be able to create joint ventures with Chinese companies.
This approach (trying to scale the energy supply chain) has few precedents. The most oil-producing countries in the world send most of their crude oil abroad. In fact, more than 40% of the world's refining capacity is located in the United States, China, India and Japan. Saudi Arabia refines less than a quarter of what it produces; Saudi Aramco, the state-owned oil giant, refines in northern China. Experiments with export bans have been primarily on simpler commodities, such as timber in Ghana and tea in Tanzania. However, obtaining nickel pure enough to be used in electric vehicles from Indonesian supplies is extremely complex, says Matt Geiger of hedge fund MJG Capital. The process requires three different types of factories, and the nickel must go through several more before it reaches a car.
Fossil fuels have enriched some parts of the Gulf, but the truth is that almost every sector is constantly gobbling up oil around the world. There are no guarantees that the green metals boom will be of similar magnitude. The batteries only need to be replaced every few years. Officials at the International Energy Agency, a global body, estimate that the benefits of green raw materials will peak in the coming years, after which they will gradually decline. In addition, technological development could suddenly reduce the appetite for certain metals (for example, if other types of battery chemistry become popular).
Meanwhile, fossil fuel beneficiaries are trying another strategy: reinventing the commercial pole. The Gulf wants to be the place where the world does business, welcoming trade from all corners of the planet and providing refuge from geopolitical tensions, especially between the United States and China. By 2050 the world should reach net zero emissions. Although the Gulf is rich, its economies are still developing. The local workforce is less qualified than that of Malaysia, but earns salaries comparable to those in Spain. That makes foreign workers essential. In Saudi Arabia, they represent three quarters of the total workforce.
The United Arab Emirates has been one of the first countries in the region to diversify. It has focused on sectors, such as shipping and tourism, that can help facilitate other businesses, as well as high-tech sectors, such as artificial intelligence and chemistry. Abu Dhabi already hosts the Louvre and New York University, and has plans to make money from space travel for tourists. Qatar is building Teaching City, a campus that will cost $6.5 billion and span 1,500 hectares; The idea is that it works a bit like an industrial estate for universities with headquarters of ten of them, such as Northwestern University in the United States and University College London.
Other Gulf countries now want to emulate that approach. Saudi Arabia expects foreign investment flows to rise to 5.7% of GDP in 2030, up from 0.7% in 2022, and is spending huge amounts of money to make that ambition a reality. The Public Investment Fund has disbursed $1.3 trillion in the country in the last decade, more than the Inflation Reduction Act, President Joe Biden's industrial policy in the United States, plans to spend. The fund is investing in everything from soccer teams and petrochemical plants to entirely new cities. Industrial policy has never been carried out on such a scale. Dani Rodrik of Harvard and Nathaniel Lane of Oxford University estimate that in 2019 China spent 1.5% of GDP on its own efforts. Last year, Saudi Arabia disbursed sums equivalent to 20% of GDP.
The problem with spending so much money is that it's hard to see what works and what doesn't. Omani manufacturers, who make products ranging from aluminum to ammonia, can get a rent-free factory in one of the country's new industrial parks, buy materials with generous subsidies and pay their workers' salaries by taking out cheap loans from shareholders, who usually include the government. They may even resort to export subsidies to sell cheaper abroad. How do you know which companies will survive after all that money and which will go under without it?
Something is already painfully clear. The private sector has not yet taken off in the Gulf. Over the past five years, almost 80% of all non-oil economic growth in Saudi Arabia has come from public spending. Although an impressive 35% of Saudi women are now part of the workforce, up from 20% in 2018, overall female labor force participation rates in the rest of the Gulf remain low. Researchers at Harvard University have found that legislation introduced in 2011, which stipulated that Saudis had to make up a certain part of a company's workforce (for example, 6% of all workers in green technology and 20% in insurance), has decreased productivity and has done nothing to increase the weight of private employment.
A few countries will manage to enter the group of high-income countries. The UAE's spending on artificial intelligence may pay off. New technologies may make the world more dependent on nickel, to the benefit of Indonesia. India's population is too young for growth to stagnate completely. However, the three strategies used by countries that seek to enrich themselves (the leap into high-tech manufacturing, the exploitation of the ecological transition and the reinvention of the commercial hub) represent bets, and expensive bets at that. Even at this early stage, there are some lessons to be learned.
The first is that the State is now much more active in economic development than at any other time in recent decades. One way or another, an economy must evolve from agrarian poverty to diversified sectors capable of competing with rivals from countries that have been rich for centuries. This requires infrastructure, research and state experience. Loans at below-market rates may also be needed. That means some state involvement is inevitable, and policymakers will have to pick some winners. Even so, governments intervene now much more than before. Many have lost patience with the Washington Consensus. The benefits of his more direct reforms, such as independent central banks and ministries filled with professional economists, have already been reaped; The institutions that once imposed the doctrine (namely the IMF and the World Bank) are shadows of their former selves.
Today, policymakers in the developing world take a cue from China and South Korea. Few remember the interventionist follies of their own country. In the 1960s and 1970s, it was not only East Asian countries that enthusiastically experimented with industrial policy; In Africa, many did too. For most of a decade, the two regions grew at a similar rate. Beginning in the mid-1970s, however, it became clear that African policymakers had made the wrong bets (see chart). A debt crisis began a decade known as the "African tragedy" and during which the continent's economies contracted an average of 0.6% annually. Later in the 2000s, Saudi officials spent big and unsuccessfully to foster a petrochemical industry, forgetting that shipping oil abroad was cheaper than paying people to work at home.
The second lesson is that the stakes are high. Most countries have invested huge sums in their chosen path. For smaller ones, like Cambodia or Kenya, the result could be a financial crisis if things go wrong. In Ethiopia, that has already happened, with a debt default that has been accompanied by civil war. Even the largest countries, such as India and Indonesia, will not be able to afford a second attempt at development. The cost of their current efforts, should they fail, and the cost of demographic aging will leave them with no fiscal space. The richest countries are also limited, although by another resource: time. Saudi Arabia needs to develop before oil demand declines or it will have few means to support its citizens.
The third lesson is that the way countries grow is changing. According to Rodrik's work, the manufacturing industry has been the only area in which poor countries improve their productivity at a faster rate than rich countries and thus manage to catch up. Modern industry may not offer the same advantages. Instead of spending time trying to make factory processes more efficient, workers in countries trying to get rich extract more and more green metals (working in a sector with manifestly low productivity), cater to tourists (another sector low productivity) and assemble electronic devices (instead of manufacturing more complex components). All of this means that the race to get rich in the 21st century will be more grueling than that of the 20th century.
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Translation: Juan Gabriel López Guix
