Raghuram Rajan: How emerging economies can prosper in a protectionist world
Subscribe to enjoy similar stories. As apprehensions grow in China, Europe and Japan about a possible trade war triggered by the incoming Trump administration, one should also spare a thought for developing countries. Their tried-and-tested method of expanding beyond agriculture to achieve middle-income status has been to embrace low-skilled export-oriented manufacturing.
How will these countries fare now? Their prospects may be better than expected, especially if they choose alternative development paths. In the past, poor countries developed through manufacturing exports because foreign demand allowed their producers to achieve scale, and because abysmal agricultural productivity meant that low-skilled workers could be attracted to factory jobs even with low wages. This combination of scale and low labour costs made these countries’ output globally competitive, despite their workers’ lower relative productivity.
As firms profited from exports, they invested in better equipment to make workers more productive. As wages rose, workers could afford better schooling and health care for themselves and their children. Firms also paid more taxes, letting the government invest in improved infrastructure and services.
Firms could now make more sophisticated, higher-value-added products, and a virtuous cycle ensued. This explains how China moved from assembling components to making world-leading electric vehicles (EVs) in just four decades. Visit a cell-phone assembly plant in a developing country today, however, and it is easy to see why this path has become more difficult.
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