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Can India, Indonesia and Saudi Arabia be the next great economies? - The Economist - 04.02.24

Several countries are making bold—and risky—bets on growth.


Politicians and policymakers all over the world share a preoccupation: how to make their countries richer. The trouble is that the route to prosperity looks ever more daunting. The global economy is changing, as new, green technologies emerge and trading relationships fragment. In countries that are already rich the state, after decades of free-market rhetoric, is back in a big way. Governments are spending hundreds of billions on handouts for industries they deem to be strategically important.


In the face of this, many developing countries’ ideas for growth are staggeringly ambitious. India and Indonesia hope to become high-income countries within 25 years. Muhammad bin Salman, Saudi Arabia’s crown prince, wants to diversify and develop its economy just as rapidly. Refreshingly, such plans are more outward-looking than many development strategies of old. But they contain pitfalls, too.


In many ways, the developing world is choosing to bank on globalisation. Indonesia wants a bigger role in green supply chains. It seeks to do everything from mining and refining nickel, even to building the electric vehicles that run on it. It then wants to export the finished products to the rest of the world. Countries in the Gulf want to become attractive homes for global business, and are opening up to flows of people, cargo and cash. Narendra Modi envisions India as a high-tech manufacturer for the world, churning out microchips and smartphones.


That is a welcome shift. Less than 50 years ago India hoped to grow by closing itself off from the global economy. It turned out to be an approach that failed miserably. Some still suggest that India’s domestic demand could carry its growth.

 

But serving foreign markets plays a vital role in development. It keeps firms honest, by forcing them to compete in markets that their governments do not control. It lets them reach the largest possible scale. And foreign customers can teach firms how to serve them better. In East Asia export performance was also a useful yardstick for policymakers, because it revealed which industries deserved their continued backing.


Nonetheless, today’s development strategies also hold dangers. In many countries governments are running the risk of warping the economy in the name of nurturing it. Saudi Arabia’s onslaught of industrial policy, mainly disbursed as handouts from the Public Investment Fund, exceeds the spending even of America’s Inflation Reduction Act. In order to help exporters grow, India is seeking to fence off its high-tech manufacturers behind tariffs and subsidies. Indonesia’s all-in bet on nickel leaves it perilously exposed, should other battery chemistries prevail.


The rich world’s new-found zeal for protectionism may make it tempting for poorer countries to follow suit. Yet floods of cash and shelter from foreign competition make it impossible to know whether a government’s development gambles are paying off. A bet on one technology could go wrong if others emerge.


Parts of the developing world have paid dearly to learn these lessons before. For most of the 1960s Africa’s policymakers had the same ideas as East Asia’s, and the continent grew as fast, until picking the wrong champions left it languishing between 1975 and 1985. It is the poorest region in the world today.


Picking winners is also harder than it was 60 years ago. Then the choice was over which form of manufacturing to promote. Cheap, abundant workforces gave poor countries an edge. Manufacturing was the only sector in which poor countries got better faster than rich countries.


Today, however, factories have become more capital-intensive. Though manufacturing still offers a way to boost a country’s productivity, it is less certain to become a poor country’s comparative advantage. That makes it even harder for policymakers to spot a good industry for them to place their bets. Rather than gambling with the public’s money, they would be better off keeping it off the table.


There are, after all, plenty of other worthwhile things to spend it on. The state has a vital role in providing public goods by investing in infrastructure to stitch regions together, or education to boost workers’ skills. That might still favour some industries over others. But if economies stay open, then they will at least experience the disciplines and benefits of trade.


Vision 2050


The stakes are high. The developing world is home to over 6bn people and some of the most fragile democracies. Getting growth wrong would keep such places poorer for longer. That would be not just a human tragedy, but also a potential source of political instability. To avert it, the developing world needs to be bold—and resist the urge to build walls around itself. ■



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This article appeared in the Leaders section of the print edition under the headline "Vaulting ambition".


image: Vincent Kilbride

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