Developing Countries Can’t Count on Manufacturing to Supercharge Growth

Factories in Bangladesh employing legions of workers to produce goods for export, at wages that are low by Western standards but relatively generous in local terms – the growth strategy dozens of countries have followed in recent decades. That model has more than tripled the size of Bangladesh’s economy, turning subsistence farmers into textile workers for brands from Adidas to Zara—what the World Bank calls one of the “greatest development stories” of our time.

Huq, who chairs the family-run Mohammadi Group, says that upon closer inspection, the seams of that model are fast coming undone. Several years ago, Huq installed hundreds of jacquard-weaving machines and other equipment from China and Germany, allowing her to cut 3,000 jobs, almost a third of her staff. Although those people eventually found work in other parts of the business, she worries about the future: As many as 80% of Bangladeshi factories planned to purchase automation equipment from 2023 to 2025, with each machine capable of displacing as many as six people, according to a study from researcher Shimmy Technologies Inc.

The collapse of the Soviet Union and the formation of the World Trade Organization a few years later spurred a shift toward export-oriented manufacturing rather than tariff-protected local industry as the best path to sustainable development. The strategy lifted hundreds of millions from poverty in China and beyond, giving rise to a period of dramatic growth.

But that playbook is less and less able to generate the economic expansion poorer countries need to raise standards of living. As automation spread, the number of robots in factories worldwide jumped more than threefold from 2012 to 2022, with most of the growth in developing countries. Supply chains have fragmented as war tears through Ukraine and the Middle East. Post-pandemic inflation and higher interest rates have pushed Ethiopia, Pakistan and other heavily indebted nations toward default. And tensions between the US and China are reshuffling trade patterns and inspiring protectionist policies.

Manufacturing today makes up a smaller portion of global economic output than it did two decades ago. China accounts for about a third of today’s production of physical goods, and the next dozen countries—including the US, Japan, Mexico and Germany—are responsible for an additional 45% or so, leaving little room for places still looking for a way in. And even as China gets richer, it’s still focused on manufacturing and has done little to bolster consumption, so its 1.4 billion citizens are unlikely to buy more goods from other countries anytime soon. “The market isn’t what it used to be, and China got there first,” says Richard Baldwin, an economist at the IMD Business School in Switzerland.

No clear alternative has emerged for developing countries seeking to get rich. Those that are doing relatively well, like Romania, have combined advantages such as a sizable market and access to resources with low taxation and a diversified industrial base.

Of 85 less-developed countries Bloomberg Economics analyzed, almost three-quarters—economies with $25 trillion in output—are unlikely to further benefit from export-oriented manufacturing. Many of those are in Africa, particularly in places with low literacy, patchy electricity and poor governance. Those factors make the pivot to growth areas such as services difficult, meaning dozens of nations may simply be left behind. 

The pandemic, the inflation it triggered and the subsequent spike in interest rates have added to the difficulties. As investors slow their lending to emerging markets, even bright stars such as Sri Lanka have fallen into bankruptcy, prompting the World Bank to warn of a “lost decade.”

Emerging nations now carry public debt of $29 trillion, up from $12 trillion a decade ago, with more of them facing default and asking for bailouts from global lenders. Last year the International Monetary Fund approved about $5.7 billion of loans to poor countries, roughly four times its annual average before the pandemic.

Even as services jobs proliferate, the best ones tend to be in fields such as finance and tech, requiring skills that few people in developing nations have. As the global economy increasingly pivots away from manufacturing, many of the least developed countries will fall further behind.

As the global economy slows, a diversified approach to growth appears to be the winning ticket: some manufacturing, some services, some protectionist policies. Even then, the go-go economic expansion that propelled it will become increasingly rare.

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