(Bloomberg Businessweek) -- Rubana Huq’s garment factory is a constant cacophony of hissing steam irons, swooshing fans and snipping scissors. In the vast industrial facility near Dhaka, hundreds of women guide pieces of fabric through sewing machines, stitching clothing for the likes of H&M, Pepe Jeans and Primark. A digital signboard tracks productivity with the precision of a stock ticker, calculating the defect rate for garments down to the hundredth percentage point.
The scene evokes the growth strategy dozens of countries have followed in recent decades: factories employing legions of workers to produce goods for export, at wages that are low by Western standards but relatively generous in local terms. 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. “When large-scale automation happens for Bangladesh, replacing the workers will be a huge issue,” Huq says.
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.
A prolonged period of rapid globalization has been replaced with something closer to slowbalization. From 1995 to 2008, emerging and developing countries averaged economic growth of about 10%, Bloomberg Economics says. After the US financial crisis, the pace of expansion in emerging markets roughly halved. Exports accounted for almost 30% of global gross domestic product in 2007, up from 18.8% in 1991. But that trend has stalled, with exports making up 29.3% of GDP at the end of 2023.
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. “I do worry that many developing countries will not be able to transition to a new model,” says Harvard University economist Dani Rodrik.
Ethiopia illustrates how civil strife and mismanagement can derail even the most promising countries. For most of the 2010s, it was hailed as Africa’s best candidate for replicating the export-led success of places such as South Korea or Vietnam. The World Economic Forum called Ethiopia the continent’s “new growth engine,” and from 2004 to 2017 it had one of the world’s fastest annual growth rates, averaging almost 11%. It benefited from duty-free access to the US and low labor costs, with an Ethiopian garment worker earning a third of what a Kenyan makes for similar work.
But vast public investment in roads, trains and airports resulted in unsustainable public debt, runaway inflation and a string of white elephants. Ethiopia owes about $7 billion to China, which has funded 70 megaprojects, such as a pricey railway to Djibouti. A decade ago, a light-rail system built with Chinese money was touted as a 21st century solution to bottlenecks in Addis Ababa. Today, only a third of the trains function, breakdowns are routine, and daily ridership is a fraction of projections.
When Abiy Ahmed was elected prime minister in 2018, many saw an able technocrat who could right the ship, but that prediction proved to be wishful thinking. In 2020 war broke out between ethnic groups in the troubled region of Tigray, taking a big bite out of the economy. Foreign donors pulled billions of dollars, and the US ended Ethiopia’s tariff-free access to its market. Last year almost 450 manufacturing companies, out of roughly 5,000, stopped production in the aftermath of war. Even China, Ethiopia’s biggest lender, pared its support. Garment companies left the country because of the civil unrest, economic precarity and differing cultural expectations in the workplace. “The Chinese model of labor-led urbanization into factories didn’t 100% work in the Ethiopian context,” says Cobus van Staden of the China Global South Project, a research group.
Even Bangladesh—which climbed from the second-poorest nation on Earth in the 1970s to the lower-middle-income economy it is today—is struggling. The country had been on track to graduate from its United Nations classification as a least-developed country. Recent political upheaval, with weeks of curfews and protests culminating in the government fleeing on Aug. 5, threw that prospect into question. Garment exporters fear a dramatic decrease in sales this year, and Huq says some clothing labels are accelerating plans to quit Bangladesh entirely. “Many brands have told me that they’re going to be shifting at least 25% of their business by Christmas,” she says. “That is alarming.”
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.
Increased friction between Beijing and Washington is further scrambling the world order, and that’s spurring efforts to protect local industry, even among erstwhile free-trade advocates. Over the past few years, the US increased tariffs on Chinese goods sixfold, to 19.3%, and Beijing has responded with its own curbs. Former President Donald Trump has promised even more tariffs if he returns to power.
France, Germany and Italy in April pledged a coordinated economic response to the rising protectionism, joining other European nations in embracing measures such as targeted subsidies, tax incentives and trade restrictions. Globally, governments introduced more than 2,500 such policies last year, triple the number implemented five years ago, according to the IMF.
Romania offers clues on how to generate growth that can employ people at scale. Before joining the European Union in 2007, the country was the continent’s second-poorest. It’s now one of the region’s brightest lights, with clusters of software companies in Bucharest and near the ancient winemaking city of Iasi, where Amazon.com Inc. and Oracle Corp. have offices. Romania’s prosperity has surpassed that of its wealthier neighbor, Hungary, and even old-guard EU member Greece. Its citizens once lined up for food handouts during its communist past, but today—thanks partly to the higher living standards and salaries Romanians enjoy—the queues are more likely to be of immigrants renewing work permits.
The country has bet on varied industries, buffering it from supply chain shocks that exposed the vulnerabilities of places such as Bangladesh, where clothing makes up almost 90% of exports. Auto manufacturer Dacia Renault makes one of Europe’s most popular cars. The country is the EU’s No. 2 exporter of grain, after France. And there’s a thriving home appliance industry, with companies such as DeLonghi, Electrolux and Haier manufacturing there. “Romania’s transformation over the past few decades has been remarkable,” says Cristian Sporis, president of AmCham Romania, the nation’s largest business association. “Highly skilled human capital, competitive taxation levels, a large domestic market and access to resources were leading advantages.”
According to Bloomberg Economics analysis, Romania is among the top-ranked countries in terms of export potential. And it’s particularly strong in the service sector—anything from pedicurists and physicians to car detailers and computer coders—which now accounts for two-thirds of global output.
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. A 2023 Yale University study of India found that farmworkers who shifted to service jobs saw both their productivity and pay climb. But the gains were “strikingly unequal” and disproportionately benefited wealthier urban dwellers, the researchers said.
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. “To climb up the ladder,” says Raghuram Rajan, a former governor of the Reserve Bank of India, “is likely to be harder than in the past.” —With Ankur Shukla, Arun Devnath, Andra Timu, Simon Marks and Fasika Tadesse
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