Developing economies need to push ahead with sweeping reforms to build new infrastructure, educate its labor force and improve business environment to catch a new wave of industrial changes, the executive director of the World Bank’s board, Otaviano Canuto, told Princeton University students on Thursday (Feb 15).
In a lunch-time talk organized by the Julis-Rabinowitz Center for Public Policy and Finance, Canuto argued that the manufacturing-led development model fueled by cheap labor, lower trade costs and abundant capital of the last two decades is no longer enough for countries to escape the “middle-income trap” that risks keeping economies stagnant.
Recent technological changes are shifting the manufacturing process toward innovation that requires more services and design and less labor input. Breakthroughs such as 3-D printers that allow for the manufacturing of tailored-made products, artificial intelligence and robotics are part of the innovation wave known as industry 4.0. A surge in global demand for services has also limited the scope for further gains in traditional manufacturing that in the past helped spark the economic miracles of Japan and China, he argued.
“It is not that producing manufactured goods in non-advanced economies is doomed, but replicating the case of China and Japan based on exports of manufactured goods has become extremely more difficult because the demand is not there,” Canuto said.
Instead of picking certain industries for government-backed stimulus, countries should focus on “horizontal” reforms among all sectors to bolster their human capital and give their businesses the upper hand in the new manufacturing era.
Education, employment training, labor flexibility and property rights should be the priority for developing nations to make the next leap into higher-income economies, Canuto stated.
Canuto asserted that China is again at the forefront by extending its export model while at the same time inserting itself in the new technology-led manufacturing model.
“One conclusion is less export-led manufacturing and more horizontal policies, which is what matters more instead on focusing on specific sectors.”
Talk slides HERE.