How emerging economies could prosper in a protectionist world

As manufacturing export success gets harder, they should focus on service exports. These are unlikely to face big trade barriers

- RAGHURAM G. RAJAN

A professor of finance at the University of Chicago Booth School of Business, former governor of RBI and co-author of ‘Breaking the Mold: India’s Untraveled Path to Prosperity

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 low-skilled workers could be attracted to factories and even low labour costs made these countries’ output globally competitive, despite their firms’ lower relative productivity.

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.