Economy needs a course correction for sustained growth

Upon reaching six to eight per cent growth through a labour-based industrial economy, less-developed countries and their advisers often extrapolate past successes to predict high-income status in the near future. Unfortunately, this outcome rarely materialises. Instead, after investing in infrastructure and education to build on previous gains, these countries often end up with high debt and graduate unemployment. Is it simply bad luck? Why can a labour-based industrial economy not scale up to provide employment for graduates and propel less-developed countries to high-income status? Is there a need to change course to address this critical issue?

The industrial economy in less-developed countries mainly includes crafts, import substitution, and export-oriented manufacturing. Recently, service exports in the digital space have also been added. Additionally, efforts have been made to foster ideas and startups. The challenge is to leverage these sectors for sustained growth - around seven per cent per year over several decades - to reach high-income status. The obvious question is whether value addition and extraction can scale in a globally competitive market economy, and how less-developed countries can leverage this potential.

Prior to the Industrial Revolution, the industrial economies of all countries began with tinkering and craftsmanship. However, not all countries have been equally successful in scaling these up. For example, before 1750, Southeast Asia was the global manufacturing hub, producing 25 per cent of global industrial output. With the advent of the First Industrial Revolution, however, Southeast Asia's global share began to decline rapidly. Consequently, the income disparity between Southeast Asia and Europe continued to widen. Although colonisation played a role, this region has not regained its share even after 75 years of independence.

To shed light on why some countries experienced sustained, extraordinary growth, reaching high-income status, while most failed, Nobel Laureates Daron Acemoglu and James A. Robinson attributed this to institutions that either empower or impede waves of creative destruction. They reasoned that sustained high economic growth depends on transitioning to successive long waves of innovation, replacing mature ones.

For example, the mechanisation of textiles or steam engines in energy production generated new waves of growth but displaced earlier production methods, such as handlooms in textiles.Similarly, electrical technology fuelled the next wave of growth, supplanting the mechanical wave that drove the First Industrial Revolution, uplifting the UK-led Europe. Consequently, as the USA led in electrical technology, it experienced sustained growth by dismantling firms and industries dominant in the First Industrial Revolution. Hence, the USA surpassed Europe.

Meanwhile, Japan, followed by South Korea and Taiwan, successfully leveraged the third wave brought by semiconductor technology, achieving high-income status through industrial growth. On the other hand, despite strong institutions, countries like Australia and Canada could not generate equivalent wealth from the industrial economy. Besides, by pursuing import substitutions, export-oriented manufacturing, and IT service export, South Asian countries could not find a sustained growth path towards reaching high-income status. Malaysia, for instance, is still struggling to exit the middle-income trap due to its narrow focus on supplying labour to a global high-tech value chain.

This raises an important question: Why has South Asia failed to harness successive waves of innovation to achieve sustained economic growth and reach high-income status? Will investment in physical assets, infrastructure, and human capital development through conventional education, research, and institutional strengthening - as a recent Nobel Prize-winning thesis suggested - lead to sustained economic growth? Similarly, will increasing the flow of ideas through patent filing or licensing generate wealth from the same resources, as proposed by Paul Romer's theory of ideas and objects? Or will improvements in infrastructure, human capital, and research outputs drive economic growth by enhancing total factor productivity, also known as the Solow Residual? While these factors will undoubtedly contribute, data and theory suggest that less-developed countries are unlikely to experience sustained growth sufficient to reach high-income status.

Due to technological progression, increasing value for all products - from potato chips to silicon chips - is being driven by idea flow. However, supporting this idea flow through investment in ecosystems and institution-building that reflects democratic values fairly has not been sufficient. This article proposes seven steps to empower less-developed countries to elevate their industrial economies to a new level, creating and extracting economic value sustainably to reach high-income status:

1. Provide universal primary education on wealth creation dynamics from technological potential, rational decision-making under uncertainty, and idea management to foster a cumulative effect. This will create broad-based democratic support for institutions and policies aimed at wealth creation from idea flow distilled from technology.
2. Encourage grassroots-level ideas and technology management, generating millions of idea streams to foster wealth creation.
3. Promote systematic process innovation to create a snowball effect in industrial sectors, enhancing local production competitiveness, fostering idea-based wealth-creation institutions, and developing managerial capacity.
4. Establish a research centre to understand and predict global wealth-creation dynamics by leveraging technological advancements, allowing for early detection of signals, trend prediction, and opportunity identification.
5. Begin investing in global technology stocks with scaling potential to deepen understanding of global dynamics and grow capital.
6. Identify a few products in suitable industries for global competition and evolve them through incremental advancements and creative destruction.
7. Implement synchronised responses to succeed in the global race, advancing selected products and shifting the innovation epicentres of these products toward less-developed countries. This will foster wealth-creation clusters through idea trade, paving a scalable growth path to high-income status.

It appears that conventional approaches to catching up or merely supporting the wealth-creation dynamics of advanced industrial economies will not result in a sustained growth trajectory for less-developed countries through the industrial economy alone. Therefore, a shift in our development policy is essential. Unfortunately, existing economic theories and conventional means do not offer the momentum required for this shift. For this reason, the seven steps outlined in this article must be implemented to promote national understanding, consensus-building, and synchronised action, allowing less-developed countries to graduate from supplying labour and natural resources to the global value chain and ultimately move the innovation epicentres of specific products and industries away from advanced economies.

M. Rokonuzzaman, Ph.D is an academic, researcher, and activist: technology, innovation, and policy.

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