Another strength of the manufacturing-led growth model was its alignment of productivity gains with available labour. Through learning by doing, countries improved efficiency within existing sectors while steadily climbing the value chain. Economies could begin with low-productivity exports and, as workers gained skills, shift to more advanced sectors. This made growth faster, more inclusive and ultimately more sustainable.
But those days appear to be over. As the world enters an era of protectionism and deglobalisation, two alternative development paths have emerged. The first, proposed by Rohit Lamba and Raghuram G. Rajan, argues that countries like India should prioritise skill-intensive exportable services.
While Lamba and Rajan’s approach retains some benefits of the old manufacturing-led model — tapping global demand and boosting efficiency — its major weakness is that only a tiny share of the workforce can benefit directly. In 2024, even India, the leading example of this strategy, had less than 2.5% of its workforce in skill-intensive, tradable sectors. For most poor countries, where skilled labour is limited, this path is unworkable. Even where possible, it risks deepening inequality rather than promoting inclusion.
The second strategy, proposed by Dani Rodrik and Rohan Sandhu, argues that the window for labour-intensive exports has largely closed, and that emerging technologies like AI and automation will further weaken manufacturing’s role in job creation. They instead call for boosting productivity in non-tradable services. As most employment and economic activity in developing countries lies in these sectors, this approach offers greater potential for inclusive growth.
This strategy has two key limitations. First, new technologies can displace workers in non-tradable services, just as they do in manufacturing. Second, these services vary significantly in terms of skill and productivity. Sectors like telecoms, finance and real estate are high-skilled and efficient, while areas such as retail and caregiving are more accessible to unskilled workers but offer limited scope for productivity gains.
This dynamic, known as the Baumol effect, makes non-tradable services unlikely drivers of sustained, inclusive growth. Some sectors, like construction and tourism, may offer potential, but their productivity gains often rely on labour-displacing technologies, which limit their impact on broad-based development.
So, where does this leave developing countries? Surprisingly, while the traditional manufacturing-led strategy is no longer as effective as it once was, it remains a viable path for today’s low-income countries, provided that middle-income countries vacate the export space they currently dominate.
See also: EU unveils plan to reinvigorate world’s second-biggest market
Simple arithmetic makes the point clear. In 2023, Brazil, China, South Korea, Taiwan and Mexico made up around two-thirds of low- and mid-skilled manufacturing exports, worth about US$5.3 trillion. Over the next decade, rising wages and geopolitical shifts — especially anti-China sentiment — are likely to push them up the value chain or away from exports entirely.
This shift could create space for low-income countries. Capturing even half the vacated export markets, plus a slice of China’s growing domestic demand — worth at least half a trillion dollars — could more than double their exports to between US$2 trillion ($2.5 trillion) and US$2.5 trillion.
If low-income countries succeed, it could create 50-60 million new jobs, even with the reduced employment potential of export-led manufacturing due to labour-displacing technology. For context, China’s manufacturing workforce of approximately 150 million has helped lift the living standards of its 1.4 billion people. Similarly, expanded export opportunities could benefit up to 500 million people in today’s poorest nations.
While the path has grown tougher, especially for countries heavily reliant on the US, the manufacturing-led growth model is not obsolete. It highlights the need for strategic adaptation. Poor countries must diversify trade ties and engage more with middle-income economies to encourage them to vacate export markets for low-income nations to enter.
Deglobalisation and technological change have intensified the search for alternatives to export-led development. Yet, a sober assessment reveals a tough trade-off: high-skilled exportable services offer dynamism but lack inclusivity, while non-tradable services provide inclusion but limited growth potential.
While the growth miracles of China, South Korea and Taiwan may be hard to replicate, the traditional focus on unskilled, labour-intensive manufacturing exports remains a promising path and perhaps the best route to shared prosperity in the world’s poorest regions. — © Project Syndicate, 2025
Amrit Amirapu is a Senior Lecturer in Economics at the University of Kent. Arvind Subramanian, former chief economic adviser to the Indian government, is a senior fellow at the Peterson Institute for International Economics and the author of Of Counsel: The Challenges of the Modi-Jaitley Economy (India Viking, 2018
