Developing Economies: Winners, Losers, and Those Left Behind

Unique Challenges for Development

While it is never easy to raise an economy up the rungs of development stages, countries that are developing now face issues that are distinctly different from their predecessors. Some of the traditional pathways towards development are changing, or vanishing altogether. On the other hand, new pathways may be opening, as the same technologies that disrupt markets also contain the tools to respond to disruption. The key for public leaders in developing markets and the companies that operate in those markets is to understand what is changing, how that will impact a specific economy, and how much time the effects will take to materialize.

The conditions, opportunities, and constraints facing developing countries now are far different than those facing the countries that developed during the 20th century. Many elements are important contributors to these shifts, and the outcomes that they drive will differ on a region or country basis.

Manufacturing: Low-end manufacturing is the traditional pathway to higher-level economic development. Countries begin as manufacturers of easily produced subcomponents or finished goods, and gradually move up the value chain to produce more complex and valuable goods and services. This development pathway is receding as structural shifts are emerging in manufacturing technology and the way goods are built and consumed.

Communications: Cellphones, the internet, social networks, and other communications technologies are available to developing nations, although at different levels of saturation. The impact of the communications revolution is multifaceted, as it both enables productivity and presents security challenges. Peoples of developed nations are more connected, globally aware, and productive, but they are also more cognizant of their plight and the misdeeds of their governments and are able to organize dissent more easily.

Underemployment: Advances in agricultural technologies have enabled many countries to achieve food security with far fewer workers in the agricultural sector than ever before. When those countries have not advanced to the point that their economies can create more jobs in manufacturing and higher value-added sectors, this presents the problem of underemployment: Too many people of working age do not have jobs.

In many cases these people are young, capable, and highly educated and/or trained for jobs that do not exist. Unemployed youth often become disenfranchised and alienated, creating political volatility. The Arab Spring of 2010-2012 and ongoing issues in the region are the most visible examples of this phenomenon, but it is an issue many countries around the world are facing. Unrest is of course not a new phenomenon, but the scale of unemployment is new, as many unemployed youth would have been dispersed on farms in prior eras.

In summary, although developing countries will face pressures specific to their place and unique environment, understanding macro trends provides an important foundation for our analysis.

Expected Years of Schooling

Source: United Nations Development Programme (2015). Human Development Report 2015: Work for Human Development.

Stratification of Outcomes

The general categorization of developed vs. developing economies is becoming increasingly less useful as the stratification of outcomes within developing economies deepens and solidifies.

Winners: Changing market structures offer some countries the ability make significant development gains, in effect leapfrogging their peers. Proximity and connectivity to the most important developed markets is a powerful advantage, especially if there is a labor or materials dependency between those markets. Wealth is consolidating globally, and the countries that are able to integrate themselves into those centers of consolidation will benefit.

Losers: Conversely, as manufacturing and robotics technologies enable more productive regionalized economic activity, countries that are not able to maintain strong connections to key markets will likely face challenges ranging from lower demand to protectionist policies.

Those Left Behind: At the extreme end of the spectrum are those countries whose development is not just slowed by these changes; they also lose the avenue to develop. All countries will face economic hardship if key elements of their manufacturing base are 3D printed near the end customers in developed countries. However, countries with diversified resource, manufacturing, and service-based industries will able to offset losses in the low-end manufacturing sector with other types of economic productivity. Countries that lack natural resources or other alternate avenues of productivity face the real risk of falling off the development path entirely.

We can make assumption-based forecasts around what countries will end up in which strata, but we cannot predict this with certainty, as there are many remaining unknowns. Economic diversification and degree of connectivity with major developed economies will be key things to watch for. Proximity and positive cultural relationships that facilitate immigration will also be important.

Human Development Index

Regional Nuances

Of course, none of these factors are deterministic. The success or failure of countries to adapt to changing conditions depends on the decisions they make in context of their own unique characteristics.

Leaders of developing countries have a difficult challenge to identify, evaluate, and react to changes — but the same technologies that will disrupt their current patterns can also provide new tools and ways to adjust.