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Navigating Today’s Complex Economic Policy Triangle: A View from the South

1. Introduction

In an era of unprecedented global interconnectedness, developing countries face an increasingly complex and often hostile economic landscape. This landscape is shaped by three main groups of policy constraints. First, the rise among major powers of protectionist tendencies has made the global environment more challenging, particularly as advanced economies increasingly turn to industrial policies to achieve specific economic objectives, and intensifying geopolitical rivalries lead to restructuring of global value chains and regrouping of countries into economic blocs. Second, at a time when demand for government services is at an all-time high, the macroeconomic policy space in developing countries has become significantly constrained, leaving little room for maneuver. A series of crises—from the Global Financial Crisis to COVID-19 to commodity price shocks—has drained government budgetary resources. Third, rapid technological advances are disruptive, rendering traditional policy reforms for growth and structural transformation outdated, and thus necessitating policy experimentation in new, uncharted areas.

These three groups of policy constraints have created a perfect storm of challenges for developing countries. This paper examines the multifaceted impact of these global shifts on the economic policy options available to developing countries. Currently, these countries face the challenge of operating without a clear and coherent framework for their development policies and strategies. This has led to a paradigm shift characterized by a landscape where ‘every country is for itself,’ resulting in the absence of clear policy objectives or instruments to navigate this new reality. Such an approach is unsustainable and poses significant risks to global economic stability and inclusive development. This paper proposes an alternative: a robust, nuanced, and tailored economic policy framework that addresses the unique challenges of developing countries while leveraging their inherent strengths and potential.

2. The Changing Global Economic Landscape

The First Group of Policy Constraints: Rising Protectionism in the Global Environment

The global economic landscape has undergone a seismic shift in recent years, with protectionism emerging as a dominant trend, marking a significant departure from the decades-long push for trade liberalization that characterized much of the post-Second World War era.

Rising protectionism, which began after the Global Financial Crisis, has intensified since the 2018 U.S.-China trade war. This conflict arose from long-standing economic tensions between the two powers. For decades, the U.S. has criticized China’s trade practices, accusing it of intellectual property theft, forced technology transfer, and state subsidies that give Chinese companies an unfair advantage. China has viewed these criticisms as attempts to hinder its economic rise and preserve U.S. dominance. In 2018, the U.S. imposed substantial tariffs on Chinese imports, and China responded in kind. By 2019, the average U.S. tariff on Chinese goods had risen from 3.1% to 19.3%, while China’s tariffs on U.S. goods increased from 8% to 21.1% ¹ . The trade war has since expanded into a broader economic and technological conflict, with both countries seeking to decouple their supply chains.

The European Union (EU) recently entered this trade dispute by proposing new tariffs on Chinese electric vehicles (EVs), citing unfair competition due to Chinese subsidies. In response, China started an investigation into EU subsidies on dairy products, escalating trade tensions.

In addition to tariffs, advanced economies have increasingly turned to other industrial policies to achieve specific economic objectives. This shift represents a significant departure from the free-market orthodoxy that these countries previously advocated for the developing world. In the U.S., the 2022 CHIPS and Science Act provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development, aiming to boost a strategic industry and reduce dependence on foreign suppliers ² . The EU launched its Industrial Strategy 2020 to support the green and digital transformation of EU economies. In 2024, it announced a strategy to bolster its competitive position against the U.S. and China by enhancing its industrial and trade policies ³ . These strategies emphasize significant state intervention to strengthen key industries and ensure strategic autonomy. Both the U.S. and EU reactions respond to China’s ambitious industrial policy, reflected in its ‘Made in China 2025’ plan, which aims to comprehensively upgrade Chinese industry, making it more efficient and integrated so it can occupy the highest parts of the global production chains ⁴ .

Alongside the rise in protectionism, the global economic landscape is being reshaped by the intensifying of geopolitical rivalries, leading to a restructuring of global value chains, including ‘friendshoring’—the practice of sourcing materials, components, and manufactured goods from countries considered allies or friends. This trend is largely driven by geopolitical considerations and concerns over supply-chain resilience, particularly in the wake of disruption caused by the COVID-19 pandemic.

For developing countries, rising protectionism and the reorientation of global value chains present both opportunities and challenges. Politically aligned countries may attract increased investment and trade as companies seek to diversify their supply chains. For instance, Haberkorn et al of the Federal Reserve found that Mexico and ASEAN nations, such as Malaysia and Vietnam, have benefited from U.S.-China trade tensions as production shifts from China to these regions. But resource-exporting countries and the least-developed nations face significant challenges ⁵ . The global economic slowdown, exacerbated by the trade war and pandemic, has reduced demand for commodities, harming countries dependent on natural-resource exports.

Moreover, the trade war has disrupted global supply chains, increasing uncertainty for developing countries that trade with both the U.S. and China. China’s slowing economic growth, combined with rising global protectionism, has made the economic environment more volatile, complicating future planning for developing countries. The role of the World Trade Organization (WTO) as a forum for trade negotiations and dispute resolution is diminishing as a policy instrument for these nations.

The trend toward restructuring of global value chains also raises concerns about the fragmentation of the global trading system. As supply chains are reorganized along geopolitical lines, inefficiencies may increase, reducing global economic integration. This could slow global growth and limit opportunities for developing countries to benefit from technology transfer and integration into global value chains.

The Second Group of Policy Constraints: Limited Macroeconomic Space

The macroeconomic space of developing countries is shrinking because of dwindling fiscal resources, limited monetary policy flexibility, and weakened central bank independence.

Fiscal Space

Government budgets in developing countries have been impacted by recent crises, including the Global Financial Crisis, COVID-19, and commodity price shocks of the last decade. Additionally, competing demands for public spending have risen as a result of demographic trends, climate change, high debt and debt service burdens, and increased military spending. This complex interplay creates a challenging environment for managing economic stability and growth.

Demographic Trends: Aging Populations, Youth Unemployment, and Brain Drain. Aging populations are increasingly straining public finances in many developing countries. While aging was traditionally a challenge for advanced economies, many developing nations now face this demographic shift faster than anticipated. According to United Nations projections ⁶ , the proportion of people aged 65 and above in developing countries is expected to rise from 8.4% in 2024 to 14.7% by 2050. By 2071, the elderly population will outnumber those under 14.

This demographic shift intensifies the demand for healthcare, pensions, and other social services. For instance, Brazil’s healthcare spending reached 10% of GDP in 2023, driven partly by its aging population. Similarly, middle-income countries such as Thailand are experiencing rapid growth of their elderly populations, putting additional pressure on public resources. World Bank data shows that public health spending already exceeds 5.4% of GDP in middle-income nations compared to less than 4.9% a decade earlier, with further increases expected.

The challenge is compounded by limited social safety nets. The International Labour Organization estimates that only 12.7% of retirees in low-income countries receive pensions, compared to nearly universal coverage (96.8%) in high-income nations ⁷ . This leaves elderly populations vulnerable and pressures governments to expand social services, straining fiscal resources further.

Youth unemployment also presents a significant burden, as governments often must increase spending on social welfare programs, job training, and educational initiatives to foster economic engagement and avoid social unrest. The ILO reports a global youth unemployment rate of approximately 13% in 2024, but in regions such as North Africa, this rate has reached as high as 23% ⁸ . High youth unemployment reduces tax revenues while increasing public expenditure needs, diverting funds away from critical infrastructure or health services.

Brain drain exacerbates resource loss by depleting developing countries of educated and skilled professionals who migrate for better opportunities. This exodus limits the domestic workforce in vital areas including healthcare and education, forcing governments to spend more on recruitment, training, and outsourcing to fill gaps. Additionally, the loss of highly-skilled professionals stifles innovation and reduces government revenue, compounding fiscal pressures. Socha-Dietrich and Dumont found that, as of 2018, nearly 25,000 doctors trained in sub-Saharan Africa—close to one-quarter of the region’s total physicians—were working in OECD countries ⁹ .

Climate Change. Climate change presents both risks of impacts and urgent adaptation needs. Developing countries face severe impacts, including rising sea levels, desertification, and extreme weather, which can disrupt growth and economic stability. Tackling these issues requires significant investments to transform energy systems, agriculture, and urban infrastructure, and to take adaptation measures ¹⁰ . Financing for these initiatives depends heavily on external support, with estimates indicating that 2%–4% of GDP in additional investment will be necessary annually. 

High Debt and Debt Servicing Burden. The high debt burden is another critical issue for developing countries. Many have accumulated substantial debt to finance infrastructure and social programs, particularly during the COVID-19 pandemic. World Bank data shows that the average external debt-to-GDI ratio in low-income countries rose from 28.8% in 2012 to 44.5% in 2022. In some cases, such as Zambia and Sri Lanka, debt levels have become unsustainable, leading to defaults and calls for international assistance.

The IMF’s October 2024 Fiscal Monitor warned that global public debt ¹¹ is projected to exceed $100 trillion (93% of global GDP) by 2024, potentially reaching 100% of global GDP by 2030. In 2007, before the Global Financial Crisis, this debt was below 61% of global GDP. For emerging markets and developing countries, ‘debt at risk’ (debt in adverse scenarios) has increased to 88% of GDP. High global interest rates exacerbate the debt burden, increasing debt service costs; the World Bank estimates that low- and middle-income countries will pay over $100 billion in debt service in 2024. In some countries, like Ghana and Egypt, debt service consumes over 40% of government revenues, crowding out spending on essential services.

Many developing countries have borrowed in foreign currencies, leaving them vulnerable to exchange-rate fluctuations. For example, inflation and currency depreciation have worsened debt burdens in Turkey and Argentina, further constraining already limited fiscal space.

Military Spending. Rising geopolitical tensions, especially between the U.S. and China and other major powers, have led some developing countries to increase their defense spending. The Stockholm International Peace Research Institute (SIPRI) reported that in 2023, military spending rose in all five geographical regions for the first time since 2009 ¹² . Defense spending in Africa increased by 22% in real terms, with notable increases in North Africa (38%) and sub-Saharan Africa (8.9%). East Asia saw a 6.2% rise, reflecting regional security concerns. This shift toward defense expenditure diverts funds from critical developmental needs.

Limited Scope for Monetary Policy

The ability of central banks in developing countries to use monetary policy to stabilize their economies has been significantly curtailed. High global interest rates have forced many developing nations to raise their own rates to prevent capital outflows and currency depreciation, which in turn raises domestic borrowing costs and slows investment and growth. For example, Brazil’s central bank raised its benchmark interest rate to 13.75% in 2023 to curb inflation, which slowed economic growth. Similarly, Egypt raised rates to control inflation, causing a decline in investment and higher borrowing costs for businesses and households.

Furthermore, capital flows have become more volatile, complicating exchange-rate management. With dwindling foreign-exchange reserves in many developing countries, defending currencies has become increasingly difficult. For instance, Pakistan’s foreign exchange reserves fell to less than two months’ worth of imports in 2023, falling short of the conventional three-month minimum threshold for reserve adequacy. This shortfall severely constrained the country’s ability to manage its currency effectively. 

Developing countries face a monetary trilemma, which involves managing the trade-offs between exchange-rate stability ¹³ , independent monetary policy, and capital mobility ¹⁴ . The trilemma suggests that a country can only achieve two of these three goals at once ¹⁵ , and choosing which to prioritize depends on specific circumstances. Obsfelt and Taylor ¹⁶ noted that the monetary trilemma has made it impossible for most countries to maintain firm currency pegs, given the need to pursue independent monetary policy for domestic economic goals.

External shocks, such as higher international interest rates, exacerbate this trilemma. Higher international interest rates make it more difficult to peg an exchange rate because of pressures to devalue. To reduce the impact of external shocks on the domestic economy, policymakers may need to limit capital flows or adopt more flexible exchange rates to retain the ability to influence domestic interest rates. The need for an independent monetary policy is also critical for another reason. Coming out of the COVID-19 pandemic, many SMEs and even large enterprises were in vulnerable positions and needed working capital and new investment to resume and expand production. Any attempt by the central bank to raise domestic interest rates in response to higher international interest rates could push these enterprises into bankruptcy and adversely impact economic growth.

Eroding Central Bank Independence

Growing fiscal dominance, fueled by high debt and successive crises, has led some governments to exert influence over central banks, compromising their independence. In countries such as Turkey and Argentina, central banks have been pressured to keep rates low or print money to fund budget deficits, resulting in hyperinflation and currency devaluation. This erosion of independence undermines central-bank credibility, making inflation control and economic stability more difficult.

The Third Group of Policy Constraints: Technological Change and Economic Growth

The pace of technological change has accelerated dramatically in recent years, fundamentally altering the nature of work, trade, and economic development. Often referred to as the Fourth Industrial Revolution, advancements in artificial intelligence, robotics, the internet of things, 3D printing, and biotechnology are transforming economies in ways similar to the impact of electricity in the nineteenth century.

Technological change is disrupting traditional economic growth patterns. Traditionally, growth in developing countries has been driven by structural transformation, the movement of resources from low- to high-productivity sectors, such as from agriculture to manufacturing. In Africa, structural transformation accounted for 74% of productivity growth before the 2008 financial crisis ¹⁷ . However, this is no longer the case. Rodrik and Stiglitz ¹⁸ have pointed out that structural transformation through export-oriented industrialization, which helped East Asian countries become developed nations, is no longer viable today. Several factors contribute to this: technological changes have made manufacturing more skill- and capital-intensive; the COVID-19 pandemic accelerated existing trends of slowing growth and increasing debt; geopolitical competition and backlash against hyper-globalization have increased; and climate change is affecting traditional sectors such as agriculture.

Rodrik and Stiglitz ¹⁹ proposed a new growth strategy for developing countries based on two components. The first focuses on the green transition, including transforming energy systems, investing in sustainable agriculture, and building climate-resilient infrastructure. The second component focuses on enhancing productivity in labor-intensive, non-traded services. With manufacturing’s diminished capacity to absorb labor, services will remain the primary labor-absorbing sector. They suggest a three-pronged approach: encouraging large firms to create lower-skill jobs in non-tradable services, providing public inputs for smaller enterprises, and investing in technologies that complement low-skill workers rather than replace them. They emphasize the importance of policy experimentation and learning, with objectives, instruments, and institutions evolving over time.

While the industrial policy approach of Rodrik and Stiglitz is compelling, its success will depend on three key factors. First, the public sector in developing countries has weak institutional capacity, and will need to be significantly strengthened to effectively support the private sector in policy experimentation, planning, and executing assistance programs. Second, as Rodrik and Stiglitz noted, productivity in services sectors is low, meaning this services-oriented approach is likely to yield weaker economic growth than traditional manufacturing-led strategies. To counteract this, developing countries should not only develop tourism to attract low- and semi-skilled workers in the informal sector, but they should also take steps to promote specific labor-intensive manufacturing sub-sectors, such as garment production and agribusiness ²⁰ .

Third, the process of labor replacement by AI and other technologies is likely to unfold gradually. As Acemoglu noted ²¹ , the macroeconomic effects of AI, while significant, are relatively modest, with total factor productivity projected to increase by no more than 0.7% over a decade. Svanberg et al also highlighted that while AI will reshape labor patterns, predictions of rapid and widespread automation often overlook the slow pace of adoption and the technical and economic challenges involved in developing AI systems to handle specific tasks ²² . Consequently, developing countries may have at least one to two decades before manufacturing jobs are significantly impacted.

3. Policy Guidance for Developing Countries

The Washington Consensus—a set of market-oriented economic-policy prescriptions that dominated development thinking in the 1980s and 1990s—has largely faded into history. This paradigm, which emphasized privatization, deregulation, and trade liberalization, was promoted by international financial institutions (IFIs) after the Import Substitution Industrialization (ISI) strategy of the 1960s and 1970s failed to deliver expected results. However, the track record of countries that followed the Washington Consensus has been mixed at best. Easterly ²³ found that these countries did not grow significantly faster than those that did not. In fact, some of the most successful developing countries of the past few decades, such as China and Vietnam, achieved rapid growth while only selectively implementing elements of the Washington Consensus.

The waning of the Washington Consensus has left a significant vacuum in development economics. There is no longer a clear, widely accepted set of policy prescriptions for developing countries to follow. In its place, a more eclectic approach has emerged, recognizing the importance of context-specific policies and the potential role of the state in promoting development. Hausmann et al introduced “growth diagnostics” ²⁴ an approach focused on identifying and addressing the most binding constraints on economic growth in a specific country. Lin proposed the New Structural Economics, which emphasizes industrial policies tailored to a country’s comparative advantage and level of development ²⁵ . While these approaches offer valuable insights, they lack the rigor and cohesive theoretical framework needed to provide the kind of clear, actionable policies that the Washington Consensus once sought to deliver.

This policy vacuum has left policymakers in developing countries adrift in an increasingly complex global economic landscape, forcing them to make critical decisions about trade, fiscal, financial, and structural reforms without a coherent framework to guide their choices. This ad-hoc approach to economic policymaking—‘every country for itself’—has resulted in inconsistent outcomes, heightened vulnerability to external shocks, and reduced policy credibility, as countries struggle to balance competing demands from IFIs, domestic constituents, and global markets. The absence of a clear development paradigm has led to policy experimentation that, while potentially innovative, often lacks the institutional backing and theoretical foundation necessary for sustainable economic transformation.

Moreover, the current situation—in which each developing country must independently navigate global economic challenges, from volatile capital flows to technological disruption and climate change—represents a significant inefficiency in the international economic system. Without a shared understanding of development priorities and proven policy tools, countries often reinvent the wheel or, worse, repeat the mistakes of others. Any short-term opportunistic gains will not be sustainable in the long run. This fragmented approach not only increases the risk of policy failures but also hampers collective action on transnational challenges that require coordinated responses. The need for a new, coherent development framework anchored in aligned interests and observed behaviors has become increasingly urgent as developing countries seek to build resilient economies while addressing inequality, environmental sustainability, and technological transformation.

As noted by Agenor and El Aynaoui ²⁶ , the emergence of China as the second world power, and the rise of new Asian competitors, have important implications for all countries and their growth strategies. A major concern for developing countries is that rising protectionism from the U.S. and the EU could lead to an increase in China’s exports to these countries. This concern is based on three factors. First, Chinese exports are highly competitive across a wide range of goods, from low- to high-value-added products, because of an efficient production ecosystem characterized by massive economies of scale, a vast domestic supply chain, organizational efficiency, and a well-trained workforce. Second, in 2023, China’s exports reached $3.5 trillion, with roughly half directed to the U.S. and EU. Increased protectionism from these markets could divert this surplus to developing economies, as China’s production capacity is geared toward exports rather than domestic consumption. Third, recent research by Haberkorn et al has shown a trade war-induced shift: major U.S. trading partners are importing more from China ²⁷ . Between 2019 and 2022, China’s share of ASEAN imports rose by 1.5 to 4 percentage points, primarily in tariffed goods. Mexico saw a similar increase of 0.5 to 2.5 percentage points, also concentrated in tariffed goods.

A passive or ‘do-nothing’ approach on the part of developing countries could lead to a global system in which, driven solely by efficiency, most countries become reliant on a few dominant countries for industrial goods. In such a scenario, importing countries would be left producing only food, non-tradable services, and IOUs to pay for goods from producer countries. Although this setup might seem rational from an economic-efficiency perspective, it would be undesirable for many, as it could worsen inequalities and undermine economic sovereignty.

For policymakers in developing countries, navigating the current technological revolution requires a delicate balance. They must find ways to harness new technologies to drive economic growth and improve public services, while mitigating the risks of job displacement and widening inequality. Countries that can successfully navigate these dynamics, leverage their strengths, and forge strategic partnerships will be best positioned to transform the challenges posed by great-power competition into opportunities for development and prosperity.

4. Strategies for Developing Countries

The policy framework to help developing countries navigate the increasingly complex and uncertain global environment should be flexible enough to accommodate the diverse circumstances of different nations, while providing clear guidance on key policy areas. Below are a few key pillars of this new framework:

i) Building macroeconomic buffers to enhance resilience to external shocks;
ii) Leveraging technology for productivity gains, particularly in the public sector;
iii) Promoting growth and structural transformation; and
iv) Enhancing policy coordination among developing countries.

The international community has a crucial role to play in supporting these efforts through technical assistance and financial support.

Building Macroeconomic Buffers

In an increasingly volatile global landscape, developing countries must prioritize the building of robust macroeconomic buffers to enhance their resilience to external shocks. This involves reforming fiscal, monetary, exchange rate, and macroprudential policies:

• Fiscal Policy should be strengthened to mitigate adverse impacts on output and inequality by combining revenue and expenditure measures, safeguarding public investment, protecting vulnerable households through targeted transfers, and phasing out untargeted subsidies ²⁸ . This could involve improving tax collection by modernizing tax systems and broadening the tax base. Additionally, expenditures should prioritize growth-enhancing investments in areas such as infrastructure and human capital. To address debt vulnerabilities, governments should mitigate unidentified debt arising from arrears and contingent liabilities.
• Monetary Policy should adopt flexible inflation-targeting regimes to balance price stability with other key objectives, such as financial stability and economic growth. Developing local currency bond markets is also important to reduce reliance on foreign currency borrowing, which exposes economies to exchange-rate volatility. For instance, India’s shift to a flexible inflation targeting regime in 2016 helped anchor inflation expectations and reduce macroeconomic volatility.
• Exchange Rate Policy should be monitored closely, and international reserves should be built up. Countries should move toward more flexible exchange-rate regimes that can act as shock absorbers against external volatility. Foreign exchange interventions should smooth excessive volatility, rather than defend a particular exchange-rate level. Research shows that countries with more flexible exchange-rate regimes are less likely to experience currency crises. They also recover faster from shocks.
• Macroprudential Policies should address systemic risks in the financial sector and manage volatile capital flows. These policies must be coordinated with monetary and fiscal policies for greater effectiveness while maintaining financial autonomy. South Korea’s comprehensive macroprudential tools, such as limits on banks’ foreign-exchange derivative positions and a levy on non-core foreign currency liabilities, have proven effective in enhancing financial stability.

Leveraging Technology for Productivity Gains

Developing countries can harness advanced technologies to improve productivity, especially in the public sector. Key areas in which technology can play a transformative role include:

• Governance: Digital systems for government services can reduce bureaucracy, increase efficiency, and curtail corruption. Developing national digital identity systems can enhance access to public services and financial inclusion. An efficient and transparent digitized public sector can improve project management, data analysis, and policy evaluation, encouraging the use of data and rigorous evaluation in policy design and implementation, including annual reviews of investment and current expenditure programs. Estonia’s comprehensive e-governance system exemplifies the transformative potential of digital governance.
• Education: Technology can improve access to quality education, particularly in remote areas. Digital platforms with adaptive learning technologies can personalize education and address learning gaps. India’s BYJU’S online learning platform, which has reached over 80 million students, demonstrates this potential.
• R&D and Innovation: Technologies including artificial intelligence (AI) and the internet of things (IoT) hold significant potential to transform research and development (R&D) in developing countries. AI can enhance efficiency by automating routine tasks, analyzing vast datasets, and generating insights that accelerate innovation across sectors, from agriculture to healthcare. Additionally, these technologies can compensate for resource limitations by enabling remote collaboration, virtual simulations, and streamlined workflows, helping developing countries overcome traditional R&D barriers such as limited infrastructure, funding, and skilled personnel. With strategic investments, AI and IoT can empower these nations to tackle local challenges innovatively and contribute to global knowledge creation through the collection and analysis of data.
• Health: Innovations such as telemedicine systems and AI-driven analytics can improve healthcare access, disease surveillance, and health-system planning, especially in rural areas. Telemedicine allows patients to consult with doctors remotely, overcoming long travel distances and shortages of medical professionals. AI-driven analytics can support disease surveillance by rapidly processing data to identify outbreaks and patterns, enabling faster responses and better-targeted interventions. Additionally, AI tools can aid health system planning by forecasting patient needs, optimizing resource allocation, and ensuring efficient and timely delivery of healthcare services. Rwanda’s use of drones to deliver medical supplies to remote areas exemplifies successful innovation in this field.
• Agriculture: In agriculture, AI-driven predictive analytics can assist farmers in maximizing crop yields under resource constraints, while IoT devices can monitor and relay critical data on soil health and weather patterns in real time, making research efforts more precise and actionable. The Digital Green project in India and Ethiopia, which uses community videos to share agricultural best practices, has reached over 1.8 million farmers, highlighting technology’s role in agriculture.

Promoting Growth and Structural Transformation

While Rodrik and Stiglitz’s approach emphasizes job creation in the services sector, it alone may not provide employment for the millions of young people entering the workforce in developing countries each year. This is partly because of the lower productivity of the services sector compared to manufacturing, which leads to weaker economic growth, and partly because demand for services (mostly non-tradable) takes longer to materialize, unlike the readily available demand for manufactured goods in global markets. Thus, traditional economic sectors remain crucial for absorbing unskilled and semi-skilled workers, making it essential for governments to promote growth in those sectors and integrate them into the broader economy.

To address these challenges, developing countries should implement a balanced and adaptable strategy that includes various types of enterprises. This strategy should involve formulating FDI policies to integrate low-income countries into global value chains (GVCs), and facilitate deeper GVC involvement for middle-income countries, stimulating the growth of domestic firms catering to regional and domestic markets, and actively promoting digitalization to connect the two sectors. Policies should be practical, grounded in empirical case studies that highlight successes and failures in specific scenarios.

A critical issue for industrialization in developing countries is the increasing capital intensity of manufacturing. Research shows that countries such as Ethiopia and Tanzania have high capital-to-labor ratios compared to other nations. Gelb et al noted that labor costs in sub-Saharan African countries are significantly higher than in countries with similar income levels ²⁹ . This suggests that higher labor costs may lead multinational GVC enterprises to adopt more capital-intensive technologies in their sub-Saharan African investments.

Various policy solutions can address this challenge. Some Latin American nations have established special industrial zones with unique wage regulations. Alternatively, high labor costs could be offset by leveraging other inputs, such as industrial land with essential infrastructure (e.g. electricity, water, transport). Practical, second-best solutions may be preferable in these contexts. Our research on African manufacturing has revealed many examples of industry clusters (e.g. cut flowers in Kenya and Ethiopia, tomatoes in Senegal) flourishing despite sectoral constraints ³⁰ .

McMillan and Zeufack pointed out that certain manufacturing sub-sectors, such as garments, agri-processing, and materials-intensive products, remain labor-intensive ³¹ . While direct employment in resource-based manufacturing may be limited due to capital intensity, the indirect benefits of these exports can be significant. Agri-processing, for example, has the potential to create jobs and wealth indirectly for logistics and packaging companies, restaurants and hotels, and agricultural input suppliers. McMillan and Zeufack also observed that among informal-sector firms, a small subgroup—referred to as “in-between” firms—has demonstrated very high productivity growth ³² . One way to foster this growth is by identifying and encouraging startups with high growth potential. The newly established African Continental Free Trade Area offers a prime opportunity for sub-Saharan African countries to expand their market reach.

Tourism is a high-potential sector for creating employment opportunities for low- and semi-skilled workers in developing countries. In Africa, for instance, the World Travel & Tourism Council reported that tourism generated over 24 million jobs in 2023, a significant portion of which involved low- and semi-skilled roles in areas including hospitality, food services, transport, and cultural and recreational services. This sector’s labor-intensive nature and extensive service requirements create accessible employment opportunities that do not necessarily require advanced skills or formal education, providing an entry point into the workforce for many individuals and supporting economic inclusion. Moreover, the indirect jobs tourism creates in supporting industries, such as retail and transportation, amplify its employment impact and development potential for low-income communities.

The green-manufacturing sector presents another potential pathway for industrialization, particularly given the South’s solar energy potential. Transitioning to green manufacturing could enhance cost-competitiveness in light manufacturing and promote job growth. The pharmaceutical industry also presents a viable sector for industrialization, offering both health and economic benefits.

Developing countries should adopt a practical industrialization strategy anchored in the following principles:

• Recognizing that market forces alone will not generate industrialization.
• Understanding that no ‘one-size-fits-all’ policy exists; individualized strategies are needed.
• Ensuring that policies are practical, flexible, and focused on real-world challenges rather than rigid ideologies.
• Fostering close collaboration between the public and private sectors to facilitate effective industrialization initiatives.

As discussed in Dinh ³³ , recommended industrialization policies can be broadly divided into two categories: general policies to facilitate structural transformation, and specific policies to foster manufacturing.

General policies to facilitate structural transformation (cross-sectoral):

• Creating a Supportive Environment: Uphold political and macroeconomic stability, and prioritize labor-intensive activities and strengthening of the private sector as key governmental objectives.
• Elevating Agricultural Productivity: Introduce measures such as land-tenure security, improved market and financial access, informed crop selection, efficient fertilizer usage, and irrigation upgrades, to shift surplus labor to more-productive sectors.
• Maximizing Informal Sector Potential: Upgrade worker skills, enhance access to financial services, improve transport and communication, provide healthcare, and solidify land and property rights. Additionally, simplify the transition from the informal to the formal sector by reducing registration costs.
• Minimizing Mobility Obstacles: Prioritize investments in critical infrastructure, such as transport networks, energy sources, and communication systems. Consider providing worker housing near industrial zones and simplifying administrative processes, such as school enrollment.

Specific policies to bolster manufacturing:

• Cultivating Foreign Direct Investment (FDI): National and local leaders should actively encourage and attract FDI, while addressing barriers that hinder FDI growth. Collaborative efforts between FDI enterprises and vocational institutions can provide essential workforce training. The East Asian experience shows that FDI not only creates jobs but also facilitates knowledge transfer and financial integration.
• Stimulating Local Economic Ventures: It is important to recognize and support indigenous economic initiatives. Studies on Africa and Asia offer insights into effective manufacturing growth strategies, such as strategic sequencing, starting small, scaling up or down as needed, and identifying success zones through targeted policies ³⁴ .
• Bridging Small and Large Enterprises: Developing countries can implement policies that bridge the gap between small firms and large FDI or GVC-related enterprises. This can involve offering equal incentives to both direct and indirect exporters, and fostering organic clusters, which are groups of enterprises and institutions that share a specific business activity within a limited geographical area.
• Advancing Digitalization for Industrial Growth: The gap between output and employment across small and large enterprises in developing countries presents an opportunity for digitalization. Strategic digital integration can elevate MSMEs, enhance the technological capabilities of large enterprises within global value chains, and foster mutual cooperation between the two sectors.

Enhanced Policy Coordination Among Developing Countries

Greater policy coordination among developing countries can unlock new opportunities for shared growth and resilience. South-South cooperation, regional integration, and joint policy initiatives can help strengthen the bargaining positions of developing countries and build collective capacity:

• South-South Cooperation: Sharing best practices in areas such as industrial policy, social protection, and technology adoption is essential. Developing countries can establish knowledge-sharing platforms and networks to facilitate collaboration among policymakers and experts. The India-Brazil-South Africa (IBSA) Dialogue Forum provides a strong example of such cooperation, enabling these countries to coordinate their stances on global issues and share development experiences.
• Regional Integration: Deepening economic integration at the regional level can create larger markets and enhance competitiveness. By focusing on regional value chains, countries can reduce their dependence on volatile global markets and increase resilience. The African Continental Free Trade Area (AfCFTA) is a promising initiative aiming to create a single market for goods and services across 54 African countries. Successful implementation could significantly boost intra-African trade, fostering economic growth and development.
• Joint Research and Development: Pooling resources for R&D in areas of shared interest, such as tropical agriculture or renewable energy, can generate significant benefits. Establishing joint research centers and exchange programs can foster innovation and facilitate knowledge sharing. The CGIAR (initially the Consultative Group for International Agricultural Research) network of research centers demonstrates the potential of collaborative efforts to address shared challenges in agriculture and food security.
• Policy Learning Networks: Creating platforms for policymakers from different developing countries to exchange experiences and learn from each other’s successes and failures is crucial. Joint training programs and policy simulations can enhance the capacity of policymakers to respond effectively to emerging challenges. The South-South Global Thinkers initiative, supported by the United Nations Development Program (UNDP) and the United Nations Office for South-South Cooperation (UNOSSC), is a successful example, facilitating knowledge-sharing on sustainable development issues among think tanks from developing countries.

5. The Role of the International Community

The international community plays a significant role in supporting developing countries as they formulate and implement economic policies. This support should aim to expand the capabilities of these countries, while avoiding a uniform approach. Key areas of international assistance include technical aid to enhance expertise in financial regulation, trade negotiations, and public management, with programs such as those offered by IFIs. Concessional financing, such as that provided by the World Bank’s International Development Association, is also crucial, as are innovative financing strategies, such as debt-for-climate swaps ³⁵ .

Equally important are reforms to global economic governance to ensure that developing countries have a greater voice in international institutions and agreements. Initiatives such as IMF quota reforms, which seek to increase the voting power of emerging markets, are examples of these efforts.

Technology transfer and balancing intellectual property rights are also essential for sustainable development, particularly in green technologies and essential medicines. The TRIPS agreement (Trade-Related Aspects of Intellectual Property Rights), overseen by the WTO, offers some flexibility for compulsory licensing, which has helped countries including India and Brazil. Strengthening cooperation on global public goods, such as climate change mitigation and pandemic preparedness, is another key aspect, with institutions like the Green Climate Fund supporting these efforts.

Improving data collection and accessibility for informed policymaking is also vital. The World Bank’s Open Data initiative exemplifies how better data access can empower decision-making. Ultimately, international support should enable developing countries to build resilient economies through enhanced technology use, stronger public institutions, and improved policy coordination, allowing them to navigate global challenges more effectively.

6. Summary and Conclusion

The global economic landscape has undergone significant transformations in recent years, presenting both challenges and opportunities for developing countries. The rise of protectionism, including large-scale industrial policies in advanced economies, geopolitical rivalries leading to GVC restructuring, limited macroeconomic policy space, and rapid technological disruptions have created a complex and often hostile environment for these nations. Meanwhile, the abandonment of the Washington Consensus has left a policy vacuum in development economics, with no clear alternative paradigm to guide policy in developing countries. In this context, the notion of ‘every country for itself’ has gained prominence, leaving developing countries to navigate an increasingly uncertain global environment without clear policy objectives or instruments. This inefficient approach has resulted in inconsistent outcomes, heightened vulnerability to external shocks, and reduced policy credibility, as countries struggle to balance competing demands from IFIs, domestic constituents, and global markets. This fragmented approach increases the risk of policy failures and hampers collective action on transnational challenges that require coordinated responses.

Instead, what is needed is a new economic policy framework for developing countries—one that addresses the unique challenges they face, while leveraging their strengths and potential. This framework should be flexible enough to accommodate the diverse circumstances of different nations, while providing clear guidance on key policy areas. This paper has discussed the main pillars of such a framework, including:

• Building macroeconomic buffers to enhance resilience to external shocks and self-insurance;
• Leveraging technology for productivity gains, particularly in the public sector;
• Promoting policies for growth and structural transformation, with a focus on R&D and innovation; and
• Enhancing policy coordination among developing countries.

The international community has a crucial role to play in supporting these efforts through technical assistance and financial support tailored to the policy space and capabilities of individual developing countries.

Developing countries must take ownership of their development processes, crafting policies that reflect their unique circumstances, priorities, and aspirations. This involves not only addressing immediate economic challenges but also investing in long-term capabilities in areas such as education, innovation, and institutional development.

The path ahead will not be easy, and there will undoubtedly be setbacks and challenges. However, by fostering greater cooperation among developing countries, leveraging new technologies, and pushing for reforms in the global economic system, developing countries can chart a course toward more inclusive and sustainable development.

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15. This can be seen intuitively (Dinh, 2022) if one focuses on the extreme policy choice in a small economy: a fixed exchange rate or a pure float regime; a complete independent monetary policy or no monetary policy control; and perfect capital mobility or financial autarky. If a country has a fixed exchange-rate regime and free capital mobility, then it must give up its independent monetary policy. When a country faces an external shock such as interest-rate increases from the base country (the U.S.), the interest-rate differential will cause holders of domestic bonds to sell them and buy foreign bonds. This will increase the demand for foreign currency and, because of the fixed exchange-rate regime, will require the central bank to intervene and reduce the money supply. Hence the country gives up its independent monetary policy. Hinh T. Dinh, Sailing on a Stormy Sea: Policy Challenges for Developing Countries 2022-2025, Policy Paper PP-20/22, Policy Center for the New South, 2022.
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31. Margaret McMillan et Albert Zeufack, Labor Productivity Growth and Industrialization in Africa, Journal of Economic Perspectives, pages 3-32, 2022. 
32. ibid
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