Hong Kong - The world is in the midst of a global permacrisis. As interrelated shocks – the war in Ukraine, the fallout of the COVID-19 pandemic, the escalating US-China rivalry, climate change, and a looming financial meltdown – threaten to engulf the world’s great powers, it is time for emerging-market and developing economies (EMDEs) to revisit and revise their development strategies.
After the end of World War II, development economists emphasized decolonization, alternative growth models, and strengthening state mechanisms to rein in markets. But over the past four decades, the neoliberal trade framework – underpinned by the Bretton Woods institutions and the Washington Consensus – did away with many of these state capacities in favor of market-oriented growth with minimal government intervention.
The Asian financial crisis of 1997-98 shook confidence in the Washington Consensus, and the 2008 global financial crisis led some development economists to abandon it altogether. At the same time, economists have begun to look beyond GDP growth, broadening the concept of development goals to include gender equality, environmental sustainability, happiness, and diversity.
For a while at least, the spectacular rise of the BRICS economies - Brazil, Russia, India, China, and South Africa – seemed to offer a compelling alternative to the neoliberal development framework. But conflicting ideologies and approaches have left economists unable to agree on a new paradigm.
To address diverse goals, development economics has become increasingly multi-disciplinary. By incorporating insights from various other social sciences, as well as from ecology and other life sciences, development scholars have been trying to devise alternative, more holistic economic models. But reimagining the economy, as Harvard economists Dani Rodrik and Gordon Hanson have argued, also requires shedding outdated assumptions.
Having said that, there is no one-size-fits-all development model. Economies are complex systems shaped by a dizzying array of interactions between individuals, communities, societies, states, and global structures. These constantly shifting local and international contexts generate unpredictable outcomes that cannot be easily explained by simple, seemingly elegant theories.
In short, EMDEs must adapt to a fast-changing world in which achieving a universal development agenda is no longer possible. Devising holistic and practical development strategies suitable for this new reality requires systems thinking and a new philosophical framework.
For example, consider the complex challenges facing the world’s 38 small island developing states (SIDS), whose share of the world’s population is just under 0.2%. Individually, these countries, which account for 0.1% of global GDP, look minuscule in terms of land, economic output, and population size. But including their maritime exclusive economic zones (EEZ), they collectively occupy 21 million square kilometers (81 million square miles). If they were a single country, it would be the world’s second largest, just behind Russia.
The fact that they account for one-fifth of the United Nations members and 8.7% of the world’s combined EEZ and land area gives SIDS geopolitical clout, with larger countries regularly courting their UN votes and maritime access. The growing tensions between the United States and China over the strategically important Solomon Islands are a case in point.
But SIDS are highly vulnerable to external shocks. The pandemic crushed the tourism industry, which accounts for most of these countries’ exports, causing SIDS’ combined GDP to contract by 6.9% in 2020, compared to the global average decline of 4.8%. SIDS are also increasingly threatened by rising sea levels. For example, 77% of the Maldives’ land area is expected to be underwater by the end of the century.
The scarcity of usable land, small populations, and limited capital constrain SIDS’ development prospects. With services accounting for half their GDP, no significant manufacturing or agricultural activity, and few oil and gas resources, SIDS economies are extremely vulnerable to rising prices for consumer goods and energy.
One area where SIDS could have a comparative advantage is digital services. But first they must invest in high-quality technology infrastructure and in creating a workforce skilled in information and communications technologies. Mobile broadband subscriptions rose from one quarter of the population in 2014 to almost half by 2018, but lags world average by 22 percentage points. If they wish to develop new sources of sustainable income, governments must devote considerable resources to upgrading their education systems, particularly their science, math, and creative arts curricula.
As we have previously argued, a bottom-up approach to sustainable development, underpinned by community-level consensus and powered by nonprofit social enterprises, is preferable to top-down strategies. Mainstream development economics’ focus on creating economies of scale has fostered concentrations of state and market power, generated social and environmental injustices, and helped fuel the current populist backlash. Without reaching a broad social consensus and empowering grassroots communities, polarization will intensify further, undermining developing countries’ ability to achieve the UN Sustainable Development Goals.
By embracing technology and modern management techniques, SIDS could harness the power of communities to drive sustainable socioeconomic development. Shifting from a top-down design to a bottom-up approach would enable small communities to empower themselves. This would ultimately strengthen developing countries’ national economies and the global economy as well.
Reimagining development economics is not about socialism versus capitalism. Rather, it is about thinking systemically and acting locally, thereby enabling economies and communities to define, experiment, and achieve their own aspirations while still benefiting from relevant global knowledge.
This article was originally published in Project Syndicate
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Professor Geng Xiao is the Director of the Institute. Professor Xiao is also Chairman of the Hong Kong Institution for International Finance. Before joining Shenzhen Finance Institute, Xiao Geng is Professor of Practice in Finance at Peking University HSBC Business School, Director of the Research Institute of Maritime Silk-road, and Deputy Director of PHBS Think-tank. Professor Xiao was previously Professor of Practice in Finance and Public Policy at the University of Hong Kong, Vice President of the Fung Global Institute, Director of the Columbia University Global Center in Beijing, Founding Director of the Brookings-Tsinghua Center for Public Policy, Senior Fellow of the Brookings Institution, Head of Research and Advisor to Chairman at Securities and Futures Commission of Hong Kong, and Consultant for the World Bank and UNDP.