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The writer is a professor at Harvard’s John F Kennedy School of Government. His new book is ‘Shared Prosperity in a Fractured World’
The world faces three major interlinked economic challenges: reversing the erosion of the middle class (and the democratic backsliding that comes with it); accelerating the green transition; and enhancing poverty reduction and growth in developing countries.
In an age of rising authoritarianism and international conflict, these goals seem more distant than ever but the evidence from the ground up is more encouraging. Pragmatic policymakers around the world, often operating at the subnational level, have long engaged in a variety of experiments that yield a glimmer of hope. We can build a better future if we set aside entrenched habits of thinking and take the lessons of these policies to heart.
Fostering structural change in the economy is the key to dealing with the related problems of the middle class, global climate and poverty reduction. Updated industrial and innovation policies offer the best chance for progress on all three fronts.
If you want an example of success, look no further than China’s green industrial policies, which have been responsible for dramatic reductions in the costs of solar and wind energy and electric batteries. This was not the result of direct controls on emissions or global co-operation — strategies that conventional thinking emphasises. China has shown it is possible to make much greater headway with local and national programmes to spur innovation and drive structural change. These involve collaboration with business and across different levels of government.
As the cost of renewables has come down, phasing out fossil fuels globally and reducing emissions directly has become a more realistic possibility. But the green transition does not on its own address the crisis of the middle class in advanced countries or promote significant job creation in the modern sectors of poorer nations. Both objectives require dedicated good jobs policies.
These should target services rather than the manufacturing and high-tech sectors. Despite what many policymakers seem to believe, the decline in the manufacturing share of employment globally cannot be reversed. The bulk of future jobs will be in non-tradeable sectors of the economy such as care, retail, personal and food services. Since these jobs typically do not require university degrees, simply investing in education will not be enough either.
We need the services equivalent of China’s green industrial policies to promote technological and organisational innovation in the labour-absorbing segments of the economy. Luckily, here too there are examples to build on, in the form of developmental coalitions bringing together local policy officials, non-profits, and private business — think of The Right Place in Grand Rapids, Michigan or the Virgina Economic Development Partnership. National governments can amplify such initiatives, as the Biden administration did with its regional challenge programmes.
In developing countries, similar strategies must confront the reality that employment is largely informal and company size much smaller. But there are a number of promising initiatives: a competition in Nigeria that provides financial and business assistance to young entrepreneurs; a partnership with large ride-hailing platform companies to help them increase employment of local drivers in Haryana state, India; and a free digital app for street vendors in Bogotá, Colombia, enabling them to co-ordinate and purchase their supplies from wholesale markets.
Such initiatives may seem worlds apart from green industrial policies or regional development policies, but they often spring from a similar mindset. Instead of top-down regulation and conventional subsidies, they rely on open-ended collaboration between public agencies and private actors, and are focused on enhancing productivity as the ultimate guarantor of good jobs. Multiplied many times over, such programmes can lay the foundation for growth that is more inclusive than in the traditional export-oriented industrialisation model, which in any case is no longer viable.
There is a final lesson here. It is often tempting to pin the blame for our ills on a lack of global co-operation. And while greater international co-operation on aid, trade rules and climate commitments is clearly desirable, we should also recognise that much of what we need to do for the climate, the middle class and the global poor can be done at the national level and below, with policymakers acting for the benefit of their own immediate constituencies.
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