BEIJING – All low-income countries have the potential for dynamic economic growth. We know this because we have seen it happen repeatedly: a poor, agrarian economy transforms itself into a middle- or even high-income urban economy in one or two generations. The key is to capture the window of opportunity for industrialization arising from the relocation of light manufacturing from higher-income countries. That was true in the nineteenth and twentieth centuries, and it remains true today.
Japan seized its opportunity in the years following World War II, using labor-intensive industries, such as textiles and simple electronics, to drive its economy until rising labor costs eroded its comparative advantage in those sectors. That shift then allowed other low-income Asian economies – South Korea, Taiwan, Hong Kong, Singapore, and to some extent Malaysia and Thailand – to follow in Japan's footsteps.
China, of course, is the region's most recent traveler along this well-trodden path. After more than three decades of breakneck economic growth, it has transformed itself from one of the poorest countries on earth to the world's largest economy. And now that China, too, is beginning to lose its comparative advantage in labor-intensive industries, other developing countries – especially in Africa – are set to take its place.
Indeed, ever since the Industrial Revolution, the rise of light manufacturing has driven a dramatic rise in national income. The United Kingdom's economic transformation started with textiles. In Belgium, France, Sweden, Denmark, Italy, and Switzerland, light manufacturing led the way. Similarly, in the United States, cities like Boston, Baltimore, and Philadelphia became centers for producing textiles, garments, and shoes.