Development economics for an age of upheaval

CAPE TOWN—The economist Dani Rodrik recently reopened one of development economics' most enduring debates, arguing that developing countries should shift their attention from manufacturing to productivity-enhancing services. In doing so, he has challenged the long-held assumption that manufacturing remains the primary engine of development.

But the deeper issue is not whether services should replace manufacturing. It is whether structural transformation should still be understood primarily as the movement of resources between sectors. That framework, which guided development economics for more than half a century, is increasingly out of step with how modern economies actually create value.

From W. Arthur Lewis and Raúl Prebisch to Albert Hirschman and Nicholas Kaldor, structural transformation was understood as the reallocation of labor and capital from low-productivity activities to more productive ones. Manufacturing occupied center stage because it combined economies of scale, technological learning, and sustained productivity growth. But that framework reflected the realities of an era in which factories were at the heart of technological progress and income growth.

The objectives of development have not changed since then, as productivity, technological learning, and economic complexity remain the foundations of long-term prosperity. What has changed is where—and how—those capabilities emerge.

Three factors are driving this shift. AI is rapidly reshaping the relationship between labor and production, while geopolitical fragmentation has brought industrial policy back to the center of economic strategy. At the same time, the clean-energy transition is reorganizing production around new technologies, critical minerals, and low-carbon industries. Although none of these developments diminishes the importance of manufacturing, together they suggest that it no longer defines structural transformation.

Increasingly, what matters is not the sectors themselves but the productive capabilities they encompass. Modern manufacturing depends on software, logistics, finance, and digital platforms, while agriculture relies on biotechnology, satellite imagery, and precision engineering. Sophisticated services now drive the technological learning, innovation, and export dynamism once associated almost exclusively with manufacturing. As a result, the boundaries once separating these sectors are steadily blurring.

In many respects, capabilities have always been the true engine of structural transformation. And given that productive services increasingly perform the role historically played by manufacturing, the most important question is which activities continuously expand an economy's productive capacity. The answer lies in ecosystems that integrate manufacturing and engineering with research, digital infrastructure, finance, and public institutions.

Consider electric-vehicle batteries. Traditional industrial policy encourages countries such as the Democratic Republic of the Congo to process cobalt domestically rather than export raw ore. But domestic manufacturing alone no longer guarantees that countries will capture the most profitable parts of the value chain. Even if the DRC succeeds in producing battery components—or even batteries themselves—much of the value will flow elsewhere so long as the design, specialized equipment, software, technical standards, and distribution networks remain concentrated abroad.

China illustrates this dynamic. For all its manufacturing prowess, the country's competitive advantage stems less from manufacturing scale than from its control over the technologies, technical know-how, intellectual property, and industrial ecosystems in which manufacturing operates. The lesson is clear: structural transformation requires moving beyond production toward ownership of the productive ecosystem itself.

For Africa, however, this lesson strengthens the case for industrialization, as building technological capabilities and capturing more value domestically remain essential priorities. If anything, AI and the growing importance of productive services reinforce manufacturing's role as a powerful source of learning, technological progress, and capability building.

Yet Africa's comparative advantages are also evolving. Unlike previous late developers, African countries are pursuing industrialization in a world in which demographic change, the climate transition, and digital technologies are transforming the development landscape. As advanced economies age, Africa is projected to account for much of the growth in the world's working-age population and consumer demand.

Because African countries are not constrained by legacy production systems, they can build renewable energy systems, low-carbon industries, and digitally integrated infrastructure from the ground up, rather than retrofit carbon-intensive systems built over more than a century. But whether they can capitalize on these advantages will depend on their ability to build institutions that foster learning and innovation.

Industrial policy must evolve accordingly. Rather than simply promoting manufacturing or targeting strategic sectors, governments must create the conditions for productive capabilities to expand. That means cultivating ecosystems that connect firms with universities, research institutions, financial systems, digital infrastructure, and regional markets.

Industrialization in Africa has always been about building the institutional foundations of a modern economy. Industrial societies rely on formal markets, modern logistics, financial intermediation, enforceable contracts, and reliable data, all supported by institutions capable of managing complex economic interactions. Factories are only one part of that broader architecture.

This is where emerging technologies offer new opportunities that previous late developers did not have. Digital payments, identity systems, interoperable public platforms, and AI can accelerate formalization, lower transaction costs, improve tax administration, expand access to finance, and strengthen state capacity.

AI, in particular, has the potential to modernize the institutional architecture within which markets function. Properly governed, it can help countries leapfrog stages of industrial development while creating new opportunities to develop and protect intellectual property.

By challenging manufacturing exceptionalism, Rodrik has done development economics a valuable service. The next step is to question sectoral exceptionalism itself and rethink how production is structured.

In a world organized around digital networks, intangible assets, and industrial ecosystems, prosperity will depend on economies' ability to accumulate and renew productive capacity. Rather than retracing the path of earlier industrializers, Africa must seize this moment to forge a new model of structural transformation.

This article is also published on Project Syndicate. illuminem Voices is a democratic space presenting the opinions of leading Sustainability Thought Leaders, their views do not necessarily represent those of illuminem.

The world needs sustainability knowledge. At illuminem, no interest group or shareholder can influence our work. Thank you for supporting our mission to make high-quality and independent sustainability information free for all. Every contribution helps. Thank you for donating today.