Developing Countries Need a New Strategy

Apr 6 , 2025
By Rabah Arezki

---

US President Donald Trump's repeated threats to impose reciprocal tariffs on goods from nearly every country have set off alarm bells around the world. Trump's tariffs are likely to accelerate the ongoing fragmentation of the global economy. As is often the case, developing economies will bear the brunt of the fallout.

The developing world now faces a series of interconnected threats. Imported inflation, driven by tariff-related costs, could trigger a global recession, lowering commodity export prices and fueling business uncertainty, which in turn would reduce foreign direct investment. To protect themselves, developing countries should find ways to navigate today's Trumpian chaos while still responding to their rapidly growing youth populations' demand for decent jobs and economic opportunities.

Achieving this requires striking a delicate balance between maintaining open markets and preserving economic sovereignty, broadly defined as a country's ability to make independent policy decisions affecting its economy. That is easier said than done. Most developing economies in Africa, Latin America, and South and Central Asia are heavily reliant on extractive industries and cash-crop exports, sectors often dominated by multinational – primarily Western – corporations, which are often perceived as predatory, extracting resources from developing economies while giving little in return.

Such violations remain widespread despite repeated international efforts to rein in tax evasion and abusive practices. Few companies illustrate this better than the commodity giant Glencore. In 2023, the company was ordered to pay a 700 million dollar fine after admitting to a years-long scheme to bribe officials in multiple countries. Glencore has also faced allegations of massive tax evasion, bullying governments, and fomenting violence against protesters.

Glencore's behavior illustrates the longstanding power imbalance between developing-country governments and multinationals. However, the dynamic is beginning to shift as more governments assert their economic sovereignty and demand a fairer share of the value created by foreign investment.

Rebalancing these relationships should start with transparent contracts and stronger institutional capacity, enabling developing countries to negotiate better terms, boost tax revenue, and invest in social programs and infrastructure. Given that extractive industries are capital-intensive, well-designed policies on local content can help create positive spillovers and boost job creation. To this end, some governments require multinationals to process raw materials domestically. Botswana, for example, has leveraged its 15pc stake in De Beers – the world's biggest diamond company – to increase the share of rough diamonds cut domestically.

Some critics may argue that developing economies should simply give up on open markets, thereby eliminating the influence of multinational corporations. But, while multinationals are certainly part of the problem, they can also be part of the solution. Severing ties with them would amount to adopting an autarkic model of economic development, which would impede technological spillovers to the broader economy and restrict access to global markets and financing.

Despite its size and rapid growth, even China has never attempted such a move. That is not to say that some adjustments won't be required. It is now widely accepted that small and medium-sized enterprises (SMEs) drive job creation in developing countries, but the reality is far more complex. In most, labour markets are bifurcated: on one side are state-owned and private companies, including multinationals; on the other, informal, low-productivity SMEs that struggle to pay living wages. And the few SMEs that manage to scale up tend to concentrate talent, financing, and access to international markets.

Targeting firms solely based on size is a misguided approach that does not help them to expand, as evidence shows that subsidising SMEs rarely leads to sustained growth. For example, when a support program for SMEs in India was dismantled in the late 1990s, the impact on job creation was negligible. A more effective approach would be to adopt a hybrid industrial policy that combines temporary subsidies for SMEs – with unambiguous sunset clauses – and competitive pressures that reward performance and limit waste.

Perhaps more importantly, multinational corporations should be welcomed, but with strong incentives to facilitate technology sharing and localise production in ways that create high-quality jobs. China offers a useful model. After joining the World Trade Organization (WTO) in 2001, the country facilitated technology transfers by effectively forcing foreign corporations to enter joint ventures with Chinese firms. What made this possible was both the appeal of China's low-cost labour and the promise of access to its vast and rapidly growing domestic market.

By contrast, other Asian countries like Bangladesh and Vietnam have made enormous efforts to attract multinational corporations but have struggled to localise production and expertise.

The broader lesson is that in a fragmenting world economy, multilateral organisations should do more to support the provision of public goods in developing countries. As the push for economic sovereignty gains momentum, multinational corporations should heed developing economies' demand for a fairer share of the gains from global economic growth and ensure that the benefits of open markets are shared more equitably.

---

PUBLISHED ON Apr 06, 2025 [ VOL 26 , NO 1301]

---