The Sovereign Gap

What happens to nations whose development model is being bypassed by the technology it was supposed to lead them toward

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TAM-RWR.4-03 · The Reshaped World, Arc 4: The Renegotiated Contract · The Approximate Mind

On Dr. Akinyi’s desk, a carved wooden figure of a woman carrying a basket on her head.

She bought it at a market in Accra fifteen years ago, on her first visit to the continent, when she was still a graduate student and the trip was part of dissertation research and everything felt provisional in ways that later careers tend to resolve. She has been back to Ghana many times since, but not to that specific market. She does not know whether it is still there. The figure is still on her desk, in Washington, in an office from which she advises governments on strategies she is beginning to question.

The strategy she has been building for ten years is coherent. It follows the development model that industrialized East Asia and is industrializing South and Southeast Asia: attract manufacturing through competitive labor costs, build export capacity, accumulate capital, invest in education and infrastructure, move up the value chain. The model works. It has been the most reliable path from poverty to middle-income status available since the end of World War II.

She has been watching the AI transition for three years with the attention of someone whose professional framework is at risk.

She has not changed the strategy. She does not know what to change it to.

The Development Ladder

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The ladder metaphor is not decorative. It is structural. The development sequence is sequential in the strict sense: you cannot occupy rung three without having passed through rungs one and two. The bottom rungs are labor-intensive manufacturing, accessible because high-income nations’ labor costs make production there profitable for goods whose manufacturing is labor-intensive. The middle rungs are more skill-intensive manufacturing and basic services. The upper rungs are knowledge-intensive production and high-value services.

The ladder works because the rungs exist. The bottom rungs exist because there is a gap between labor costs in high-income and low-income countries large enough to make geographic relocation of labor-intensive production profitable. The gap is real. It has been the engine of development for sixty years.

AI is removing the bottom rungs. Not by closing the labor cost gap, which is closing more slowly than AI deployment. By making developed-nation production cheaper than developing-nation labor in the specific categories of manufacturing that constitute the bottom rungs. Automated manufacturing. Lights-out factories. Robotic assembly that does not need the geographic relocation that created the development opportunity, because it does not need the labor that relocation was seeking.

The bottom rungs of the development ladder are not being climbed by new entrants. They are being dissolved beneath the nations currently on them.

The Two Traps

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Nations at different stages of the ladder face different versions of the same problem.

The partially industrialized nation, those that have attracted manufacturing and built the infrastructure, education systems, and export capacity that manufacturing requires, built those things on the expectation that manufacturing employment would continue and expand. Roads to industrial zones. Ports calibrated for container volumes. Vocational training programs aligned with manufacturing skills. These investments were rational, based on the reasonable expectation that the development model would continue to function as it had.

If manufacturing employment contracts before the infrastructure’s costs are recovered, the infrastructure becomes a fiscal burden rather than a development asset. The roads lead to factories that are automating. The port handles declining container volumes. The vocational graduates are trained for jobs that are not being created at the rate the training program assumed. The partially industrialized nation is caught between the costs of infrastructure it built for a development model that is changing and the benefits of industrial employment that are arriving more slowly than projected.

The unstarted nation faces a more fundamental problem. It had planned to attract the labor-intensive manufacturing that is now being automated in the countries that had it. The plan was based on the historical pattern: labor costs decline relative to the frontier as development proceeds, making the frontier’s labor-intensive production increasingly attractive to relocate. This is no longer the frontier’s situation. The frontier is automating its labor-intensive production, not relocating it. The unstarted nation’s labor cost advantage is real. There is decreasing production that the advantage makes it attractive to relocate.

The ladder’s bottom rungs do not disappear instantly. Manufacturing relocation continues. The trend is not a cliff. It is a slope. But it is a slope in the direction that makes the development model less available with each passing year, which means nations that have not yet used the model face a narrowing window in which to use it, and the window is narrowing faster than development institutions have communicated.

The Alternatives and Their Limits

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Dr. Akinyi has mapped the alternatives honestly, which is why the map is unsatisfying.

Resource extraction. The nations with extractable natural resources can generate revenue from them independent of the manufacturing development model. This works for the nations that have the resources. It does not work for the nations without them, which is most nations. It also produces development patterns that historically have been associated with institutional weakness, rent-seeking, and the resource curse rather than with broad-based income growth and state capacity building. Resource extraction funds governments. It does not develop the population.

Services leapfrogging. The mobile phone analogy: nations that never built fixed-line telephone infrastructure leapfrogged directly to mobile networks. Perhaps nations that never built manufacturing infrastructure can leapfrog directly to service economies. This has occurred in specific cases, most prominently Rwanda’s attempt to become an East African technology hub. The cases are real and instructive. They are also small and not easily replicable at the scale of the nations that the manufacturing model was supposed to develop. A small nation with a specific geographic and political advantage can become a services hub. A nation of a hundred million people in West Africa does not have a comparable opportunity.

Digital economy participation. The platform economy offers income-generation opportunities to individuals in developing nations through content creation, freelancing, and gig work. These are real income flows. They are also not development in the structural sense: they do not build institutional capacity, they do not generate the tax revenues that fund public services, they do not produce the broad-based middle class whose consumption drives domestic economic growth. They are individual income supplementation at scale, not development.

The green energy pathway. The global energy transition creates demand for minerals used in batteries and solar panels that are concentrated in certain developing nations. This is a real opportunity and it faces the same limitations as resource extraction: it funds governments without necessarily developing populations, and the revenues are subject to the same political economy dynamics that make resource revenues unreliable development foundations.

I wonder whether the development community has confronted the possibility that the development model itself, the ladder metaphor and all it implies, may be a historical artifact rather than a universal pathway, and whether the inability to name an alternative of comparable scope is a failure of imagination or an honest recognition that no such alternative currently exists.

Sovereign Capacity

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The development model was supposed to do something beyond generating income growth. It was supposed to build sovereign capacity: the institutional infrastructure that allows a nation to govern itself effectively, to collect taxes, to deliver services, to enforce contracts, to maintain security, to participate as an equal in international negotiations.

Sovereign capacity requires a fiscal base. A fiscal base requires economic activity that can be taxed. A government that cannot tax cannot fund the administration that makes governance possible. A government that cannot fund its administration cannot enforce its laws, deliver its services, maintain its infrastructure, or develop the institutional competence that makes it capable of governing the increasingly complex technical and economic environment of the twenty-first century.

The development model was the mechanism through which nations built sovereign capacity by building fiscal capacity. Nations that industrialized developed the tax base that funded the state that developed the institutions that made the tax base sustainable. Nations that did not industrialize have weaker fiscal bases and weaker states and fewer institutional resources to manage the AI transition than the nations that did.

The AI transition arrives in this context not as a neutral technological development but as a shock that is differentially distributed. The high-capacity nations have the institutional resources to adapt, however slowly and imperfectly. The low-capacity nations have fewer institutional resources and face a more severe version of the adaptation challenge, because the development model that was supposed to build their capacity is the model the transition is disrupting.

The gap in sovereign capacity that the development model was supposed to close is widening as the development model’s availability narrows.

The Figure

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Dr. Akinyi looks at the carved figure. A woman carrying a basket on her head. The figure represents, without intending to, the informal economy that employs more people in West Africa than the formal economy the development model is designed to build. The informal economy was supposed to be transitional: the condition before development arrived. Everyone expected the informal economy to formalize as the formal economy grew.

The formal economy grew, where it grew, more slowly than expected, with more enclave characteristics than the models predicted, with less labor absorption than the development community had hoped. The informal economy persisted, adapted, expanded in some cases, integrated digital tools in others, remained the primary livelihood for hundreds of millions of people who were supposed to graduate out of it.

She is beginning to wonder whether the informal economy is the condition after the development model’s ladder expires, rather than the condition before it arrived, and whether the woman with the basket, who was never part of the strategy, is the strategy’s most durable participant.

She does not know what to do with this thought. It does not map onto any policy recommendation she can make to the governments she advises. She puts it in the same folder as the strategy she has not yet changed.

The figure is still on the desk. The market may or may not still exist in Accra. She has been back to the continent many times. She has not gone back to check.

References

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The Development Ladder and Its Conditions

Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishers, 2012.

Rodrik, Dani. “Premature Deindustrialization.” Journal of Economic Growth, vol. 21, no. 1, 2016, pp. 1–33.

World Bank. World Development Report 2020: Trading for Development in the Age of Global Value Chains. World Bank, 2020.

AI and Development

Korinek, Anton, and Joseph E. Stiglitz. “Artificial Intelligence and Its Implications for Income Distribution and Unemployment.” The Economics of Artificial Intelligence: An Agenda, edited by Ajay K. Agrawal et al., University of Chicago Press, 2019, pp. 349–390.

UNCTAD. Technology and Innovation Report 2021: Catching Technological Waves. United Nations, 2021. unctad.org.

The Informal Economy

Chen, Martha Alter. “The Informal Economy: Definitions, Theories and Policies.” Women in Informal Employment: Globalizing and Organizing (WIEGO) Working Paper, no. 1, 2012.

De Soto, Hernando. The Other Path: The Invisible Revolution in the Third World. Harper and Row, 1989.

Sovereign Capacity and Fiscal Development

Besley, Timothy, and Torsten Persson. Pillars of Prosperity: The Political Economics of Development Clusters. Princeton University Press, 2011.

Tilly, Charles. Coercion, Capital, and European States, AD 990–1990. Basil Blackwell, 1990.

Resource Curse and Alternatives

Collier, Paul. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done about It. Oxford University Press, 2007.

Ross, Michael L. The Oil Curse: How Petroleum Wealth Shapes the Development of Nations. Princeton University Press, 2012.