Closing the gap ?

By Dani Rodrik

Perhaps for the first time in modern history, the future of the global economy lies in the hands of poor countries. The United States and Europe struggle on as wounded giants, casualties of their financial excesses and political paralysis. They seem condemned by their heavy debt burdens to years of stagnation or slow growth, widening inequality, and possible social strife.

Much of the rest of the world, meanwhile, is brimming with energy and hope. Policymakers in China, Brazil, India, and Turkey worry about too much growth, rather than too little. By some measures, China is already the world’s largest economy, and emerging-market and developing countries account for more than half of the world’s output. The consulting firm McKinsey has christened Africa, long synonymous with economic failure, the land of “lions on the move.”

As is often the case, fiction best reflects the changing mood. The emigre Russian novelist Gary Shteyngart’s comic novel Super Sad True Love Story is as good a guide as any to what might lie ahead. Set in the near future, the story unfolds against the background of a US that has slid into financial ruin and single-party dictatorship, and that finds itself embroiled in yet another pointless foreign military adventure – this time in Venezuela. All the real work in corporations is done by skilled immigrants; Ivy League colleges have adopted the names of their Asian counterparts in order to survive; the economy is beholden to China’s central bank; and “yuan-pegged US dollars” have replaced regular currency as the safe asset of choice.

Can they carry the load?

But can developing countries really carry the world economy? Much of the optimism about their economic prospects is the result of extrapolation. The decade preceding the global financial crisis was in many ways the best ever for the developing world. Growth spread far beyond a few Asian countries, and, for the first time since the 1950’s, the vast majority of poor countries experienced what economists call convergence – a narrowing of the income gap with rich countries.

This, however, was a unique period, characterized by a lot of economic tailwind. Commodity prices were high, benefiting African and Latin American countries in particular, and external finance was plentiful and cheap. Moreover, many African countries hit bottom and rebounded from long periods of civil war and economic decline. And, of course, rapid growth in the advanced countries generally fueled an increase in world trade volumes to record highs.

In principle, low post-crisis growth in the advanced countries need not impede poor countries’ economic performance. Growth ultimately depends on supply-side factors – investment in and acquisition of new technologies – and the stock of technologies that can be adopted by poor countries does not disappear when advanced countries’ growth is sluggish. So lagging countries’ growth potential is determined by their ability to close the gap with the technology frontier – not by how rapidly the frontier itself is advancing.

The bad news is that we still lack an adequate understanding of when this convergence potential is realized, or of the kind of policies that generate self-sustaining growth. Even unambiguously successful cases have been subject to conflicting interpretations. Some attribute the Asian economic miracle to freer markets, while others believe that state intervention did the trick. And too many growth accelerations have eventually fizzled out.

This time is different

Optimists are confident that this time is different. They believe that the reforms of the 1990’s – improved macroeconomic policy, greater openness, and more democracy – have set the developing world on course for sustained growth. A recent report by Citigroup, for example, predicts that growth will be easy for poor countries with young populations.

My reading of the evidence leaves me more cautious. It is certainly cause for celebration that inflationary policies have been banished and governance has improved throughout much of the developing world. By and large, these developments enhance an economy’s resilience to shocks and prevent economic collapse.

But igniting and sustaining rapid growth requires something more: production-oriented policies that stimulate ongoing structural change and foster employment in new economic activities. Growth that relies on capital inflows or commodity booms tends to be short-lived. Sustained growth requires devising incentives to encourage private-sector investment in new industries – and doing so with minimal corruption and adequate competence.

If history is any guide, the range of countries that can pull this off will remain narrow. So, while there may be fewer economic collapses, owing to better macroeconomic management, high growth will likely remain episodic and exceptional. On average, performance might be somewhat better than in the past, but nowhere near as stellar as optimists expect.

The big question for the world economy is whether advanced countries in economic distress will be able to make room for faster-growing developing countries, whose performance will largely depend on making inroads in manufacturing and service industries in which rich countries have been traditionally dominant. The employment consequences in the advanced countries would be problematic, especially given an existing shortage of high-paying jobs. Considerable social conflict could become unavoidable, threatening political support for economic openness.

Ultimately, greater convergence in the post-crisis global economy appears inevitable. But a large reversal in the fortunes of rich and poor countries seems neither economically likely, nor politically feasible.

Dani Rodrik, Professor of International Political Economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy.
A version of this article first appeared on Project Syndicate.

About Michaela

I am a wanderer and a wonderer, like you are. I love our journey and to walk in the company of friends – to learn, experience, share, laugh, cry and above all I simply love this marvelous, magical, mysterious life. I have no plan (cannot believe I am saying this) and my only intention is to be truthful to myself and others.
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6 Responses to Closing the gap ?

  1. johanna11 says:

    Interesting – but my mind (yes, that fractious “thing” or energy!) keeps veering off to questions of sustainability and social justice – caring for people. and other life forms, and giving them a “fair go”…. Can we really look at economics by itself any more?

  2. Michaela says:

    Of course not…it is what matters to people. Buying stuff just does not seem to be cutting it any longer…and the relatedness of production and goods is becoming so obvious.

    • johanna11 says:

      Hi, Michaela,
      Could you please amplify? When you say, “Of course not… it is what matters to people” – are you saying economics is out of touch with what matters to people? That is what I feel – “growth” in itself is neither good nor bad. We need to create systems that are responsive to people’s needs and lifestyle, and allow a flow of information, not only from producers to consumers (or intended consumers), but in the other direction also. That could actually be more important – e.g. “we need sewing machines which can… or ploughs that… Or, packaging that does not pollute the environment, is recyclable, etc.”

      And – sorry if I’m being dense here, but – would you please spell out your meaning more in the last two sentences?
      Cheers, Johanna

  3. Michaela says:

    We apply certain parameters to what we call a ” healthy” economy. Trouble is, that those parameters do not change, as the world changes. During the last decades everything has been focussed on growth, but as the growth is stalling, as we have reached a ceiling, this does not mean the economy is dead – people and needs just change. What is however dead is the practice of making money from borrowing and lending. This has been a practice for many, many years and the means of growth – as well as inflation. In times like this, people are reconsidering what they really need, and they become more conscious of what they actually have.

    The system creates itself. All we need to do is to allow it to happen.

    • johanna11 says:

      Yes, for sure, the criteria of a “healthy” economy change. The emphasis on growth in the eonomy is not a helpful one, in assessing whether the economy is doing its job – allowing a decent living for all members of society. And I wonder if the emphasis on”jobs” may also change…
      “The system creates itself” – Yes, but it can also self-destroy, can’t it? People may indeed borrow less, but the huge and powerful institutions, banks, industry, even governments,
      continue to borrow – and waste or consume – vast amounts of money.
      Anyway, what is happening is deeply interestsing to observe…
      I was watching the ABC (Aussi) last night and it showed an English community, Oxley South, being transformed by music – a community choir. The English government spends a lot on music education – admission to the Prom concerts is available to nearly all, at a cost of 5 English pounds – and free, on the internet. This even creates jobs! Sure, we need an effective economy (= “household”, the way goods are produced and allocated within a group or nation – now, within the world!) But beyond that, I reckon that society can be transformed, and can flourish, through the liveliness of music and the arts, which, one might say, are an aspect of active consciousness…

  4. Michaela says:

    See, there are so many, many initiatives that are leading the way. The future is Now

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