Incomes in the developing world are no longer speeding toward those in the rich
THE financial crisis was grim, but the most important global economic development in the early 21st century was a positive one: the dramatic acceleration of growth in the emerging world. Between 2000 and 2009 output per person in poor countries excluding China grew an average of 3.2 percentage points a year faster than rich ones—an unprecedented pace of catch-up. Global poverty rates tumbled. Were that pace of convergence to be sustained, average income in those countries would reach America’s in about 44 years.
Unfortunately, the era of rapid catch-up already seems to be over (see article). Growth has fallen sharply in many emerging economies. Despite the rich world’s feeble recovery in the wake of the financial crisis, emerging economies excluding China are now catching up more slowly, if at all. In 2013 their output per person, on average, grew just 1.1% faster than that in America. At that pace convergence would take more than a century. And the growth outlook is darkening further. On the basis of the IMF’s most recent projections for growth in 2014, emerging economies excluding China would not catch up with America for 300 years.
The political and economic consequences of this slow-down in convergence will be profound. Billions of people will be poorer for a lot longer than they might have expected just a few years ago. Companies that bet on vibrant emerging markets as the main source of future profits will need a new strategy. So, too, will the rich world’s policymakers, who have long hoped that rising consumption in fast-growing emerging economies would prop up their own growth. A lot therefore rides on understanding why growth has slowed, and how to speed it up once more.
Reform to relish
Some of today’s weakness is temporary. Russia’s economy is being squeezed by sanctions. Brazil’s recession won’t last forever. But strip away the effects of the business cycle and the one-offs, and there are several reasons why the pace of catch-up is likely to be permanently slower. One is that the boom in the 2000s was to some extent a one-off itself. The explosion of global trade and the surge in commodity prices that accompanied China’s remarkably rapid and export-intensive industrialisation buoyed up other emerging economies. And China cannot industrialise itself from scratch again.
On top of that there are signs that the march of technology may be making it harder to catch up. A standard route for poor countries to become wealthier is low-skill, labour-intensive manufacturing. Growth rates soar as people move from the land and into factories to sew T-shirts or assemble toys. Wages in manufacturing tend to catch up faster and more completely than in other sectors. But in the 21st-century digital economy, basic manufacturing is becoming less important. The assembly of goods adds less value than the design and engineering work at which rich countries excel. Technology has made manufacturing less labour-intensive, giving firms less incentive to seek out cheap labour in poor countries.
If catch-up is harder than a decade ago, it is not impossible. The basic laws of economics—that poorer countries with less capital ought to grow faster than rich ones—still hold. But prospering in a knowledge-based, increasingly digital, global economy will demand a broader reform agenda.
Freeing trade is as important as ever, but barriers must now be lowered in services as well as goods. Education becomes even more vital if emerging economies cannot count on moving barely literate workers from fields to factories. The roads, railways and ports that were essential to fast growth in the manufacturing era will remain essential, but adequate infrastructure will have to include reliable broadband and mobile coverage too. Because both services and knowledge industries are concentrated in cities, urban policy will matter more.
With luck, today’s slower growth will serve as a spur to ambitious reforms. In some places that is already happening. Xi Jinping, China’s president, is determined to shift his country’s growth model towards services. India’s prime minister, Narendra Modi, says improving the country’s terrible infrastructure is a priority. Others, from Turkey to Indonesia, are still complacent. Regaining momentum will not be easy, but countries that are not prepared to change do not stand a chance.
(Photo credit: PETER PARKS / AFP)
This article appeared in the Leaders section of the print edition under the headline "Hold the catch-up"
