Future Global Growth, Convergent

Future Global Growth, Convergent

By Dani Rodrik, professor of International Political Economy at Harvard University

in Fortune, September 8, Addis Ababa, Ethiopia

Perhaps for the first time in modern history, the future of the global economy lies in the hands of poor countries. The developed world struggles on as wounded giant, a casualty of its financial excesses and political paralysis. It seem condemned by its 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 the developing world worry about too much growth, rather than too little. By some measures, China is already the world’s largest economy and emerging market. Developing countries account for more than half of the world’s output. The consulting firm McKinsey & Company has christened Africa, synonymous with economic failure, the land of “lions on the move.”

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 1950s, 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, characterised by a lot of economic tailwind. Commodity prices were high, benefiting African 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 fuelled 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, including 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 the growth potential of lagging countries 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 realised, 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.

Optimists are confident that this time is different. They believe that the reforms of the 1990s, which brought improved macroeconomic policy, greater openness, and more democracy, have set the developing world on course for sustained growth. A recent report by Citigroup, a financial conglomerate, 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.


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