Growth to Convergence: An Elusive Dream?

The Economist reported on statistics from the World Bank that indicated that the average annual rate of growth among the emerging countries was 7.6% between 2000 and 2009, 4.5% higher than the rate of growth experienced by developed countries during the same period (the gap was computed by subtracting the change in GDP per person at purchasing-power-parity (“PPP”) in emerging markets from the change in GDP per person in the US).  Economists lauded the substantial reduction in poverty among developing countries: the share of the population in those countries who had to try and live on less than $1.25 per day, the internationally recognized definition of poverty at that time, fell from 30% in 2000 to below 10%.  Policymakers, economists and consultants optimistically predicted that the world was finally heading toward “convergence” and that, all other things being equal, just 30 additional years of the same gap in performance between emerging world and developing countries would lead to parity between the average income per capita in emerging countries and in the US. 

The consequences of convergence would be monumental, tantamount to the transformation caused by the Industrial Age to the global economy and the lives of people all around the world (particularly those in the poorer countries who had fallen so far behind as the US and European countries surged forward on the winds of industrialization).  Unfortunately, however, the gap in the growth rates in developed and developing countries narrowed substantially since 2008 and The Economist reported World Bank statistics for 2013 that showed that the average GDP per capita in the emerging world, when measured based on PPP, grew just 2.6% faster than GDP in the US in that same year (1.1% if growth in China was excluded from the performance of the emerging countries).  If developing countries could sustain their lead at that level the estimated date for convergence would be pushed out to 50 years (115 years if China was excluded); but the news seems to be getting worse: the World Bank predicted that the gap in annual growth between emerging markets other than China and the developed world in 2014 would close to 0.39%, a barely discernable difference which if continued would delay convergence for more than three centuries (in the words of The Economist, “indistinguishable from never as far as today’s societies are concerned”).

The Economist discussed the unexpected and disappointing failures of many of the more popular models of economic growth that had been relied upon when suggestions were made to policymakers in developing countries.  For example, developing countries had been admonished to open their borders to inbound foreign investment to gain access to capital and technology from developed countries that could be used to accelerate economic maturation and growth; however, apart from a few Asian countries, some of which already had a history of industrialization, productivity gains through technology were rare among developing countries.  Other economists focused on improving human capital and/or institutions in developing countries.  Initiatives in these areas were problematic: educational systems in developing countries remain weak, under-funded and poorly staffed and the institutions in place in many developing countries are often controlled by elites that use them to pillage natural resources for their own benefit with little concern for the rights and well-being of the general population. 

Some successes, albeit often temporary, were achieved through improvement of governance and introduction of market reforms in emerging markets; however, The Economist argued that what appears to have been an illusionary push toward rapid convergence could be attributed to conditions that will likely be difficult to replicate and/or sustain in the future.  The first factor was what The Economist referred to as “a benign macroeconomic environment” that included low interest rates and relatively free flows of capital around the world.   A second factor that supported growth in certain developing countries was an extended period of strong commodity price that allowed those countries to generate additional revenues from exports of their natural resources.  The most important factor, however, was the virtual explosion of global trade and goods exports between 1994 and 2007 led by spectacular growth in China that not only profoundly changed the domestic economy in that country but also the world economy in ways not seen since the emergence of Britain as the global economic leader in the 19th Century.  Important developments and conditions underlying the expansion of global trade included the establishment of the World Trade Organization, which China acceded to 2001, groundbreaking technological and logistical advances that substantially reduced the difficulties and costs associated with exporting.  As a result, previously isolated units of global supply chains operating in developing countries could expand their reach into new markets by leveraging local labor that was still relatively inexpensive and aggressively establishing infrastructure and regulations that allowed for rapid imports into and shipments out of new industrial cities that seemed to appear overnight.

The factors described above certainly contributed to the surge in growth among developing countries, particularly China; but the last few years have cast a harsh light on the mountains that those countries will need to climb in order to make further progress toward economic development much less convergence.  One issue is that capital flows from developed countries slowed significantly in the face of anxieties related to the global economic crisis.  Trade opportunities for developing countries have also suffered as consumers in the richer countries tighten their belts and reduce discretionary spending.  Economists have expressed skepticism about whether development of manufacturing acuities in developing countries will generate sufficient increases in income levels in those countries and it appears that developing countries may have exhausted the historical competitive advantage they can wring out of their labor forces.  Finally, building production capacity is just one of the initial steps on the road to development and further progress depends on initiatives that few developing countries appear ready and able to pursue: development of physical infrastructure, design and marketing skills and managerial capabilities.

The Economist concluded that while efforts to further simplify global trade regulations and promote investment in infrastructure in the world’s poorest countries continue, the success and timing of these strategies is difficult to predict—some developing countries such as India have opposed extensive trade reforms unless and until concessions are made in areas of specific concern to them, such as agriculture—and economic development is likely to hinge not on hoping or expecting another boom like the one seen during the first decade of the 2000s but rather on slow and deliberate improvements to the basic components that economists have called out in the past including institutions and worker skill levels.  Notice should also be taken of the distance that needs to be travelled.  Predictions for the GDP per person at PPP as a share of that in the US as of 2014 for even the wealthiest emerging market countries were still relatively low—Russia and Poland were at 45% and 44%, respectively—and poorer countries remained far behind (e.g., India (10%), Pakistan (9%), Kenya (4%) and Congo (1%)), an indication that even the high growth years had done little for efforts of the most impoverished countries to catch up.  Even the recent explosion of growth in China had brought it to just 22% and as this essay was written in August 2015 it was far from clear how the Chinese government was going to cope with the precipitous drop in the annual growth rate for its economy from 11.9% in the first quarter of 2010 to a projected 7.1% by the first quarter of 2017.

Source: “The headwinds return”, The Economist (September 13, 2014), 29-31.

 

 

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