How poor countries seemed to be catching up with rich ones—and why they are now falling behind again | September 14, 2014 | by R.A.

Growth rates are dropping across emerging markets

Growth rates are dropping across emerging markets

IF THE 20th century belonged to the rich countries of North America and Europe, some economists argue, then the 21st will be the era of the emerging world. Economic growth across emerging markets has been scorching since 2000. Some of the largest countries, like India and China, managed growth rates above 10% per year.

Continued growth at such rates would lead to “convergence” with the rich world. That would mean higher living standards in developing countries and a shift in the balance of economic and political power. Yet those prospects seem to be diminishing. Growth rates are dropping across emerging markets, from the largest—including countries like Brazil and Russia that are now in recession—to the smallest. As a result, the rate of convergence has dropped to almost zero. What was driving convergence, and why has it stopped?

When comparing income levels across countries, most economists use GDP per person, adjusted for purchasing-power parity, or PPP. PPP-adjusted GDP per person is around $53,000 in America, $36,000 in Britain, $12,000 in China, and $1,300 in Ethiopia. Such large divergences have long been a puzzle to economists; poor countries ought to be able to learn from richer ones and borrow technology in order to produce more and raise their incomes. Yet from the 1940s until the 1990s poor countries generally grew more slowly than rich ones, falling ever farther behind in income terms. Only a fortunate handful—including countries like South Korea and Singapore—made the leap from poor-country status to rich. It therefore came as a surprise in the late 1990s when the trickle of countries making the passage to higher income-levels became a flood.

Over the past 15 years, most emerging economies have enjoyed faster growth in GDP per person than rich ones, leading to convergence in incomes. Many economies have done well by doing the things economists long reckoned were required for catch-up growth: they opened their economies to global markets, reformed their laws to be more business-friendly, invested in infrastructure and educated their workers. And convergence generally worked the way economists long thought it would. In China, low-wage manufacturing of cheap goods for export eventually evolved into the production of more sophisticated goods and services, as workers and firms accumulated knowledge and experience. From 2000 to 2009, developing economies’ growth rates were more than four percentage points higher than those of rich countries, pushing their share of global output from just over a third to nearly half.

Yet the forces that drove convergence are now acting as a drag on emerging-market growth. Global trade grew more than twice as fast as output in the early 2000s, but has struggled to keep pace in recent years. Incomes in some economies were buoyed by rising commodity prices, which have since plateaued or begun to drop. Perhaps most importantly, expansion around the world of supply-chain oriented trade allowed poorer economies quickly to become export powerhouses by importing complex components (like computer chips) for assembly into finished goods that could be re-exported.

Although it enabled faster growth, supply-chain trade may not have contributed much to developing economies’ technological sophistication. Amid slowing growth in trade and commodity prices, developing economies are therefore finding it harder than expected to build on past success. The end of the recent era of fast convergence may mean that developing countries will have to work harder to reform their economies and boost education in order to continue catching up with the rich world.

The Economist

Menzi Kulati

#BringBackOurGirls

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