Fri, Jul 29, 2011 - Page 9 News List

The future of the global economy lies in the hands of the poor

The big question is whether advanced countries in economic distress could make room for faster-growing developing countries’ manufacturing industries

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 US 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.

The question is, 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.

However, this 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.

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