Emerging markets: Catching up is hard to do

THE current print edition contains a briefing on a “great deceleration” across emerging markets. The BRIC economies have been going through a slowdown of late, yes, but while some of that slowdown is just cyclical stumbling some of it reflects the end of a unique era of economic growth—and, more importantly, of catch-up growth by the world’s poorer economies.

Europe has been pulling apart from the world’s other large economic

areas, in terms of real output per person, for roughly half a millenia. But in the late 19th century the world entered an era of “divergence, big time”. The typical American, who was just six times better off than the typical Chinese or Indian in 1890, was about 25 times better off 100 years later.

That wasn’t exactly how it was supposed to happen. Economies should undergo catch-up growth, economists like Robert Solow reckoned. The farther behind the leader an economy is, the thinking goes, the more scope there should be for poor economies to grow rapidly by adopting the technologies and strategies of those who have gone before. But for most of the modern economic period richer countries got richer faster than poorer countries. And so economists developed models in which catch-up proceeds in fits and starts, as one economy here or a few economies there attract new concentrations of industrial activity and rapidly converge toward the club of rich-world countries.

And then suddenly, beginning in the mid-1990s, the world experienced true catch-up growth. As the briefing notes:

“According to a recent study by Arvind Subramanian and Martin Kessler, of the Peterson Institute, a think-tank, from 1960 to the late 1990s just 30% of countries in the developing world for which figures are available managed to increase their output per person faster than America did, thus achieving what is called “catch-up growth”.

That catching up was somewhat lackadaisical: the gap closed at just 1.5% a year. From the late 1990s, however, the tables were turned. The researchers found 73% of developing countries managing to outpace America, and doing so on average by 3.3% a year. Some of this was due to slower growth in America; most was not.
As the piece points out, this performance was possible thanks to a lucky confluence of historical forces. The keystone was China, the world’s most populous economy and also one of its poorest, with huge scope for catch-up growth. India also held potential, but as the chart above shows most of the realised catch-up was accounted for by China (the large vertical bit of the line that marches a long way to the right between 1993 and 2012). China made its turn toward liberalisation just as international supply chains were becoming a cornerstone of economic development. It was able to link itself into “Factory Asia” and catch up at breakneck pace. And China’s enormous appetite for commodities bumped up against several decades of lagging commodity supply. That led to soaring commodity prices, which helped transmit China’s boom around the emerging world.

The sun is now setting on this era. China has much less room for catch-up, and some of the factors that amplified China’s rise—like expensive commodities—will now be dampened by the enormous supply response around the world. There is every expectation, however, that catch-up growth will continue. We still anticipate that emerging markets will grow faster than the rich world. India, which will in a few decades time be the world’s most populous country, still has vast scope to raise the productivity and incomes of its workers.

I see two hard questions looming over this outlook, however. One is whether the emerging world will manage the deceleration without a nasty setback. Many observers expect a reckoning in China, for example. This newspaper thinks that China has some lumps to take but that the government is well positioned to manage the slowdown and avoid a hard landing. But disasters mostly occur thanks to unforseen errors: the mistakes people didn’t realise would be big mistakes.

The second is whether something has actually changed in the nature of global economic activity to facilitate true catch-up across the emerging world, or whether we have merely come through a period in which stepwise catch-up finally came to an economy massive enough to—temporarily—bend patterns of economic activity around it. As the chart above illustrates, it is far from clear whether the last 15 or so years was a time in which emerging economies marched forward together toward rich-world levels of productivity and income or one in which the emerging world was fortunate to be dragged a ways as the global economy digested the one-off, rapid development of the Chinese economy. It would be a bitter epilogue to the BRIC growth story indeed if much of the world remained trapped in the old balance, a yawning, impassable gap between their levels of income and those in the fortunate economies of the advanced world.

Πηγή: The Economist