Catching up at different speeds

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Catching up at different speeds

PARIS - With weak demand in advanced countries now impeding growth in emerging economies, including major players in Asia and Latin America, many are arguing that the era of income convergence has come to an end. Nothing could be further from the truth.

As I have argued before, convergence of emerging countries’ real average incomes, in the aggregate, with advanced countries’ incomes is likely to continue into the 2020s. That process started in the late 1980s and continued unabated, except in the years around the Asian financial crisis in 1997-8.

The pace of convergence accelerated further during, and just after, the global financial crisis of 2008-9: the aggregate average differential in per capita income growth increased to more than four percentage points in the 2008-12 period, from a little more than two percentage points in the two decades before. As the advanced economies recover, however weakly, the growth differential is likely to narrow again, perhaps to about two percentage points, which still implies steady convergence at a decent pace.

In that sense, it is not “the end of the party” for emerging markets, as some claimed early last summer, when U.S. Federal Reserve Chairman Ben Bernanke’s suggestion of a possible “taper” of the Fed’s policy of quantitative easing triggered a “mini-crisis” in several of the more vulnerable emerging markets. These economies have since recovered a significant part of the lost ground in terms of exchange rates and asset prices.

A major part of the economic-convergence process that has been taking place since the late 1980s has been due to “catch-up” growth. The emerging markets developed the institutions and the skills base needed to import and adapt technology, which is easier than generating new technology from scratch. The pace of catch-up growth declines only gradually over time, as the less advanced economies slowly move closer to the technological frontier.

The catch-up process also takes place within countries, as labor moves from low-productivity rural activities to higher-productivity urban activities, and as low-productivity firms in all sectors emulate their more advanced domestic counterparts. Moreover, the transfer and diffusion of technology has been facilitated greatly over the last few decades by increased foreign direct investment, the information revolution, which has facilitated access to knowledge, increased trade, and the globalization of financial markets.

These factors apply to emerging countries generally. Why, then, do Latin American economists seem to share a cautious - even pessimistic - mood about future growth and convergence in the region, whereas most Asian economists, while conceding that further structural reforms are needed, believe strongly that Asia will continue to converge rather rapidly?

Beyond global factors that apply to all, rapid catch-up growth requires sufficient investment in both physical and human capital. New manufacturing techniques and new products or product improvements are usually embodied in new machines and skills. China has invested about 43 percent of its GDP, on average, during the 2000-13 period. Emerging Asia, excluding China but including India, has invested about 28 percent of GDP over the same period, while the investment share for Latin America has been just 21 percent. That alone probably explains much of the difference among China, in a category of its own, emerging Asia, and Latin America. The quality of skills and education cannot be measured as easily by a single figure, but there is ample evidence that Latin America has also lagged behind most of Asia when it comes to skills accumulation.

Many other factors, of course, influence growth and convergence: macroeconomic stability, the efficiency and robustness of the financial sector, the terms of trade, the quality of public administration, demographic factors and political factors. There also is variation within regions, including among provinces of China. (Likewise, Africa’s growth performance has improved spectacularly since the turn of the century, but variance within the continent is even larger than elsewhere.) Nonetheless, in terms of the likely strength of the convergence process that globalization has facilitated, it is important to distinguish between Latin America and Asia, and, within Asia, to distinguish China from the rest of the continent.

China’s economy will most likely continue to converge rapidly, though its annual growth rate may fall from 9 percent to 7 percent. The rest of emerging Asia will also converge reasonably quickly, though not as quickly as China. Latin America, however, will likely converge only very slowly in the absence of major structural reforms that increase its ability to invest and improve the quality of education.

There will surely be exceptions to this general trend, but there are some stable regional characteristics. Overall, however, basic economics, which has always stressed the need to save and invest in order to grow, still explains a lot. Latin America and Asia operate in the same global economy, with access to similar technology and markets. If Latin America invests around 20 percent of its national income in a sustained manner, while emerging Asia invests close to 30 percent - including investments in education - emerging Asia will converge significantly more rapidly.

Copyright: Project Syndicate, 2013.

*The author, former minister of economic affairs of Turkey and former administrator for the United Nations Development Program (UNDP), is vice president of the Brookings Institution.

by Kemal Dervis
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