REVIEW | FINANCE & DEVELOPMENT MAGAZINE E-mail

 

Playing Catch-up

 

We may be standing on the hinges of economic history. If so, we will be witnesses to an extraordinary event, one that has happened only twice since the beginning of mankind. For thousands of years, living standards displayed no truly long-term trends, nor any great variation from country to country. Then, in the 1700s, came the first sudden swing in the course of economic history. The Industrial Revolution propelled a remarkable and sustained rise in living standards, first in Britain, then elsewhere. But this transformation occurred only in a few places, essentially in Europe, nations of European descent, and Japan. The rest of the world, more than four-fifths of humanity, remained mired in the agricultural past. By 1950, the world was a profoundly unequal place.

Then the course of history suddenly swung again. After 1950, some countries, mainly in Asia, that had been lagging behind started growing at unprecedented rates, about 7 percent per year, enabling them to start closing the gap with the advanced economies.

More recently, the two most populous countries—China and India—began to grow at rates close to 10 percent. If these trends continue, we will witness, in our lifetimes, a third historical swing: a renewed convergence of living standards. What was once the privilege of a favored few will become commonplace for many. This potentially epochal process is the subject of Michael Spence’s remarkable new book, The Next Convergence.

The basic arithmetic behind convergence is simple. It is known as the rule of 72. This rule says that you can calculate the number of years it will take to double living standards by dividing 72 by the average growth rate. So if a country is growing at 10 percent, its standard of living will double in about 7 years. This means that if a country starts off with per capita income of $500, and grows by about 10 percent a year, incomes can reach $16,000 in just about 35 years. A few years after that, incomes will be at advanced economy levels. Provided, of course, the country continues to grow at the same pace.

In fact, that proviso is a big one. For growth is a mysterious process. Only 13 countries have managed to grow at even 7 percent on average for a 25-year period. And of those lucky 13, only half have continued on to advanced economy levels. In other words, catch-up is far from inevitable.

For that reason, Spence eschews speculation about what a converged world would look like. Instead, he focuses on a more practical matter: what countries need to do to get there.

What are the keys to success? No one truly knows. But economists have some ideas—particularly, Spence. Not only is he a Nobel laureate, but he has thought long and hard about these issues in his capacity as Chairman of the Commission on Growth and Development, launched in part by the World Bank. The current book is the fruit of those years of research and thinking.

Spence argues that poor countries grow through two primary mechanisms. First, they acquire knowledge from rich countries. Second, they specialize in producing goods that are demanded by other countries, so that they can sidestep limited domestic purchasing power and the divergence between what locals demand and what the country is good at producing. Put simply, success requires that countries educate their populations and integrate into the global economy.

Spence makes one further key point. Too many countries, he points out, find a successful formula, such as labor-intensive exports, and then try to stick with it, most notably by preventing their exchange rates from appreciating. But sustained growth requires structural change, with labor-intensive manufacturing giving way to advanced manufacturing and services as skills and income rise.

The Next Convergence considers a range of such issues, including the structural problems of China and India and doubts about appropriate economic models in the wake of the 2008 global crisis. In all of these cases, Spence explains complex issues in remarkably clear and concise language. His concision and range occasionally come at the expense of the richness and variety of growth experiences. But you will not find a better introduction to today’s most critical global economic debates.

Josh Felman
Assistant Director
IMF Research Department

Last Updated on Saturday, 04 June 2011 21:56
 
joomla hosting at My Artisan Web