This is a Golden Age of Global Growth (Yes, You Read That Right)
Op-ed in the Financial Times
© Financial Times
When the world's policymakers meet in Washington this month, the travails of advanced countries will be the focus. Five years into the global financial crises, the economic landscape remains largely cheerless. A depressed euro area is struggling with high and rising unemployment. The US recovery is fitful. The blistering pace of emerging market growth has cooled. But all this risks obscuring the good news: that the golden age of global economic growth, which began in the mid-to-late 1990s, has mostly survived. These continue to be the best of economic times.
Lant Pritchett of Harvard famously described the phenomenon whereby the living standards of a few countries pulled away from the rest in the aftermath of the industrial revolution as "divergence, big time." My 2011 book, Eclipse, documented the converse: never had the living standards of so many poorer nations begun to "converge" or catch up with those of advanced countries. What we are seeing today, despite the crises, is convergence with a vengeance. An unequal world is becoming less so.
Convergence occurs when a country's rate of economic growth per head exceeds that of the typical advanced country, say the United States. Between 1960 and 2000, the United States grew at about 2.5 percent. About 20 poor countries (excluding oil exporters and small countries) grew faster than the United States by 1.5 percent on average, among them remarkable growth stories such as Japan, Korea, Singapore, China, and India.
About a decade before the global crisis struck, a shift occurred. Eighty countries—four times as many as in the previous period, located in sub-Saharan Africa and Latin America as well as Asia—started catching up with US living standards. Their growth exceeded that of the United States on average by nearly 3.25 percent, implying that this broader group was catching up twice as fast as did countries following the Second World War. Put simply, prosperity was spreading across the globe, and at an accelerating pace.
The implications are enormous. For example, if this pace continues, sub-Saharan Africa—and, indeed, 80 percent of all countries—could in 50 years be in a situation comparable to that of Chile today.
Did the subprime and euro area crises set back this process? Between 2008 and 2012, developing countries' growth did decelerate in absolute terms, from about 4.5 percent to about 3 percent. But the pace at which they were catching up with rich ones did not slow significantly.
These numbers help to clarify confused discussions about the decoupling of rich and poor nations. Cyclically—that is, in the short-run—everyone is coupled: If the United States slows, so will China; and vice versa. That is a fact of interdependence. But the phenomenon of convergence suggests there is structural decoupling: In the medium to long term, the rise in living standards relative to that of the rich world depends mostly on what developing countries themselves do and less on the external environment.
And what have they been doing? Many have shed the most egregious forms of dirigisme and embraced markets. New information and communication technologies have created investment opportunities to galvanize growth, and unleashed social and economic churn. The full consequences are yet to be felt.
Developing countries have embraced macroeconomic stability as an end in itself and as a pre-requisite for sustained growth, a lesson industrial countries forgot in the run-up to the crisis. The failure to deliver stability lay behind the poor growth performance of Latin America and sub-Saharan Africa in the 1970s and 1980s. Macroeconomic prudence ensured that they emerged from the crises relatively unscathed.
Not everything about the convergence phenomenon is rosy. Poor countries on average may be catching up, but the gains are not being shared widely among their citizens because of rising inequality. And corruption and weak governance are endemic across the world, which could yet hold back investment and growth.
For the vast majority in the developing world, then, the real challenge lies at home: to make sure that strong economic growth and the resulting catch-up with rich countries become, in the words of John Maynard Keynes, "normal, certain, and permanent."