In a world economy rapidly running out of bright spots, many are putting their hopes on the emerging and developing economies. Many experienced very rapid growth over the past decade, and most have recovered quickly from the 2008-2009 crisis.
Optimism abounds. Citigroup predicts real gross domestic product will grow more than 9 per cent a year in Nigeria and India, and more than 7 per cent in Bangladesh, Indonesia and Egypt over the next two decades. In a new Peterson Institute for International Economics study, Arvind Subramanian projects that aggregate output of developing and emerging economies will expand at an annual rate of 5.6 per cent over the same horizon.
If they prove correct, developing countries will make a substantial contribution to aggregate demand in the struggling rich countries and ensure the world economy’s steady growth. We shall witness the most impressive closing of the gap between rich and poor in history.
Unfortunately, these predictions are largely extrapolations from the recent past and they overlook serious structural constraints. China’s problems are already well recognised. The country’s growth has been fuelled over the past decade by an ever-growing trade surplus that has reached unsustainable levels. China’s leaders must refocus its economy away from export-oriented manufacturing and towards domestic sources of demand, while managing the job losses and social unrest this restructuring is likely to generate.
At least China has successfully built broad-based modern industries, something that remains a daunting task for most other countries. India has scored important successes in IT and business services, but it must expand its manufacturing base if its economy is to generate decent jobs for a vast, low-skilled workforce and sustain growth. In Nigeria, formal employment has actually shrunk due to public sector retrenchment, privatisation, trade liberalisation and lack of job creation in new industries. Nigerian workers are flocking back to family farms.
In Latin America, global competition has fostered productivity gains in manufacturing and non-traditional agriculture. But gains are limited to narrow segments of the economy. Labour has migrated to less productive service sectors and informal activities. In Brazil, for instance, despite an exceptional performance last year, the average growth rate over the past decade is just a fraction of what the country achieved for decades before 1980.
Other countries are hooked on dangerous, unsustainable levels of foreign borrowing. Turkey has grown rapidly, despite pitifully low levels of domestic saving, thanks to an ever-widening current account deficit. This renders the economy susceptible to swings in markets, as the beating the lira has taken in recent weeks shows. Growth booms based on capital inflows or commodity booms have typically been shortlived.
Optimists believe this time will be different because policies and institutions have greatly improved in the developing world. They point to these countries’ commitment to macroeconomic stability, openness to the global economy and better governance (as exemplified by the spread of democracy and end of civil wars in Africa). These changes portend well, but they serve mainly to reduce the risks of crises. They do not constitute a growth engine.
Sustained growth, of the type that a handful of countries in Asia have managed to generate, requires more than conventional macroeconomic and openness policies. It requires active policies to promote economic diversification and foster structural change from low-productivity activities (such as traditional agriculture and informality) to mostly tradable higher-productivity activities. It requires pulling the economy’s labour force into sectors that are on the automatic escalator up, such as formal manufacturing.
This structural transformation is rarely the product of unassisted market forces. It is typically the result of messy and unconventional interventions that range from public investment to subsidised credit, from domestic-content requirements to undervalued currencies. Few countries have managed such industrial policies well.
An additional complication now is that policymakers in the US and Europe have long stopped viewing subsidies and undervalued currencies in developing nations with benign neglect. With high unemployment and stagnant economies, they are likely to be even more vociferous in opposing such policies.
Hence, the policies optimists hope will sustain growth in the emerging markets are unlikely to work, while the policies that would deliver growth are unlikely to be permitted by industrial countries. Growth in the developing world will most likely remain episodic and too weak to propel the world economy.
The writer is a professor of international political economy at Harvard’s Kennedy School of Government and author of ‘The Globalization Paradox’
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