A long piece in The Economist recently on the evolution in purchasing power parity between economies of developed and emerging countries. Up until a few years ago, it looked as if convergence would be reached within 30 years, even if excluding Chinese growth. Hundreds of millions of people were drawn out of poverty. Voices have been calling for the post-2015 global development goals to include the eradication of poverty by 2030.
However, the pace of economic growth has been slowing in emerging economies, not just in China, which is managing a difficult transition from low-wage, export-based manufacturing towards an economy dominated by services and internal consumption. However, at the current pace, it will take 150 years to catch up (using as indicator GDP/ person in PPP as % of US GDP).
Convergence was foreseen by economists like Robert Solow. As the main drivers he identified capital influx (as a result of higher interest rates offered by developing countries) and technological progress (enabling emerging economies to leapfrog development stages). Pietra Rivoli saw a ‘race to the bottom’ by poor countries as a way to attract labour-intensive industries, allowing people to abandon agriculture, get access to better services, creating a virtuous spiral.
The main reasons why the convergence has grinded to a near standstill are:
- The peak of manufacturing in a country’s development occurs earlier and is lower than previously. Dani Rodrik attributes this to the growing role of technology, reducing demand for low-wage manufacturing jobs, lowering the incentive for companies to seek out regions with low wages and lowering the share of manufacturing in the total value chain of a product.
- The previous decade was a period of exceptional hyperglobalisation, spurred by strong demand for natural resources, China’s accession to the WTO and strong growth in trade (also outside China).
Rather than the optimistic scenario foreseeing income convergence within a generation, it looks we’re back at the slow grind towards convergence, driven by incremental progress in geography (infrastructure, see work of Jared Diamond), institutions (see work of Daren Acemoglu) and trade (e.g. regional agreements on trade in services).
The article is rather pessimistic in tone, as it considered the gains in poverty reduction as an exceptional feat not likely to be repeated soon. It raises critical questions for countries like India and Bangladesh which are looking to benefit from their demographic dividend and take over some of China’s low-wage industry. It also underlines the need for investments in education.