This “divergence” wasvery pronounced in colonial times. It slowed after the 1940’s, but it was only around 1990 that anentirely new trend could be observed – convergence between average incomes inthe group of rich countries and the rest of the world. From 1990 to 2010,average per capita income in the emerging and developing countries grewalmost three times as fast as average income in Europe, North America, and Japan, comparedto lower or, at most, equal growth rates for almost two centuries.
This has been arevolutionary change, but will this 20-year-old trend continue? Willconvergence remain rapid, or will it be a passing phase in world economichistory?
Long-termprojections based on short-term trends have often been mistaken. In the late 1950’s, after the Soviet Union launched thefirst spacecraft, eminent Western economists predicted that Soviet income wouldovertake that of the United States in a few decades. After all, the Soviet Union was investing close to 40% of its GDP, twicethe ratio in the West.
Later, in the 1980’s, Japan’sspectacular growth led some to predict that it would overtake the US, not only inper capita terms, but even in terms of some measures of “economic power.”
These kinds ofprojections have often been based on simpleextrapolations of exponential trends.Over two or three decades, substantial differences in compound growth ratesquickly generate huge changes in economic size or per capita income.
Will the recentpredictions of rapid ongoing global convergence similarly turn out to be wrong,or will most of the emerging countries sustain a large positive growthdifferential and get much closer to the advanced economies’ income levels?
Understanding thephenomenon of “catch-up” growth is key to answering this question. Trade andforeign direct investment have made it much easier for emerging countries toabsorb and adapt best-practice technologyinvented in the advanced economies. The information revolution, allowing mucheasier access to and diffusion of knowledge, has accelerated the process.Once they developedthe basic institutions needed for a market economy and learned how to avoidserious macroeconomic policy mistakes, emerging countries started benefitingfrom catch-up growth. Those with very high investment rates, mostly in EastAsia, grew faster than those with lower investment rates; but, overall,catch-up growth probably has been adding 2-4 percentage points to many emergingand developing countries’ annual growth rates. At the same time, populationgrowth decreased, adding at least another point to the pace of per capitagrowth.
This process willlikely continue for another decade or two, depending on where in the processparticular countries are. It is true that catch-up growth is easier inmanufacturing than in other sectors, a point recently emphasized by Dani Rodrikof Harvard University, and it may be that a goodportion of it has been exhausted in manufacturing by the best-performing firmsin emerging countries.
But there is still alot of “internal” room for catch-up growth, as less efficient domestic firmsbecome more competitive with more efficient ones. The dispersionof “total factor productivity” – the joint productivity of capital and labor –inside emerging countries has been found to be large. Moreover, sectors such asagriculture, energy, transport, and trade also have catch-up-growth potential,through imports of technology, institutional know-how, and organizationalmodels.
Of course, temporarydisturbances, a worsening of global payments imbalances, or macroeconomicpolicy mistakes, including those made in advanced economies and affecting theentire world economy, could undermine global growth. But the underlying“convergence differential,” owing to catch-up growth, is likely to continue toreduce the income gap between the old advanced economies and emerging-marketcountries.
The Soviet Union never was able to build the institutions to allow forcatch-up economic growth. Japanslowed down after it had basically caught up. China,India, Brazil, Turkey, and others may have firmsoperating close to the world’s technological frontier, but they still have alot of unused catch-up potential.
The more that thesecountries can invest while ensuring macroeconomic stability andbalance-of-payments sustainability, the faster they can adopt better technologyand production processes. In that case, they can continue to catch up, at leastfor the next decade or more. The convergence process is going to slow, but notyet.