No More Growth Miracles

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A year ago, economic analysts were giddywith optimism about the prospects for economic growth in the developing world.In contrast to the United Statesand Europe, where the growth outlook lookedweak at best, emerging markets were expected to sustain their strongperformance from the decade preceding the global financial crisis, and thusbecome the engine of the global economy.

Economists at Citigroup, for example, boldly concluded that circumstances had never beenthis conducive to broad, sustained growtharound the world, and projected rapidly rising global output until 2050, led bydeveloping countries in Asia and Africa. Theaccounting and consulting firm PwC predicted that per capita GDP growthin China, India, and Nigeria would exceed 4.5% well intothe middle of the century. The consulting firm McKinsey & Company christened Africa,long synonymous with economic failure, theland of “lions on the move.”

Today, such talk has been displaced byconcern about what The Economist calls “the great slowdown.” Recenteconomic data in China, India, Brazil,and Turkeypoint to the weakest growth performance in these countries in years. Optimism has given wayto doubt.

Of course, just as it was inappropriate to extrapolatefrom the previous decade of strong growth, one should not read too much intoshort-term fluctuations. Nevertheless, there are strong reasons to believe thatrapid growth will prove the exception rather than the rule in the decadesahead.

To see why, we need to understand how “growth miracles” are made. Exceptfor a handful of small countries that benefited from natural-resource bonanzas, all of the successful economies of thelast six decades owe their growth to rapid industrialization. If there is onething that everyone agrees on about the East Asian recipe, it is that Japan,South Korea, Singapore, Taiwan, and of course China all were exceptionally goodat moving their labor from the countryside (or informal activities) toorganized manufacturing. Earlier cases of successful economic catch-up, such asthe US or Germany, wereno different.

Manufacturing enables rapid catch-up because it is relatively easy to copyand implement foreign production technologies, even in poor countries thatsuffer from multiple disadvantages. Remarkably, my research shows thatmanufacturing industries tend to close the gap with the technology frontier atthe rate of about 3% per year regardless of policies, institutions, orgeography. Consequently, countries that are able to transform farmers intofactory workers reap a huge growth bonus.

To be sure, some modern service activities are capable of productivityconvergence as well. But most high-productivity services require a wide arrayof skills and institutional capabilities that developing economies accumulateonly gradually. A poor country can easily compete with Sweden in a wide range of manufactures; but ittakes many decades, if not centuries, to catch up with Sweden’s institutions.

Consider India,which demonstrates the limitations of relying on services rather than industryin the early stages of development. The country has developed remarkablestrengths in IT services, such as software and call centers. But the bulk ofthe Indian labor force lacks the skills and education to be absorbed into suchsectors. In East Asia, unskilled workers wereput to work in urban factories, making several times what they earned in thecountryside. In India,they remain on the land or move to petty services where their productivity isnot much higher.

Successful long-term development therefore requires a two-pronged push. It requires an industrializationdrive, accompanied by the steady accumulation of human capital andinstitutional capabilities to sustain services-driven growth onceindustrialization reaches its limits. Without the industrialization drive,economic takeoff becomes quite difficult. Without sustained investments inhuman capital and institution-building, growth is condemnedto peter out.

But this time-tested recipe has become a lot less effective these days,owing to changes in manufacturing technologies and the global context. First, technological advances haverendered manufacturing much more skill- and capital-intensive than it was inthe past, even at the low-quality end of the spectrum. As a result, thecapacity of manufacturing to absorb labor has become much more limited. It willbe impossible for the next generation of industrializing countries to move 25%or more of their workforce into manufacturing, as East Asian economies did.

Second, globalization in general, and the rise of China inparticular, has greatly increased competition on world markets, making itdifficult for newcomers to make space for themselves. Although Chinese labor isbecoming more expensive, Chinaremains a formidable competitor for anycountry contemplating entry intomanufactures.

Moreover, rich countries are unlikely to be as permissivetowards industrialization policies as they were in the past. Policymakers inthe industrial core looked the other way as rapidly growing East Asiancountries acquired Western technologies and industrial capabilities through unorthodox policies such as subsidies, localcontent requirements, reverse engineering,and currency undervaluation. Core countriesalso kept their domestic markets open, allowing East Asian countries to exportfreely the manufactured products that resulted.

Now, however, as rich countries struggle under the combined weight of highdebt, low growth, unemployment, and inequality, they will apply greaterpressure on developing nations to abide byWorld Trade Organization rules, which narrow the space for industrialsubsidies. Currency undervaluation à la Chinawill not go unnoticed. Protectionism, evenif not in overt form, will be politicallydifficult to resist.

Manufacturing industries will remain poor countries’ “escalator industries,” but the escalator willneither move as rapidly, nor go as high. Growth will need to rely to a muchgreater extent on sustained improvements in human capital, institutions, andgovernance. And that means that growth will remain slow and difficult at best.

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关键词：miracles Miracle Growth GROW More emerging contrast economic expected outlook

A year ago, economic analysts were giddy with optimism about the prospects foreconomic growth in the developing world.Today, such talk has been displacedby concern about what The Economist calls “the great slowdown.” Recenteconomic data in China, India, Brazil,and Turkeypoint to the weakest growth performance in these countries in years. Optimism has given wayto doubt。Of course, just as it was inappropriate to extrapolate from the previous decade of stronggrowth, one should not read too much into short-term fluctuations.Nevertheless, there are strong reasons to believe that rapid growth will provethe exception rather than the rule in the decades ahead.(low growth ahead)

To see why, we need to understand how “growth miracles”are made. Except for a handful of small countries that benefited fromnatural-resource bonanzas, all of thesuccessful economies of the last six decades owe their growth to rapidindustrialization. If there is one thing that everyone agrees on about the EastAsian recipe, it is that Japan, South Korea, Singapore, Taiwan, and of courseChina all were exceptionally good at moving their labor from the countryside(or informal activities) to organized manufacturing. Earlier cases of successfuleconomic catch-up, such as the USor Germany,were no different.
Manufacturing enables rapid catch-up because it isrelatively easy to copy and implement foreign production technologies, even inpoor countries that suffer from multiple disadvantages.some modern service activities are capable ofproductivity convergence as well. But most high-productivity services require awide array of skills and institutional capabilities that developing economiesaccumulate only gradually. A poor country can easily compete with Sweden in a wide range of manufactures; but ittakes many decades, if not centuries, to catch up with Sweden’s institutions.Consider India, which demonstrates thelimitations of relying on services rather than industry in the early stages ofdevelopment.
so Successful long-term development therefore requires atwo-pronged push. It requires anindustrialization drive, accompanied by the steady accumulation of humancapital and institutional capabilities to sustain services-driven growth onceindustrialization reaches its limits.Without the industrialization drive, economic takeoffbecomes quite difficult. Without sustained investments in human capital andinstitution-building, growth is condemned to peter out.
(the reasons for the previous high growth rate. manufacturing and service)

But this time-tested recipe has become a lot lesseffective these days, owing to changes in manufacturing technologies and theglobal context. First, technologicaladvances have rendered manufacturing much more skill- and capital-intensivethan it was in the past, even at the low-quality end of the spectrum.As a result, the capacity of manufacturing to absorblabor has become much more limited.
Second, globalization in general, and the rise of China inparticular, has greatly increased competition on world markets, making itdifficult for newcomers to make space for themselves.
Moreover, rich countries are unlikely to be as permissive towards industrialization policies asthey were in the past. Now, however, as rich countries struggle under thecombined weight of high debt, low growth, unemployment, and inequality, theywill apply greater pressure on developing nations to abideby World Trade Organization rules.( changes in manufacturing technologies and theglobal context cause the low growth rate)

Manufacturing industries will remain poor countries’ “escalator industries,” but the escalator willneither move as rapidly, nor go as high. Growth will need to rely to a muchgreater extent on sustained improvements in human capital, institutions, andgovernance. And that means that growth will remain slow and difficult at best.(the future possible way)