The Greate Divergence, Part II?

9 Oct

Development economist Dani Rodrik provided some cautious optimism this summer when he questioned the conclusion that some analysts came to regarding the fall of the developed economies and the rapid rise of developing economies (beyond China and India):

For the first time ever, developing countries as a group grew have been growing faster than industrial countries. Not only that, as the figure makes clear, the growth differential between the two groups has been widening in favor of the poor countries.

And it isn’t just China, India, and a few countries that have been doing well. For a change, Africa and Latin America actually experienced some convergence with rich countries over the last decade.

Many analysts have projected these trends forward and predict rapid global growth, largely off the back of emerging and developing nations. In the words of a Citigroup report, “this time will be different.”

I am not sure that it will. Growth in Latin America and Africa is fragile; much of it is making up for lost time rather than real convergence. Asia, I am more optimistic about. But growth in Asia has required unconventional policies (undervalued currencies, industrial policies) that will be difficult to rely on in a world where rich countries are facing economic crises.

He was responding to this:

He writes that:

It is certainly cause for celebration that inflationary policies have been banished and governance has improved throughout much of the developing world. By and large, these developments enhance an economy’s resilience to shocks and prevent economic collapse.

But igniting and sustaining rapid growth requires something more: production-oriented policies that stimulate ongoing structural change and foster employment in new economic activities. Growth that relies on capital inflows or commodity booms tends to be short-lived. Sustained growth requires devising incentives to encourage private-sector investment in new industries – and doing so with minimal corruption and adequate competence.

If history is any guide, the range of countries that can pull this off will remain narrow. So, while there may be fewer economic collapses, owing to better macroeconomic management, high growth will likely remain episodic and exceptional. On average, performance might be somewhat better than in the past, but nowhere near as stellar as optimists expect.

Still, fewer economic collapses and greater convergence sounds pretty great.

Read his full post here.

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