Roads to Prosperity
The Future of Economic Growth
Dani Rodrik
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CAMBRIDGE – Perhaps for the first time in modern history, the future of the global economy lies in the hands of poor countries. The United States and Europe struggle on as wounded giants, casualties of their financial excesses and political paralysis. They seem condemned by their heavy debt burdens to years of stagnation or slow growth, widening inequality, and possible social strife.
Much of the rest of the world, meanwhile, is brimming with energy and hope. Policymakers in China, Brazil, India, and Turkey worry about too much growth, rather than too little. By some measures, China is already the world’s largest economy, and emerging-market and developing countries account for more than half of the world’s output. The consulting firm McKinsey has christened Africa, long synonymous with economic failure, the land of “lions on the move.”
As is often the case, fiction best reflects the changing mood. The émigré Russian novelist Gary Shteyngart’s comic novel Super Sad True Love Story is as good a guide as any to what might lie ahead. Set in the near future, the story unfolds against the background of a US that has slid into financial ruin and single-party dictatorship, and that finds itself embroiled in yet another pointless foreign military adventure – this time in Venezuela. All the real work in corporations is done by skilled immigrants; Ivy League colleges have adopted the names of their Asian counterparts in order to survive; the economy is beholden to China’s central bank; and “yuan-pegged US dollars” have replaced regular currency as the safe asset of choice.
But can developing countries really carry the world economy? Much of the optimism about their economic prospects is the result of extrapolation. The decade preceding the global financial crisis was in many ways the best ever for the developing world. Growth spread far beyond a few Asian countries, and, for the first time since the 1950’s, the vast majority of poor countries experienced what economists call convergence – a narrowing of the income gap with rich countries.
This, however, was a unique period, characterized by a lot of economic tailwind. Commodity prices were high, benefiting African and Latin American countries in particular, and external finance was plentiful and cheap. Moreover, many African countries hit bottom and rebounded from long periods of civil war and economic decline. And, of course, rapid growth in the advanced countries generally fueled an increase in world trade volumes to record highs.
In principle, low post-crisis growth in the advanced countries need not impede poor countries’ economic performance. Growth ultimately depends on supply-side factors – investment in and acquisition of new technologies – and the stock of technologies that can be adopted by poor countries does not disappear when advanced countries’ growth is sluggish. So lagging countries’ growth potential is determined by their ability to close the gap with the technology frontier – not by how rapidly the frontier itself is advancing.
The bad news is that we still lack an adequate understanding of when this convergence potential is realized, or of the kind of policies that generate self-sustaining growth. Even unambiguously successful cases have been subject to conflicting interpretations. Some attribute the Asian economic miracle to freer markets, while others believe that state intervention did the trick. And too many growth accelerations have eventually fizzled out.
Optimists are confident that this time is different. They believe that the reforms of the 1990’s – improved macroeconomic policy, greater openness, and more democracy – have set the developing world on course for sustained growth. A recent report by Citigroup, for example, predicts that growth will be easy for poor countries with young populations.
My reading of the evidence leaves me more cautious. 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.
The big question for the world economy is whether advanced countries in economic distress will be able to make room for faster-growing developing countries, whose performance will largely depend on making inroads in manufacturing and service industries in which rich countries have been traditionally dominant. The employment consequences in the advanced countries would be problematic, especially given an existing shortage of high-paying jobs. Considerable social conflict could become unavoidable, threatening political support for economic openness.
Ultimately, greater convergence in the post-crisis global economy appears inevitable. But a large reversal in the fortunes of rich and poor countries seems neither economically likely, nor politically feasible.
Dani Rodrik, Professor of International Political Economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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robert2897 08:55 26 Jul 11
Without jobs there cannot be sustainable growth. Corporate profits have been soaring due to cost cutting, but there is relatively little top-line revenue growth. Eventually this is self-limiting: without consumers with money to spend the economy will not return to robust growth.
Globalization and offshoring are certainly significant, but in the longer run the biggest impact is going to come from technology. Robotics and artificial intelligence are poised to have a big impact -- they will ultimately make job creating very difficult or impossible, especially for the less skilled. This will happen (and is happening already) in the service sector, not just in manufacturing. And eventually, even low wage countries will be impacted by these technologies.
For more on this vastly underapreciated subject, check out the book, "The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future" (http://www.thelightsinthetunnel.com).
JSeydl1788 01:40 26 Jul 11
Very nice article, Dani. I've been noting the eerie parallels between our current trajectory and the society depicted in Super Sad True Love Story, too. However, in Shteyngart’s novel, he notes that our country’s decline was “irreversible” and that we should have basically just accepted a fate of sluggish economic growth and deteriorating social cohesion. I don’t think that’s necessarily true. The developed world has growth potential, but it’s going to depend on effective public policy and a greater understanding for its role in the economy. Entrepreneurship will be crucial to growth in the long run, but it’s not going to magically appear out of nowhere. Policy leaders can do a lot to spur entrepreneurship. Of course, education will be the key. But more flexibility for start-up companies needs to be apparent, and incentives need to be concentrated at the grass-roots level, not at the multinational corporate level.
We’ll see if Shteyngart turns out to be right. I hope not, but nevertheless his novel should be a warning sign.
liyucmh 10:55 10 Aug 11
"Ultimately, greater convergence in the post-crisis global economy appears inevitable. But a large reversal in the fortunes of rich and poor countries seems neither economically likely, nor politically feasible."
I quite agree with you, for I have been trust that in the future, more and more change will take palce of automatic technology.(http://goo.gl/B9K6y)
RameshKumarNanjundaiya 11:19 06 Nov 11
YET ANOTHER VIEW - on the current state of the Indian Economy 2011
The Economist
Oct 8th 2011 4:45 GMT
What is the current state of the Indian Economy - The Indian Paradox 2011
QUOTE
India’s economic growth rate in the past decade has been nothing short of spectacular. With its GDP growth around 7 to 9 percent per year, India is the second-fastest-growing large economy in the world. However, the country’s manufacturing sector accounts for a dismal 17 percent of its employment opportunities, as compared to 60 percent in agriculture and 23 percent in services.[1]This summer, the World Bank’s Indian Visiting Scholars Program* invited two leading academics from Harvard University to visit India and to articulate potential pathways to sustain the country’s growth trajectory. These 2 scholars are Ricardo Hausmann, Professor of Economic Development at the John F. Kennedy School of Government and Director of Harvard’s Center of International Development and Dani Rodrik, Professor of International Political Economy at the Kennedy School. While there, they interacted with the private sector and key policymakers, including senior officials of the Department of Industrial Policy and Promotion, the Planning Commission, and the Ministry of Finance. Hausmann argues that diversification in the economic structure, and not necessarily specialization, may be a crucial factor for accelerating growth in India.
UNQUOTE
My response
What is the current state of the Indian Economy and where is it headed – While I fully understand and appreciate Hausmann’s views that diversification in the economic structure, and not necessarily specialization, may be a crucial factor for accelerating growth in India, his observation that rich economies produce many products whereas developing economies produce few products that are also made in rich economies calls for a discussion. It is true, that this relationship exists not only between countries, but also between cities within a country. What is therefore the secret of India’s economic growth rate in the past decade which has been nothing short of spectacular? With its GDP growth around 7 to 9 percent per year, India is the second-fastest-growing large economy in the world. Who is the driver for this. Before we answer this, one needs to revisit the American Economic Historian W.W. Rostow who in the sixties had suggested that countries passed through 5 stages of economic development as Traditional Society, Transitional Stage, Take-off, Drive to Maturity and High Mass Consumption., Would this today apply to India. Many development economists argue that Rostows's model was developed with Western cultures in mind and not applicable to developing countries as India as it is generalised and policy makers are unable to identify the various stages as they seem to overlap each other. It depends how you look at it. It is a growth model and we should examine if there is actual all round development to witness the 9% GDP growth. One of the contributors for this is the growing “Indian Middle Class”. While the reasons are varied, but one which has really propelled up the Indian economy ( I would say, in the last 6 years) is the growing buying power of people in the so called "Middle Income Group" which in the case of India, per my estimation, represents almost 300 million people. This is a huge market to cater to and is growing. This group is the one which is pushing demand locally and thus giving a boast to the economy. It is a life cycle change in the population group. This is the group which is spending on all goods and related services. Because of such a growth demand for goods/services, banks will certainly witness increase in their lending in the next couple of years. This fuels continuous economic growth (notwithstanding inflation) The rosy side is that when the economy grows, the equity markets become much more active and again adds for the economy growth with more people coming into the "Middle Income Group of People" or the people with buying power or cash to spend. Thus going back to W.W. Rostow, we are somewhere in between stage 3 and 4. But at this stage, one needs to be very careful. While India seems to be embarking on a high-growth strategy today, it must guard and overcome some global trends which include global warming, the falling relative price of manufactured goods and rising relative price of commodities, including energy; swelling discontent with globalization in advanced and some developing economies, the various ongoing “scams” which could eat upto 2% of the GDP, the growing “young population” which should not become a struggle (almost 400 million in the age group of 15 to 30 years) to cope with and the ongoing mismatch between global problems—in economics, health, climate change, and other areas—and weakly coordinated international responses. Notwithstanding the challenges, the support of the global economy remains central for the current Indian growth story or as they call it the - The India Paradox: Promoting Competitive Industries in a High-Growth Country.
RAMESH KUMAR NANJUNDAIYA
Factified 12:12 26 Jul 11
The fundamental building block of an economy is the job. The U.S. will wake up and stop exporting jobs at some point. We will set a zero target for our goods trade deficit ($650B or 10-15 million jobs today).
This will be the real test of the developing country economies, when the rest of the developed world realizes that free trade with developing countries benefits the poorer country and the investor class at the expense of the working class.