Can Developing Countries Carry the World Economy?

CAMBRIDGE – In the early days of the global financial crisis, there was some optimism that developing countries would avoid the downturn that advanced industrial countries experienced. After all, this time it was not they that had engaged in financial excess, and their economic fundamentals looked strong. But these hopes were dashed as international lending dried up and trade collapsed, sending developing countries down the same spiral that industrial nations took.

But international trade and finance have both revived, and now we hear an even more ambitious version of the scenario. Developing countries, it is said, are headed for strong growth, regardless of the doom and gloom that has returned to Europe and the United States. More strikingly, many now expect the developing world to become the growth engine of the global economy. Otaviano Canuto, a World Bank vice president, and his collaborators have just produced a long report that makes the case for this optimistic prognosis.

There are many reasons why such optimism is not unreasonable. Most developing countries have cleaned up their financial and fiscal houses and do not carry high debt. Governance is generally improving along with the quality of policymaking. The possibilities of technology transfer through participation in international production networks are greater than ever.

Moreover, slow growth in the advanced economies need not exert a drag on developing countries’ performance. Long-term growth depends not on foreign demand, but on domestic supply. Sustained rapid growth is the result of poorer countries catching up to rich countries’ productivity levels – not of growth in the rich countries themselves. For most developing countries, this “convergence gap” is wider now than it has been at any time since the 1970’s. So the growth potential is correspondingly larger.