PARIS – With weak demand in advanced countries now impeding growth in emerging economies, including major players in Asia and Latin America, many are arguing that the era of income convergence has come to an end. Nothing could be further from the truth.
As I have argued before, convergence of emerging countries’ real average incomes, in the aggregate, with advanced countries’ incomes is likely to continue into the 2020’s. That process started in the late 1980’s, and continued unabated, except in the years around the Asian financial crisis in 1997-1998. The pace of convergence accelerated further during, and just after, the global financial crisis of 2008-2009: the aggregate average differential in per capita income growth increased to more than four percentage points in the 2008-2012 period, from a little more than two percentage points in the two decades before. As the advanced economies recover, however weakly, the growth differential is likely to narrow again, perhaps to about two percentage points, which still implies steady convergence at a decent pace.
In that sense, it is not “the end of the party” for emerging markets, as some claimed early last summer, when US Federal Reserve Chairman Ben Bernanke’s suggestion of a possible “taper” of the Fed’s policy of quantitative easing triggered a “mini-crisis” in several of the more vulnerable emerging markets. These economies have since recovered a significant part of the lost ground in terms of exchange rates and asset prices.
A major part of the economic-convergence process that has been taking place since the late 1980’s has been due to “catch-up” growth. The emerging markets developed the institutions and the skills base needed to import and adapt technology, which is easier than generating new technology from scratch. The pace of catch-up growth declines only gradually over time, as the less advanced economies slowly move closer to the technological frontier.