The End of Convergence?

WASHINGTON, DC – Until recently, there was a broad consensus that this was to be the emerging countries’ century. But financial markets’ reaction to the US Federal Reserve’s warning in May that it may wind down its unconventional monetary policies led many analysts to question how rapid emerging-market growth would be. At this month’s Annual Meetings of the World Bank Group and the International Monetary Fund, the emerging countries’ prospects will be a topic of heated debate.

Until mid-2013, the IMF and the World Bank had projected aggregate per capita GDP growth rates for the emerging and developing countries (EMDEVs) to be almost three percentage points higher than in the world’s advanced countries over the next few years. Most commentators expected a substantial difference in per capita growth to continue beyond this decade, disagreeing only about the magnitude of the emerging countries’ growth advantage.

Arvind Subramanian’s estimates for China, and Uri Dadush’s for EMDEVs more generally, represented the upper range of these projections. Others, such as Dani Rodrik, have always been more cautious, arguing that much of the past rapid growth in major EMDEVs was due to a period of technological “catch-up” growth in manufacturing, which was reaching its limits, and could not be easily extended to the large service sector or other parts of developing economies.

As it turned out, a “mini-crisis” followed Federal Reserve Board Chairman Ben Bernanke’s announcement that the Fed might “taper” its quantitative-easing (QE) policy – its open-ended commitment to monthly purchases of long-term assets worth $85 billion – before the end of 2013. Many emerging economies’ stock markets and currencies took a large hit, and headlines were soon announcing the end of the emerging-market boom.