Friday, November 30, 2012

Developing Economies: Will They Ever Catch Up?

Economists enjoy taking recent data and projecting it far into the future in order to draw grand conclusions. Such exercises lead to warnings that the doddering western countries will be economically overwhelmed in an Asian future, for example. Ruchir Sharma is the latest to take offense at this type of forecasting in an article in Foreign Affairs: Broken BRICs: Why the Rest Stopped Rising. Sharma addresses the prospects of the BRICs (Brazil, Russia, India, and China), but also looks at the broader issue of whether or not the class of emerging economies are gaining ground on the developed economies.

Sharma points out that it is a mistake to take the rapid growth rates from the past decade and assume that they can be projected into the future.

"....it is hard to sustain rapid growth for more than a decade. The unusual circumstances of the last decade made it look easy: coming off the crisis-ridden 1990s and fueled by a global flood of easy money, the emerging markets took off in a mass upward swing that made virtually every economy a winner. By 2007, when only three countries in the world suffered negative growth, recessions had all but disappeared from the international scene. But now, there is a lot less foreign money flowing into emerging markets. The global economy is returning to its normal state of churn, with many laggards and just a few winners rising in unexpected places."

The data supports the notion that the last decade was an outlier and fails to support the assumption that a convergence between developed and developed countries has been taking place.

"The notion of wide-ranging convergence between the developing and the developed worlds is a myth. Of the roughly 180 countries in the world tracked by the International Monetary Fund, only 35 are developed. The markets of the rest are emerging-and most of them have been emerging for many decades and will continue to do so for many more. The Harvard economist Dani Rodrik captures this reality well. He has shown that before 2000, the performance of the emerging markets as a whole did not converge with that of the developed world at all. In fact, the per capita income gap between the advanced and the developing economies steadily widened from 1950 until 2000....It was only after 2000 that the emerging markets as a whole started to catch up; nevertheless, as of 2011, the difference in per capita incomes between the rich and the developing nations was back to where it was in the 1950s."

The BRICs were to be the countries in line to overtake the western economies.

"As with previous straight-line projections of economic trends, however-such as forecasts in the 1980s that Japan would soon be number one economically-later returns are throwing cold water on the extravagant predictions. With the world economy heading for its worst year since 2009, Chinese growth is slowing sharply, from double digits down to seven percent or even less. And the rest of the BRICs are tumbling, too: since 2008, Brazil's annual growth has dropped from 4.5 percent to two percent; Russia's, from seven percent to 3.5 percent; and India's, from nine percent to six percent."

This source provides the most recent data on GDP growth: China 7.4%, India 5.5%, Russia 2.9%, and Brazil 0.5%.

Historically, high rates of growth have been difficult to maintain.

"Over the course of any given decade since 1950, on average, only a third of the emerging markets have been able to grow at an annual rate of five percent or more. Less than one-fourth have kept up that pace for two decades, and one-tenth, for three decades. Only Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong have maintained this growth rate for four decades. So even before the current signs of a slowdown in the BRICs, the odds were against Brazil experiencing a full decade of growth above five percent, or Russia, its second in a row."

Sharma concludes that it is foolish to project more than two business cycles into the future (five years per cycle). That allows him to make some of his own predictions.

"Among countries with per capita incomes in the $20,000 to $25,000 range, only two have a good chance of matching or exceeding three percent annual growth over the next decade: the Czech Republic and South Korea. Among the large group with average incomes in the $10,000 to $15,000 range, only one country -- Turkey -- has a good shot at matching or exceeding four to five percent growth, although Poland also has a chance. In the $5,000 to $10,000 income class, Thailand seems to be the only country with a real shot at outperforming significantly."

Finally, there is this somewhat gloomy conclusion.

"Although the world can expect more breakout nations to emerge from the bottom income tier, at the top and the middle, the new global economic order will probably look more like the old one than most observers predict. The rest may continue to rise, but they will rise more slowly and unevenly than many experts are anticipating. And precious few will ever reach the income levels of the developed world."

The OECD is one organization that is prone to making the projections that Sharma was warning us about. It has produced a report that projects economic growth out to the year 2060. It has assumed that in the 2011-2030 period the BRIC countries will have the following GDP (PPP (purchasing power parity)) growth rates: China 6.6%, India 6.7%, Russia 3.0%, Brazil 4.1%. These are numbers that Sharma would find puzzling. Growth rates drop off considerably in the 2030-2060 interval with the rate of drop off seemingly dependent on the working-age demographics in each country.

An article in The Economist provided an interesting synthesis of the conclusions in the report. It produced a plot of per capita GDP (PPP) for a range of countries as a fraction of US per capita GDP. Data was provided for 2011 and the projected numbers for 2060.



It is perhaps not too surprising that there is little relative change predicted for the developed countries because the same economic and demographic models probably apply closely to all. What is a bit surprising is the lack of progress that the developing countries make over the 50 year period, given the rather optimistic growth assumptions.

Perhaps 50 years is just a small period in terms of economic growth. Growth will have phases and transitions that must occur in order to get to the next phase. These steps can be difficult and require the development of new technical and social infrastructure to support them.

The developed countries had centuries to reach their current status so a little patience may be required.

RUCHIR SHARMA is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management and the author of Breakout Nations: In Pursuit of the Next Economic Miracles.

2 comments:

  1. Great post Mr. Couch,

    People often compare the "catch up" with a man running a high speed train: he will never succeed, but the one measure I haven't found yet is a what speed is one country developed, or how far it has to go without comparing it with the current Global North.

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  2. I think countries such as India are increasingly putting money in the wrong places, i am not saying that it is being wasted however their is no doubt a lot of corruption in the legal system and with their politicians. ITS A HUGE MESS!I think that they want to be so like western countires its unheard of! e.g last month India affored to pay a rover to go to space! why would they even think of this when over 1/3 of their population go hungary overnigh and die of starvation?? this just doesnt make any sense. I love India i have countless times seeing the beautiful culture and everything but i think what they are doing is trying to be so modern and western that they need to tackle the basics first e.g starvation, clean drinking water, social services, work houses, NHS, shelter. then start thinking about Building massive shopping mall, stadiums and worrying about spaceships and rovers! I am not saying they cant have any of it but trying fix the foundations.

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