NOWHERE are the consequences of different rates of growth clearer than on a trip up the Pearl River Delta in southern China. At the river’s mouth sits Hong Kong, a city in which average living standards exceed those in most rich European countries. Travel farther north and you pass the container ports of Shenzhen, behind which new skyscrapers tower over a sprawling melange of housing and factories. Since its establishment as a special economic zone in 1980, Shenzhen’s economy has grown at a frenetic pace, and incomes there are now just over half of those in Hong Kong, which is similar to what you would see in southern and central Europe.
Farther north and west sits Guangzhou, capital of Guangdong province, with its newly constructed motorways and tower blocks among the rice paddies. Average incomes in Guangdong are just a quarter of those in Hong Kong, equivalent to Algeria or Costa Rica. Finally, toward the western edge of the watershed, the tributaries reach across Guangxi into Yunnan—provinces where the people have yet to get into the flow of China’s voyage of development. Incomes there are but a tenth of those in Hong Kong, on a par with those in Angola or the Republic of the Congo.
Over the past 15 years the currents that take people from such hinterlands of poverty to the broad open reaches of wealth have been flowing at an unprecedented rate. When adjusted for living costs, output per person in the emerging world almost doubled between 2000 and 2009; the average annual rate of growth over that decade was 7.6%, 4.5 percentage points higher than the rate seen in rich countries (see chart 1). As a result of that difference the gap between the developed and developing worlds narrowed quickly.
This burst of growth struck an extraordinary blow against deprivation. The share of the developing world’s population living on less than $1.25 a day (the international definition of poverty) has fallen from 30% in 2000 to below 10%, according to an estimate by the Centre for Global Development, based on new data published by the World Bank in April. Such progress nurtured hopes of more to come. Were the emerging world able to maintain a 4.5-percentage-point growth advantage over the rich world, then other things being equal its average income per person would converge with that in America in just over 30 years: scarcely a generation. Such a convergence would represent an historic change rivalled in its scope only by the extraordinary industrialisation that opened the global gaps between the rich and the rest in the first place, and completely unprecedented in its pace.
Alas, those hopes are now slipping away. An analysis of data on GDP per person which takes account of new estimates of living costs released in April by the World Bank’s International Comparison Programme (ICP) suggests that convergence has slowed down a lot.
Since 2008 growth rates across the emerging world have slipped back toward those in advanced economies. When the new ICP estimates are applied, the average GDP per head in the emerging world, measured on a purchasing-power-parity (PPP) basis, grew just 2.6 percentage points faster than American GDP in 2013. If China is excluded from the calculations the difference is just 1.1 percentage points. At that pace convergence with rich-economy incomes happens over a period of time more like a century than a generation. If China is included, emerging economies could expect to reach rich-world income levels, on average, in just over 50 years. If China is left out, catch-up takes 115 years.
The most recent 2014 growth projections from the IMF suggest the outlook is darkening further. They put the difference between the growth in emerging markets other than China and growth in the developed world at just 0.39 percentage points this year. That would put off full convergence for more than 300 years—indistinguishable from never as far as today’s societies are concerned.
It used to be harder
To get the rate of convergence back up to what it was a decade ago would seem as great an economic boon as the world could wish for. But the things which made that period exceptional cannot be replicated easily, if at all. From now on simply keeping up with the rich world will prove a challenge for many. Gaining ground will require reforms that look less achievable by the day. The great expectations raised over the last half-generation look increasingly likely to be dashed.
In 1997, just before the great catch-up got into its swing, the World Bank’s senior economist, Lant Pritchett, described a widening income gap between rich and poor countries as “the dominant feature of modern economic history”. Its dominance was rendered particularly galling by the fact that orthodox economics struggled to explain it. Theories of economic growth like the one published by Nobel-winner Robert Solow in 1956 predicted that, over time, poor economies should catch up with rich ones.
In the Solow model economies were poor because their workers had access to less capital. This capital shortfall implied that the return on investment should be high, so capital should flow from rich countries to poor ones, leading the two worlds to converge on similar levels of productivity and income. The fact that the richer countries would themselves grow while this was going on complicated matters, but not too terribly. Their long-run growth, Mr Solow reckoned, was driven by new technology which, once developed, could be adopted by poorer economies too. Indeed, the poor could potentially learn from the missteps made by the rich, and leapfrog directly to more productive ways of doing things.
The model seemed to apply well enough to the histories of then-rich countries. Thanks to its trailblazing industrial revolution, British GDP per person soared above that in other countries in the 19th century. By 1870 Britons were 30% more productive than Americans and 70% more productive than Germans. Yet this advantage disappeared as rivals improved upon Britain’s successes. By the early 20th century America had already surpassed Britain; not long after the second world war most of western Europe had caught up.
But what was true for Europe and the colonies it had created in temperate climes did not apply elsewhere. Prior to the late 1990s poor countries growing faster than rich ones were rare, and doing it persistently was rarer still. From the mid-1940s to the mid-1990s less than a third of developing economies were growing faster than the rich world at any one time. In any given economy one decade’s gains were often reversed in the next.
Some Asian economies proved to be exceptions. Japan, already industrialised in the first part of the 20th century, grew to be the world’s second largest economy. South Korea, Taiwan and a smattering of city-states like Singapore and Hong Kong also got rich. But promising bursts of growth in Africa and the Middle East in the 1960s and 1970s petered out. Crises repeatedly punctured bubbles of enthusiasm in Latin America. This dismal performance left dismal scientists feeling appropriately dismal. Writing in 1987 another Nobelist, Robert Lucas, noted: “The consequences for human welfare involved in questions like [getting poor countries to grow faster than rich ones] are simply staggering: Once one starts to think about them, it is hard to think about anything else.”
Economists tweaked their models, deploying new notions such as that of human capital to try and explain the persistent divide. Perhaps, they reckoned, it was only economies with comparable levels of investment and worker skills that converged to similar incomes, a phenomenon dubbed “conditional convergence”. Other segments of the profession explored different possibilities. Some reckoned institutions were the key. In the tropics, European colonial powers tended to impose institutions distorted by the overriding interest in extracting natural resources to which the interests and rights of the general population were secondary. Since these institutions were persistent, the legacy of past misgovernment continued to hold down incomes. Still other economists focused on geography and climate. Remoteness from economic centres and hot, disease-prone conditions could retard development.
Even as these debates continued, the world shifted beneath economists’ feet as growth in the developing world shot up from the end of the 1990s. A great deal of this was due to the rise of China as a manufacturing superpower, but that was far from being the whole story. In 2006, before the effects of the financial crisis slowed rich-country growth, emerging economies were achieving catch-up rates of more than five percentage points even if China was taken out of the mix. The catch-up experience was far more broad-based than it had been in previous growth spurts.
That is not to say the benefits were evenly spread (see chart 2). In eastern Europe and East Asia economies closed the gap at a remarkable clip, though for many eastern European countries a significant part of that growth simply reversed the contraction that followed the fall of the Soviet Union. In 1998 GDP per person in Poland was just 28% of that in America, while China’s was just 7%. By 2013 those figures had risen to 44% and 22%, respectively. Other countries made less progress. Brazil’s GDP per head was already 25% of America’s in 1998 and scraped forward just three percentage points over the next 15 years. For very poor countries even quite high growth provided little catch-up; in Ethiopia, GDP per head rose from 1.3% of that in America to 2.5%. Venezuela and Zimbabwe fell further behind.