Five Known Unknowns about the Next Generation Global Political Economy


Dan Drezner over at the Brookings Institution:

2. Are there hard constraints on the ability of the developing world to converge to developed-country living standards?

One of the common predictions made for the next generation economy is that China will displace the United States as the world’s biggest economy. This is a synecdoche of the deeper forecast that per capita incomes in developing countries will slowly converge towards the living standards of the advance industrialized democracies. The OECD’s Looking to 2060 report is based on “a tendency of GDP per capita to converge across countries” even if that convergence is slow-moving. The EIU’s long-term macroeconomic forecast predicts that China’s per capita income will approximate Japan’s by 2050. The Carnegie Endowment’s World Order in 2050 report presumes that total factor productivity gains in the developing world will be significantly higher than countries on the technological frontier. Looking at the previous twenty years of economic growth, Kemal Dervis posited that by 2030, “The rather stark division of the world into ‘advanced’ and ‘poor’ economies that began with the industrial revolution will end, ceding to a much more differentiated and multipolar world economy.”

Intuitively, this seems rational. The theory is that developing countries have lower incomes primarily because they are capital-deficient and because their economies operate further away from technological frontier. The gains from physical and human capital investment in the developing world should be greater than in the developed world. From Alexander Gerschenkron forward, development economists have presumed that there are some growth advantages to “economic backwardness”

This intuitive logic, however, is somewhat contradicted by the “middle income trap.” Barry Eichengreen, Donghyun Park, and Kwanho Shin have argued in a series of papers that as an economy’s GDP per capita hits close to $10,000, and then again at $16,000, growth slowdowns commence. This makes it very difficult for these economies to converge towards the per capita income levels of the advanced industrialized states. History bears this out. There is a powerful correlation between a country’s GDP per capita in 1960 and that country’s per capita income in 2008. In fact, more countries that were middle income in 1960 had become relatively poorer than had joined the ranks of the rich economies. To be sure, there have been success stories, such as South Korea, Singapore, and Israel. But other success stories, such as Greece, look increasingly fragile. Lant Prichett and Lawrence Summers conclude that “past performance is no guarantee of future performance. Regression to the mean is the single most robust and empirical relevant fact about cross-national growth rates.”

More here.