The New Normal For Emerging Economies


The Princeton economist Dani Rodrik believes that sustained, meteoric growth in emerging economies may no longer be possible. The great “age of industrialisation” may be behind us.And evidence for this view is coming from at least four directions:
First, machines can perform more and more functions in manufacturing and sometimes even in services. That makes it harder to compete via low wages. Say you run a company in a developed nation and have been automating many of its processes. Because your total bill for employee wages would be low, why not choose the proximity and familiarity of investing in labour in or near your home country? This change would help the jobs picture in the United States and probably countries like Mexico, but it could hurt many other lower-wage nations. 
Supply chains are now scattered across many countries. Think of the old development model as a nation, such as South Korea, trying to build a nearly complete domestic supply chain for its automobile and other industries. The newer model is more distributed, as reflected by the iPhone, with the bounty from the investment spread across many locations, including the Philippines, Taiwan and mainland China. As for cars, Thailand has courted automobile factories with success, but the parts usually come from outside the country and the benefits for the Thai economy are limited.
Richard Baldwin, professor of international economics at the Graduate Institute in Geneva, refers to the internationalisation of the supply chain as “globalisation’s second unbundling”. He sees the new world as one of “development enclaves”, in which parts of countries will stand out as advanced or wealthy, without fundamentally transforming the entire economy.
Another barrier is the difficulty of sustaining a cultural vision for catching up economically. South Korea was a poor nation in the 1960s, and its economic rise required sacrifices from millions of people in work hours, savings and investment in education. But within 20 years or so, one could see that South Korea would most likely join the ranks of economically developed nations. Indeed it has, so these sacrifices yielded satisfaction within a reasonable time. Many of today’s poorer nations seem to be more than 20 years away from competing with the global leaders, which are now themselves more advanced, and that slower and longer path to the top may discourage some countries from even trying.
Finally, many lower-income countries will be old before they are rich. China’s population, for example, is ageing rapidly, given the government’s one-child policy and the decline in birthrates that accompanies rising income. It is less well known that fertility rates in much of the Middle East and North Africa are also falling rapidly. In Iran, for example, it is now estimated at 1.86 per woman, which over time would mean that families are not replenishing themselves. And shrinking and older populations, of course, limit future economic growth. By no means do these arguments mean that the living standards of poorer nations must stagnate. A country can improve the lot of at least some of its citizens by selling services, as seen in the relative prosperity of Bangalore, which, among other activities, runs call centers and sells many programming services online. Many African nations are marketing their resource wealth and may also improve productivity in local agriculture. Virtually all poor nations eventually benefit from the innovations of wealthy nations, which they often receive at much lower prices, as seen with cell phones and medications, for example.
So the chances for progress remain, but those poorer nations might never “become like the Developed West”. There was something special about the 20th century mix of widespread, well-paying manufacturing jobs, which enabled the rise of a middle class that would take significant control of government, through its roles as voters and taxpayers. Those manufacturing jobs also created strong incentives for many people to pursue traditional education, whether in Toronto or Tokyo. The best guess is that the idea of economic catch-up has changed, which means that politics in developing nations could change, too. Just as inequality in income and wealth has been rising in the United States, newly growing nations find themselves in a more stratified world, without developing their own strong egalitarian histories to undergird political institutions or economic expectations. Many of the wealthy may produce their public goods — like secure streets and clean, beautiful parks — in gated communities. In some countries, there may be a de facto “rule by consent” from abroad — if, for instance, you are an African working in a Chinese-owned mine and living in a company town, while receiving your vaccines from a Western nonprofit organisation. Those phenomena might not fit our current notions of national pride very well — and might mean further splits within developing nations. Indeed, the future path of developing countries could be much different from that of recent, high growth success stories. The next set of emerging-market winners, for example, may retain very large pockets of poverty. And as the expectation of a single, common path for economic development fades, governments may need to rethink what they can accomplish — and how. In any case, we should be prepared for the possibility that, while Seoul now looks a fair amount like Los Angeles, perhaps La Paz, Accra and Dhaka will never look much like Seoul.

About Keerthika Singaravel

2 Responses to The New Normal For Emerging Economies

  1. Alex Jones says:

    Perhaps there needs to be a new way to measure a nations wealth rather than simply GDP.

    • Perhaps.But the poor are probably going to find crossing over a lot tougher.
      I found the hypothesis discouraging but 4 solid points have been made and the governments of emerging nations can’t afford to slack off now if the majority of their people is to enjoy greater prosperity.Something our government doesn’t seem to appreciate.

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