Given that emerging economies continue to grow two or three times faster than advanced economies, the persistent gloom about their prospects is puzzling. The latest example comes from The Economist, which argues that convergence, the process by which poorer countries catch up to rich countries over time, was a temporary phenomenon that has largely run its course. The past 15 years have 'deceived people into thinking that broad convergence is the natural way of things.'
How did they come to this view? The first decade of this century saw a rapid but unsustainable pace of convergence. China led the way with double-digit growth, and even the traditional laggards (such as India and Brazil) did well. Double-digit growth is not unprecedented (pre-1980 Japan, and a number of Asian economies, have come close) but it was never sustainable in the longer term
But just because convergence has slowed from this rapid pace doesn't mean it has ended. China's 7% growth rate doubles total income every decade. And it is sustainable. After all, even countries once seen as 'basket cases', such as Indonesia, recorded average growth of 7% for the three decades of the Soeharto era.
The other sleight of hand is to focus on the catch-up period associated with the 2008 financial crisis. The emerging economies continued to grow while the advanced economies had falling GDP, which has been followed by feeble recoveries. The fact that this was a 'once-off' conjuncture which is now behind us doesn't signal the end of convergence. [fold]
On top of this, the World Bank data used by The Economist does indeed make this look like a halcyon decade: 'output per person in the emerging world doubled between 2000 and 2009; the average annual rate of growth over that decade was 7.6%'. It was good decade, but not that good. IMF figures suggest that emerging economy growth in this period was around 2 percentage points slower than The Economist's.
The Economist's rose-tinted version of the past is contrasted with a gloomy outlook. It says that the IMF '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'. With this differential, full convergence would take 'more than 300 years'.
But the latest IMF forecasts show advanced economies growing at 1.8% while emerging economies are growing at 4.6%. True, this figure includes China's growth, but even so it is inconsistent with The Economist's numbers. This difference in growth rates shown in current IMF estimates (with the emerging economies growing around 2-3 percentage points faster) might be seen as closer to the overall convergence prospects than The Economist's 'indistinguishable from never' assessment.
But in any case, the convergence story was never about aggregates, combining the diverse experience of all emerging economies taken together. The convergence story is the counter to the view that poor countries are inexorably stuck in poverty because of geography, lack of savings, or unreformable institutions. This pessimistic generalisation is refuted by the cases of Singapore, Taiwan and South Korea. Then, rebutting the argument that these were special cases, less dynamic economies like Thailand and Indonesia showed that the income gap could be narrowed, even in the face of inefficient and corrupt institutions. The point of the convergence story is that, with competent policies, poor countries can grow quickly by adopting proven technology and techniques.
It was never part of the convergence story that all poor countries would make the journey, or that it would be quick. Even China's three decades of outstanding growth have not made it rich, yet. And in any case, the objective of matching the moving target of rich-country living standards is not an essential part of the narrative. Even to get half way, to the stage where most people have been lifted out of poverty, would be a result to be cheered, not disparaged by glum mutterings about the 'middle-income trap'.
There is a message here with relevance for Australia. Convergence is happening, and it's happening in our region. Despite all the gloom from global commentators, the IMF data shows that 'emerging and developing Asia' has recorded a steady 6.5% growth rate, both in recent years and in the forecast. This is in a world full of talk of 'secular stagnation' in the advanced economies, with Europe still mired in debt and gloom, America's recovery yet to gain momentum and Latin America falling back into its traditional languor. Our part of the globe is doing just fine, thanks to convergence.
Graph courtesy of The Economist.
