I showed a neat picture in my previous post on the divergence in growth rates between developing and rich countries. But can developing countries really carry the world economy?
Much of the optimism about their economic prospects is the result of extrapolation. The decade preceding the global financial crisis was a unique period, characterized by a lot of economic tailwind. Commodity prices were high, benefiting African and Latin American countries in particular, and external finance was plentiful and cheap. Moreover, many African countries hit bottom and rebounded from long periods of civil war and economic decline. And, of course, rapid growth in the advanced countries generally fueled an increase in world trade volumes to record highs.
Optimists are confident that this time is different. They believe that the reforms of the 1990's – improved macroeconomic policy, greater openness, and more democracy – have set the developing world on course for sustained growth. My reading of the evidence leaves me more cautious. It is certainly cause for celebration that inflationary policies have been banished and governance has improved throughout much of the developing world. By and large, these developments enhance an economy's resilience to shocks and prevent economic collapse.
But igniting and sustaining rapid growth requires something more: production-oriented policies that stimulate ongoing structural change and foster employment in new economic activities. Growth that relies on capital inflows or commodity booms tends to be short-lived. Sustained growth requires devising incentives to encourage private-sector investment in new industries – and doing so with minimal corruption and adequate competence.
If history is any guide, the range of countries that can pull this off will remain narrow.
Read the full column here.