Looking into the future often entails an extrapolation of the recent past. Growth is rapid in emerging economies like China and India, while it is sluggish in the US and Europe. If this relative advantage is projected into the future, there are no prizes for guessing that the former countries will overtake the latter. The acronym Brics became complete with the inclusion of Brazil and Russia. Brazil’s economy is expected to be larger than Italy’s by 2020; India and Russia will be larger than Spain, Canada or Italy. China is already the world’s second-largest economy and is rapidly closing in on the US.
China can, in fact, become the world’s largest economy by 2030 even if its growth rate slows substantially argues Arvind Subramanian of the Peterson Institute for International Economics. Not to be left behind, the Asian Development Bank (ADB) has argued in its latest report – Asia 2050: Realising The Asian Century – that India and China together with Indonesia, Japan, South Korea, Malaysia and Thailand are potential drivers of Asia’s rise to a position of dominance in the world economy over the next 40 years, accounting for over half of global output from current levels of 27 per cent.
Such projections naturally depend on the sort of assumptions that are made. A key one that is common to most studies is the notion of catch-up as a factor propelling the growth of Brics and other emerging economies — similar to what was observed in the post-war years when the war-devastated economies of Japan and Germany caught up with the US. The East Asian miracle economies soon followed suit. Through rapid productivity growth, the BRICs catch up or converge with developed nations — manifested in their rapid rates of growth that begin to taper off once the catch-up factor wears off.
A note of caution is, however, in order. Attaining these growth trajectories is not inevitable or pre-ordained. Sustaining rapid rates of growth for decades to come is far from easy, since these economies need to implement growth-supportive policies and have stable and strong political institutions. The ADB report talks of the imperative of more reform and improved governance. Many of the fast-growing countries noted above are experiencing widening income disparities. They also face the risk of falling into a middle-income trap with their growth stalling before they reach advanced income levels.
Professor Dani Rodrik of Harvard University is, in fact, highly sceptical whether emerging countries like China and India can sustain the rapid growth they have so far experienced. The likelihood of continued convergence is predicated on “specific polices and institutional arrangements that have proved hard to identify and implement. Indeed the recipes seem to vary from context to context. The experience of highly successful East Asian countries is difficult to transplant in other settings,” he argued in a paper, “The Future of Economic Convergence”, prepared for the recent Federal Reserve Bank of Kansas City’s economic symposium at Jackson Hole, Wyoming.
According to him, the success of a handful of economies with sustained growth rates was rooted in their diversification into escalator sectors like manufacturing. Accomplishing this process of structural change has proved difficult for lagging economies in Latin America and Africa. It is proving to be difficult even for the fast-growing Indian economy that has demonstrated success only in IT and software but not in manufacturing. This means that it will keep generating too few high-productivity jobs for the vast unskilled labour force with which it will be abundantly endowed for some more time.
To be sure, China has successfully built broad-based modern industries, something that remains a daunting task for most other countries. But its rapid growth might not be sustainable since it has to change track and refocus its economy away from export-oriented manufacturing and towards domestic sources of demand, while managing the job losses and social unrest this restructuring is likely to generate. A shift in the composition of demand may harm the country’s rapid growth. A reorientation towards services and domestic consumption, thus, might blunt the process of convergence, argues Rodrik.
The upshot is that looking into the seeds of time and projecting that fast-growing countries like the BRICs will soon overtake the US and Europe is far from inevitable. The recent past is no reliable guide for an uncertain future. Sustained growth, of the type that a handful of countries in Asia have so far managed to generate, requires more active policies to promote diversification and foster structural change from low-productivity activities to higher-productivity activities. Basically, it entails pulling the economy’s labour force into sectors such as manufacturing.
According to Rodrik, this structural transformation is rarely the product of unassisted market forces. It is typically the result of messy and unconventional interventions that range from public investment to subsidised credit, from domestic-content requirements to undervalued currencies. The current environment of sluggish growth in the US and Europe would also be much less permissive of such transformation policies that enabled rapid growth in emerging countries like China and India till now.
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