Global growth beats credit crunch story

In: Uncategorized

11 Sep 2007

My comment in the latest issue of Fund Strategy argues that the long-term economic growth of developing countries is far more important than short-term market volatility.

In the midst of the anxiety about a global credit crunch it is worth dwelling on some good news. The gap between the developed countries and the developing world has narrowed significantly thanks to rapid economic growth. In the long term this will prove a far more significant development than the turmoil in the credit markets.

Gross Domestic Product (GDP) per head in the developing countries grew by almost 30% from 2003-2007, according to the Trade and Development Report 2007 from the United Nations Conference on Trade and Development (Unctad). In contrast, growth per head in the developed world grew by 10%.

Thankfully this narrowing of the gap is the result of the developing world growing strongly rather than stagnation in the advanced economies. As has become usual in recent years the economies of China and India look set to be the star performers in 2007. But Africa is forecast to grow by about 6% with Latin America and West Asia growing by about 5%. Fewer than 10 of the 143 developing countries are expected to suffer a fall in GDP per head in real terms.

Despite this narrowing of the gap it is important to recognise the developed world remains far richer than the developed countries. In 1980 the developed countries were 23 times better off than the developed world in terms of income per head. By 2007 this gap had narrowed to 18 times. However, it should also be remembered that East and South Asia have performed substantially better than the rest of the developing world.

The rapid development of the poor world is confirmed by several articles on cities in the latest edition of the quarterly Finance & Development from the International Monetary Fund (IMF). While Latin America is already highly urbanised, Asia and Africa, the world’s most populous regions, are urbanising fast. Already about half of the global population lives in cities.

Such urbanisation should be warmly welcomed. Along with industrialisation it is a key part of creating a modern, developed economy.

So rather than fret about a little volatility in global markets look to the longer term. The world economy is growing fast and demand looks set to rise particularly rapidly in the developing world. Things are far from perfect – in particular the developing countries have a long way to go. But there is enormous potential on the horizon.