The more growth the better

In: Uncategorized

17 Jan 2011

This is my latest comment from Fund Strategy.

One of the most striking features of the global economy in recent years is the performance gap between the developing world and the West. Although the advanced economies are starting from a much higher base, the poorer countries are growing faster.

Every year since 2000 emerging and developing economies have outpaced advanced nations by a significant margin.

In many respects this is a desirable trend. It means that, on average, living standards in poor countries are starting to converge with those in the rich world. There is still a long way to go before income per head is comparable between the two blocs but material wealth is becoming less the preserve of rich westerners.

Up to a point it is easy to explain the faster growth of the developing world. It is in part a catch-up ­phenomenon. Emerging economies do not need to reinvent technology or ideas from the West. They can, subject to rules on intellectual property, copy developments in the advanced economies.

It would be a mistake, however, to see catch-up as the whole story. For a long time the trend was in the opposite direction. There was a “great divergence” in which western Europe and America outperformed what became the poorer countries. This was despite the fact that, in the abstract at least, there was enormous potential for catching up. It is therefore important to examine the story more closely to explain the shift from divergence to convergence.

Leaving aside the problems of explanation, there are other difficulties associated with the disparity between the developing and advanced economies. In particular, the performance gap is at least in part a result of the sluggishness of the West rather than the purely a consequence of the dynamism of poor countries. It would be far better if both sides were enjoying strong growth; even if developing economies were still outperforming.

Economic atrophy in the West creates the basis for destabilising capital flows to emerging economies. Capital can surge into the financial markets of poorer countries only to reverse direction at the first hint of trouble.

Stronger growth in the advanced economies would also have other benefits. It would provide a welcome boost to living standards in the rich world. A more prosperous developed world would in turn be a larger market for goods from poorer countries.

Both rich and poor can benefit from strong global growth.