MANAS CHAKRAVARTY reviews on The Future of Economic Convergence Dani Rodrik; Harvard University
The received wisdom to- day is that emerging markets will continue to see high rates of growth, while growth in the developed world will be subdued.
This implies that developing nations will, slowly and steadily, catch up with the rich countries. There will, ulti- mately, be a convergence be- tween the developed and the developing world.
The theory is not new. It is also very plausible. After all, developing countries can merely copy and adapt technologies already in use in developed nations; they can borrow from the international markets to fill up gaps in do- mestic savings; and their mar- ket need not be limited to the narrow domestic arena--they can target exports to the rich countries.
But, in spite of rapid growth during the last decade, the in- come gap between the devel- oped and developing coun- tries is still at the same level as in the 1950s.
Could this time be differ- ent? Political stability and governance, the bane of countries in Latin America, have improved.
Globalization has been a huge opportunity for develop- ing countries. Macroeconomic populism has also gone out of fashion. But Dani Rodrik ar- gues that while these changes raise average performance, it's less clear they promote sus- tainable growth.
Surely, all that is needed are more reforms? Rodrik thinks that is too simplistic an argu- ment. He points out that China, India and the East Asian nations are all examples of combining the unorthodox with the standard reform measures. Says Rodrik, “Chi- na's policies on property rights, subsidies, finance, the exchange rate and many other areas have so flagrantly de- parted from the conventional rulebook that if the country were an economic basket case, instead of the power- house that it has become, it would be almost as easy to ac- count for it.“ Crossing the riv- er by feeling for the stones, it would seem, is what is re- quired. Japan, South Korea and Taiwan also had rampant government interference in their economies during their heyday. So what is it that de- termines convergence? The best way of doing so would be to shift economies from low- productivity activities, such as traditional agriculture, to high-productivity activities, such as manufacturing. He points out that industries vary in the extent to which they are behind the global technology frontier.
The further away from the frontier is an industry, the more rapid the growth in its labour productivity, regardless of the policies or institutions of the country in which it is located. But this convergence is not uniform across sectors--it is least rap- id in textiles and clothing, and most rapid in machinery and equipment. The question is: Why doesn't this convergence in productivity in industries translate into economy-wide convergence?
Rodrik says that's because economic activities that are good at absorbing advanced technologies are not necessar- ily good at absorbing labour.
As a result, too large a fraction of an economy's resources can get stuck in the “wrong“ sec- tors. In Latin America and Af- rica, labour has, in fact, moved from high-productivity activities to the low-produc- tivity informal sector.
India's example shows that while it's possible to generate growth from tradable services, such as software, these sectors rely on skills that are not widespread in the population.
Manufacturing growth, on the other hand, would have much better potential to absorb the surplus labour freed from ag- ricultural activities.
Rodrik says unconventional policies aimed at improving prospects for growth in the sectors with the most poten- tial to effect structural change in the economy are needed.
He points out: “Growth re- quires remedies targeted at these `special' sectors rather than general policies. These considerations explain why successful countries have typi- cally found it easier to accom- plish the needed structural transformation in an unortho- dox manner, by subsidizing their modern tradables direct- ly rather than attempting to remove market and govern- ment imperfections and wait- ing for markets to work their magic. Such subsidies include undervalued currencies, ex- plicit industrial policies in support of new economic ac- tivities (trade protection, ex- port subsidies, domestic con- tent requirements, tax and credit incentives) and a cer- tain degree of repression of fi- nance to enable subsidized credit, development banking, and currency undervaluation.“
The problem is twofold: It is difficult to pick winners, and slow growth in the developed world is likely to increase pro- tectionist tendencies.
In short, there is no blue- print for growth and no cer- tainty that developing econo- mies will be able to sustain their high growth rates.
