Emerging Markets, Hitting a Wall
By TYLER COWEN
A GROWTH slowdown in the so-called BRICS nations — Brazil, Russia,
India, China and South Africa — could be impeding the expansion of the
global economy. That’s serious enough, and indeed we are seeing unrest
in Brazil over stagnant living standards. Yet a graver problem may be
lurking behind the headlines — namely, that sustained, meteoric growth
in emerging economies may no longer be possible.
The disconcerting truth is that the great “age of industrialization”
may be behind us, a possibility that has been outlined most forcefully
by the economist Dani Rodrik, who is leaving Harvard for Princeton
next month. And evidence for this view is coming from at least four
THE RISE OF AUTOMATION First, machines can perform more and more
functions in manufacturing, and sometimes even in services. That makes
it harder to compete via low wages.
Say you run a company in a developed nation and have been automating
many of its processes. Because your total bill for employee wages
would be low, why not choose the proximity and familiarity of
investing in labor in or near your home country? This change would
help the jobs picture in the United States and probably countries like
Mexico, but could hurt many other lower-wage nations.
GLOBAL SUPPLY SOURCES Supply chains are now scattered across many
countries. Think of the old development model as a nation, such as
South Korea, trying to build a nearly complete domestic supply chain
for its automobile and other industries. The newer model is more
distributed, as reflected by the iPhone, with the bounty from the
investment spread across many locations, including the Philippines,
Taiwan and mainland China. As for cars, Thailand has courted
automobile factories with success, but the parts usually come from
outside the country and the benefits for the Thai economy are limited.
Richard Baldwin, professor of international economics at the Graduate
Institute in Geneva, refers to the internationalization of the supply
chain as “globalization’s second unbundling.” He sees the new world as
one of “development enclaves,” in which parts of countries will stand
out as advanced or wealthy, without fundamentally transforming the
WIDER ECONOMIC GAPS Another barrier is the difficulty of sustaining a
cultural vision for catching up economically. South Korea was a poor
nation in the 1960s, and its economic rise required sacrifices from
millions of people in work hours, savings and investment in education.
But within 20 years or so, one could see that South Korea would most
likely join the ranks of economically developed nations. Indeed it
has, so these sacrifices yielded satisfaction within a reasonable
time. Many of today’s poorer nations seem to be more than 20 years
away from competing with the global leaders, which are now themselves
more advanced, and that slower and longer path to the top may
discourage some countries from even trying.
AGING POPULATIONS Finally, many lower-income countries will be old
before they are rich. China’s population, for example, is aging
rapidly, given the government’s one-child policy and the decline in
birthrates that accompanies rising income. It is less well known that
fertility rates in much of the Middle East and North Africa are also
falling rapidly. In Iran, for example, it is now estimated at 1.86 per
woman, which over time would mean that families are not replenishing
themselves. And shrinking and older populations, of course, limit
future economic growth.
BY no means do these arguments mean that the living standards of
poorer nations must stagnate. A country can improve the lot of at
least some of its citizens by selling services, as seen in the
relative prosperity of Bangalore, India, which, among other
activities, runs call centers and sells many programming services
online. Many African nations are marketing their resource wealth, and
may also improve productivity in local agriculture. Virtually all poor
nations eventually benefit from the innovations of wealthy nations,
which they often receive at much lower prices, as seen with cellphones
and medications, for example.
So the chances for progress remain, but those poorer nations might
never “become like us.” There was something special about the
20th-century mix of widespread, well-paying manufacturing jobs, which
enabled the rise of a middle class that would take significant control
of government, through its roles as voters and taxpayers. Those
manufacturing jobs also created strong incentives for many people to
pursue traditional education, whether in Toronto or Tokyo.
The best guess is that the idea of economic catch-up has changed,
which means that politics in developing nations could change, too.
Just as inequality in income and wealth has been rising in the United
States, newly growing nations find themselves in a more stratified
world, without developing their own strong egalitarian histories to
undergird political institutions or economic expectations. Many of the
wealthy may produce their public goods — like secure streets and
clean, beautiful parks — in gated communities.
In some countries, there may be a de facto “rule by consent” from
abroad — if, for instance, you are an African working in a
Chinese-owned mine and living in a company town, while receiving your
vaccines from a Western nonprofit organization. Those phenomena might
not fit our current notions of national pride very well — and might
mean further splits within developing nations.
Indeed, the future path of developing countries could be much
different from that of recent, high-growth success stories. The next
set of emerging-market winners, for example, may retain very large
pockets of poverty. And as the expectation of a single, common path
for economic development fades, governments may need to rethink what
they can accomplish — and how.
In any case, we should be prepared for the possibility that, while
Seoul now looks a fair amount like Los Angeles, perhaps La Paz, Accra
and Dhaka will never look much like Seoul.
Tyler Cowen is a professor of economics at George Mason University.