The big story of the last 20 years has been a tale of two worlds coming together. While the developed world experienced a decade of growth in the 1990s followed by stagnation and then decline in the 2000s, the developing world saw nothing but growth. The two phenomena are related in the tremendous expansion of credit and general money supply, and are now starting to come together.
Globalization has very much evened out the world. According to data from the IMF, developing nations were never more than about 37 percent of the total product of the world before 2000. Since then, explosive growth in emerging markets has brought them to the point where half of the world’s net product comes from developing nations for the first time since such statistics were kept.
Arvind Subramanian and Martin Kessler of the Peterson Institute call it “convergence with a vengeance.” Rich, developed economies didn’t worry about growing balance of trade deficits with developing nations as new technologies such as the Internet and containerized cargo hooked up the world. It was fueled by plenty of investment money at low interest rates sent worldwide through global banks. The result is largely unprecedented in world history.
While this was fueled in large part by a search for cheap labor and scarce resources, the effects are not entirely exploitive. The World Bank notes that at the same time the percentage of the world living in subsistence poverty went from 43 percent in 1990 to under 21 percent by 2010. That’s about 1.5 billion people whose lives improved.
For all the benefits, there are many problems left to work out. The developing world will certainly insist on its rightful share of political power, ending the hegemony of developed nations that they could exploit at their will. But a hungry nation on the rise is going to find it difficult to find its own internal balances that protect workers and the environment – at least not without a concerted effort to create a corresponding open society.
World’s Largest Economies |
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IMF Data |
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1990 |
2000 |
2012 |
|
1 |
USA |
USA |
USA |
2 |
Soviet Union |
Japan |
China |
3 |
Japan |
China |
India |
4 |
Germany |
Germany |
Japan |
5 |
France |
India |
Germany |
6 |
Italy |
France |
Russia |
7 |
UK |
UK |
Brazil |
8 |
China |
Italy |
UK |
9 |
Brazil |
Brazil |
France |
10 |
India |
Russia |
Italy |
The great convergence is starting to slow, however. It’s not possible for a nation to make a lot of money selling goods to the developed world because those nations are becoming more protective. It’s now up to the nations that experienced the big rises to normalize into consumer societies that generate their own consumption to keep it moving. A lot of credit and trade is no longer a ticket to a new generation of wealth.
Developing nations feel the pressures to reform and make major investments infrastructure necessary to get to the next level.
“The (emerging market) story is based on rapid growth, led by exports, which delivers large current account surpluses, which leads to the accumulation of foreign exchange reserves and the expansion of domestic credit,” according to David Lubin, head of emerging market economics at Citigroup. “Every single element of that story is no longer true.”
Investment bank Goldman Sachs, who first proclaimed the rise of the “BRIC” nations –Brazil, Russia, India, and China — in the 1990s, is now focusing on the “Next 11.” This is a strange grab-bag of nations that includes the largely developed South Korea, hopeful Mexico, unstable Turkey and Egypt, along with isolated Iran. It’s going to be a lot more difficult to pull off the same trick twice, but big banks like Goldman are known for throwing the dice hard these days. Many of the nations they are targeting are politically savvy and are unwilling to be exploited, too.
The BRIC nations have their own challenges. Russia is quietly slipping back. China is finding ways to charge ahead and achieve superpower status, and Brazil is seeking to mature into a fully fledged developed economy. Each developing nation has its unique challenges for the next generation to normalize the gains they have realized.
Many economists have noted that income inequality is a drag on economic growth, especially in a developed economy based on consumer spending. As the world becomes one big economy we can expect that struggling nations will rise substantially until the great convergence is complete – not only economically, but politically and socially.
The process has only started, but the world has already changed. The great convergence is a process that has already been able to bring considerable wealth to large parts of the world and lift many out of poverty. Where it goes next is likely to be the most important economic and political story of the next decade as it expands to a new roster of nations on the rise.