Arvind Subramanian: Guarded optimism beats gloom

If we focus on the longue duree, there is promise for the developing world

When the world’s leading policymakers gather in Washington next month, we will hear a lot about the gloomy global outlook. There will be talk of economic threats from tortured US Federal Reserve efforts to return interest rates to normal, battles over Brexit and the anti-globalisation backlash. Yet despite the downbeat narrative of the countries that control the international policy agenda, for many of those present, and indeed the bulk of humanity, guarded optimism should trump gloom.

For millions in developing and emerging economies, despite recent turbulence, this remains a golden age — an exceptional phase in history when poor countries are catching up with their rich counterparts at unprecedented speed.

That sounds astonishing. The general impression is that emerging markets have run out of steam. After three decades of racing growth, China has slowed considerably, while the economies of Brazil and Russia have actually been contracting. The pendulum has swung away from the view prevalent in much of the 2000s that the future belonged to emerging markets.

But consider these numbers. For developing and emerging economies, per capita gross domestic product growth (GDP) — a measure of improvement in average living standards — averaged 4.3 per cent from 2011 to 2016, according to the International Monetary Fund. This is slightly higher than in the 20-year period of the 1980s and 1990s and substantially greater than in the preceding three post-war decades.

More important, per capita GDP growth rates in poorer countries exceed those in richer countries by an even greater magnitude today. In the 1980s and 1990s this differential was close to two percentage points. In the post-crisis period, it widened to 3.5 percentage points. In other words, emerging markets are catching up with living standards in rich countries at a faster pace.

Why has this first-order fact been obscured and what are its implications for policymakers?

First, perceptions have been shaped by the brief but heady years from 2003 to 2008. Developing country growth reached an average of six per cent and advanced countries, regaining some post-war momentum, grew at close to two per cent. By comparison, all seems dismal today. But this period was really an aberration of just five years, one created by an unusual and unsustainable combination of factors. If one ignores this period as we should, to focus on history’s longue durée, things are actually promising for the developing world.

A second, related, reason for the pessimism has been the overwhelming role played by the rise of China. The nation’s sharp slowdown seems to signal a broader weakening of the global economy. But this, too, is problematic. It was always clear, according to economic theory, that China’s 35-year growth had to slow. In some ways, the puzzle is not why it has slowed down dramatically but why it did not do so earlier. It is only relative to the unfounded belief that 10 per cent growth was normal for China that six per cent today seems unusual.

Ignoring this rapid catch-up in living standards has implications for the global policy agenda. Priorities and perspectives differ widely among advanced and developing economies on some of the big questions.

For example, the growing scepticism about globalisation in advanced countries is a serious problem for the poorer ones. This goes far beyond the obvious risk that the advanced countries will reverse their openness on trade or immigration, which would be detrimental to the export and growth prospects of developing countries.

The more serious danger relates to its effect on the big trading nations of the emerging economies. If globalisation is discredited intellectually, that will permeate attitudes in China and India, damaging the case that further opening of their economies will be in their self-interest. And, if they pause their opening, countries poorer than them will have fewer export opportunities because China now constitutes one of the world’s biggest import markets.

The largest difference perhaps relates to the roles of the state and markets. Advanced countries are seeking to tame capitalism and unfettered markets through higher taxation and stronger regulation. Poorer countries have no such luxury. Many have rickety states, rudimentary markets, and far-from-robust democracies.

So talk in Washington about facing up to common challenges will not ring true. Against different institutional capabilities, emerging economies must sustain and harness dynamism while the west finds a way to manage its decline.

(This is a reprint of an article originally published in the Financial Times)

The writer is chief economic adviser to the government of India