The most dramatic, and disruptive, period of emerging-market growth the world has ever seen is coming to its close
THIS year will be the first in which emerging markets account for more than half of world GDP on the basis of purchasing power, according to the International Monetary Fund (IMF). In 1990 they accounted for less than a third of a much smaller total. From 2003 to 2011 the share of world output provided by the emerging economies grew at more than a percentage point a year (see chart 1). The remarkably rapid growth the world has seen in these two decades marks the biggest economic transformation in modern history. Its like will probably never be seen again.
According to a recent study by Arvind Subramanian and Martin Kessler, of the Peterson Institute, a think-tank, from 1960 to the late 1990s just 30% of countries in the developing world for which figures are available managed to increase their output per person faster than America did, thus achieving what is called “catch-up growth”. That catching up was somewhat lackadaisical: the gap closed at just 1.5% a year. From the late 1990s, however, the tables were turned. The researchers found 73% of developing countries managing to outpace America, and doing so on average by 3.3% a year. Some of this was due to slower growth in America; most was not.
The most impressive growth was in four of the biggest emerging economies: Brazil, Russia, India and China, which Jim O’Neill of Goldman Sachs, an investment bank, acronymed into the BRICs in 2001. These economies have grown in different ways and for different reasons. But their size marked them out as special—on purchasing-power terms they were the only $1 trillion economies outside the OECD, a rich world club—and so did their growth rates (see chart 2). Mr O’Neill reckoned they would, over a decade, become front-rank economies even when measured at market exchange rates, and he was right. Today they are four of the largest ten national economies in the world.
The remarkable growth of emerging markets in general and the BRICs in particular transformed the global economy in many ways, some wrenching. Commodity prices soared and the cost of manufactures and labour sank. Global poverty rates tumbled. Gaping economic imbalances fuelled an era of financial vulnerability and laid the groundwork for global crisis. A growing and vastly more accessible pool of labour in emerging economies played a part in both wage stagnation and rising income inequality in rich ones.
The shift towards the emerging economies will continue. But its most tumultuous phase seems to have more or less reached its end. Growth rates in all the BRICs have dropped. The nature of their growth is in the process of changing, too, and its new mode will have fewer direct effects on the rest of the world. The likelihood of growth in other emerging economies having an effect in the near future comparable to that of the BRICs in the recent past is low; they do not have the potential for catch-up the BRICs had in the 1990s and 2000s. And the BRICs’ growth has changed the rest of the world economy in ways that will dampen the disruptive effects of any similar surge in the future. The emerging giants will grow larger, and their ranks will swell; but their tread will no longer shake the Earth as once it did.
The great return
The BRIC era arrived at the end of a century in which global living standards had diverged remarkably. Towards the end of the 19th century America’s economy overtook China’s to become the largest on the planet. By 1992 China and India—home to 38% of the world’s population—were producing just 7% of the world’s output, while six rich countries which accounted for just 12% of the world’s population produced half of it. In 1890 an average American was about six times better off than the average Chinese or Indian. By the early 1990s he was doing 25 times better.
There followed what Mr Subramanian and Mr Kessler call “convergence with a vengeance”. China’s pivot towards liberalisation and global markets came at a propitious time in terms of politics, business and technology. Rich economies were feeling relatively relaxed about globalisation and current-account deficits. Bill Clinton’s America, booming and confident, was little troubled by the growth of Chinese industry or by offshoring jobs to India. And the technology and managerial nous necessary to assemble and maintain complex supply chains were coming into their own, allowing firms to spread their operations between countries and across oceans.
The tumbling costs of shipping and communication sparked what Richard Baldwin, an economist at the Graduate Institute in Geneva, calls globalisation’s “second unbundling” (the first was the simple ability to provide consumers in one place with goods from another). As longer supply chains infiltrated and connected places with large and fast-growing working-age populations, enormous quantities of cheap new labour became accessible. According to figures from the McKinsey Global Institute, a think-tank, advanced economies added about 160m non-farm jobs between 1980 and 2010. Emerging economies added 900m.
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