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Let’s Talk Convergence

Homi Kharas's picture

The city of Tianjin In a recent article called “Economic Convergence: The Headwinds Return”, The Economist magazine called the rapid convergence of income levels between developing countries and the United States an aberration. It presented data showing that the difference between income per capita growth in developing countries and in developed countries had peaked around 2008 and had since become steadily smaller. When China is excluded from the calculations, the difference becomes smaller still.

So should we dismiss convergence as a trend whose time is past? I would argue that this would be premature, and that convergence is still a feature of our time. The different conclusion is not because of different data--both of us use the IMF’s World Economic Outlook series for GDP per capita at purchasing power parity terms, and its forecasts until 2019—but a different approach to convergence.

Austerity vs. Fiscal Stimulus: A False Dilemma?

Augusto Lopez-Claros's picture

The 2008-2009 global financial crisis led to a number of large–scale government interventions across the world. These included massive provisions of liquidity, the takeover of weak financial institutions, the extension of deposit insurance schemes, purchases by the government of troubled assets, bank recapitalization and, of course, packages of fiscal stimulus, sometimes of a scale not seen since World War II. Even the IMF, the world’s traditional guardian of sound public finance, came out strongly in favor of fiscal loosening, arguing through its managing director that “if there has ever been a time in modern economic history when fiscal policy and a fiscal stimulus should be used, it's now” and that it should take place “everywhere where it's possible. Everywhere where you have some room concerning debt sustainability. Everywhere where inflation is low enough not to risk having some kind of return of inflation, this effort has to be made".

When Good Is Not Good Enough for 40 Million Tanzanians

Jacques Morisset's picture

Laborer working on an irrigation project. TanzaniaTanzania has undoubtedly performed well over the past decade, with growth that has averaged approximately 7% per year, thanks to the emergence of a few strategic areas such as communication, finance, construction and transport. However, this remarkable performance may not be enough to provide a sufficient number of decent or productive jobs to a fast-growing population that will double in the next 15 years. With a current workforce of about 20 million workers and an official unemployment rate of only 2%, the challenge for Tanzanians clearly does not lie with securing a job. Rather, it is to secure a job with decent earnings.

Tariffs for Standards?

Hassan Zaman's picture

Bangladesh Duty- and quota-free access for exports to global markets is something developing country trade negotiators have demanded for years.  Few other “stroke-of-the-pen” measures could boost employment and reduce poverty in low income countries in such large numbers. For instance  if the US removed tariffs on Bangladeshi garments – which average around 13%, but for some items are as high as 33% – then exports to the US could rise by  $1.5 billion from the FY13 level of $5 billion, in turn generating employment for at least an additional half a million, primarily female, workers.[1]  Examples of other countries facing US tariffs include Cambodia (12.8% average tariff rate on its exports to the US), India (4.01%), Indonesia (5.73%), and Vietnam (7.41%). Progress in trade facilitation would likely have even greater pay-offs to growth and employment, but these require structural reforms and investments, while the decision to remove tariffs is a simpler, “stroke-of-the-pen” measure.

Africa's McTipping Point?

Borko Handjiski's picture

Three quarters of a century since the opening of the first McDonald’s, the fast food chain operates around 34,000 outfits in around 120 countries and territories across all continents. In Sub-Saharan Africa (SSA), however, – a region of 48 countries and almost a billion people - only South Africa and Mauritius have been able to attract this global food chain.
This peculiarity cannot be explained only by the fact that the region is poor. The company has found a market in about 30 countries with GDP per capita of less than US$ 3,000 (in constant 2005 US$) at the time of their first McDonald’s opening. Hamburgers, Cheeseburgers, and Big Macs are also on offer in a dozen of low-income countries as well. When the first McDonald’s opened in Shenzhen in 1990, China’s GDP per capita was less than US$ 500 per person. Of course, Shenzhen’s per capita income was several times higher, but the company has also found a market in Moldova since 1998 when the GDP per capita of the 3 million person country was less than US$ 600 per capita. There are many cities in SSA today that have higher income, population concentration, and tourists than what Chisinau had in 1998; yet they do not have a McDonald’s. As a matter of fact, 22 SSA countries today have higher income per capita than what Moldova or Pakistan had when the first McDonald’s opened there, and 15 of them have higher income per capita even than what Indonesia or Egypt had at their McDonald’s openings (see chart).

Development Assistance in Governance and Public Sector Management: Does It Ever Make a Big Difference?

Nick Manning's picture

Mother and boy being attended to by Health Education nurse

Are there examples of large scale development achievements which are likely attributable to development assistance? At the least there is the Marshall Plan (1948-1952), the “Green Revolution,” and global health programs which largely eradicated smallpox. At the country level, Korea, Taiwan, and Botswana are often cited as aid success stories with remarkable economic progress following significant aid infusions. So the summary answer is probably (and the answer might be more affirmative if we addressed the perennial problem of poor data collection). But if we apply the additional filter of “what did this have to do with assistance concerning governance and public sector management?” the answer is, at best, maybe.

Taking the example of the major public health advances supported by donors, advances in the measurement of health impacts in the early 2000s led to major costs savings and efficiencies in HIV/AIDS and malaria programs, the Global Polio Eradication Initiative had clear impact, the annual Human Development Reports have charted some truly outstanding areas of progress and there has been some, halting, progress towards attainment of the Millennium Development Goals.  However, it seems that few of these gains seem have deep roots in the improved performance of governments. Development assistance seems able to trigger improvements through standalone arrangements outside of the public sector and through logistical efforts to move material (pumps, vaccinations, and medical supplies). It does not seem to be so good at large scale governance and public sector management (GPSM) improvements.

What Does Piketty’s Capital Mean for Developing Countries?

Gabriel Demombynes's picture

The economics book that has launched a thousand blog posts, Thomas Piketty’s Capital in the Twenty-First Country, tells a grand story of inequality past and present. One would expect that a book on global inequality would have much to say about development. However, the book has limited relevance for the developing world, and the empirical data he marshals for developing countries is weak.

Piketty’s central story is that convergence in the developed world and slower population growth will leave us with a permanently modest economic growth rate (g). Coupled with a constant return to wealth (r), concentration of capital ownership, and high rates of savings among the wealthy, the low g leads to rising wealth inequality over a longish run—something like the second half of the 20th century.

A low-g future for the developed world is a mostly uncontroversial assumption. (He assumes future GDP per capita growth of 1.2 percent for the U.S.) But Piketty draws conclusions for the world as a whole, and we are a long way from global convergence. As Branko Milanovic noted in his review, catch-up growth could fend off Piketty’s inequality dystopia for some time.

Statistical Earthquakes

Homi Kharas's picture

The New ICP Data and the Global Economic Landscape

The new report of the International Comparison Program published last week promises to invigorate debate about the global economic landscape. In some areas, the report challenges conventional wisdom. In other areas, it reinforces the narrative.

The headline change according to The Economist is the rise of China to potentially become the largest economy in the world by the end of 2014. According to Angus Maddison, the United States’ economy became the largest in the world in 1872, and has remained the largest ever since. The new estimates suggest that China’s economy was less than 14% smaller than that of the US in 2011. Given that the Chinese economy is growing more than 5 percentage points faster than the US (7 percent versus 2 percent), it should overtake the US this year. This is considerably earlier than what most analysts had forecast. It will mark the first time in history that the largest economy in the world ranks so poorly in per capita terms. (China stands at a mere 99th place on this ranking.)

Pushing the Envelope

Laura Ralston's picture

Giving Cash Unconditionally in Fragile States

2012 Spring Mtgs - Close the Gap There have been many recent press articles, a couple of potentially seminal journal papers, and some great blogs from leading economists at the World Bank on the topic of Unconditional Cash Transfers (UCTs). It remains a widely debated subject, and one with perhaps a couple of myths associated with it. For example, what is cash from UCTs used for? Do the transfers lead to permanent increases in income? Does it matter how the transfers are labelled or promoted? I am particularly interested in whether UCTs could be a useful instrument in countries with low institutional capacity, such as fragile and conflict-affected states (FCS).

Why UCTs in FCS? UCTs present a new approach to reducing poverty, stimulating growth and improving social welfare, that may be the most efficient and feasible mechanism in FCS. A recent evaluation of the World Bank’s work on FCS recognized, “where government responsiveness to citizens has been relatively weak, finding the right modality for reaching people with services is vital to avoiding further fragility and conflict”. Plus there is always the risk of desperately needed finances being “spirited away” when channeled through central governments. UCTs may present a mechanism for stimulating the provision of quality services, which are often lacking, while directly reducing poverty at the same time. As Shanta Devarajan’s blog puts it, “But when they (the poor) are given cash with which to “buy” these services, poor people can demand quality—and the provider must meet it or he won’t get paid.” We should explore more about this approach to tackling poverty: where and when it has worked, what made it work, and whether we can predict whether it will work in different contexts.