Catching-up in the emancipating economies: How fast? How far?

Looking at things from the perspective of development economics and political economy of the future, I suggest we talk of “emancipating” economies. It’s a huge difference compared to “emerging” markets, as this time they are treated like subjects rather than objects. While in the case of  “emerging markets” society is something less significant, a part of the game where the lynchpin is speculation, money and profits, then with respect to an “emancipating economy”, society becomes crucial. The lynchpin here is a society that allocates its resources. Obviously, one existing in market economy conditions, in financial environment, without turning our back to the unavoidable market speculations and pursuit of gain, but also without submitting to them as the master of the whole system.

Emancipating economies

What does it implicate for the future? How may the position of respective country groups in the world evolve? Will the earlier division into “three worlds” disappear completely and will the present division into “two worlds” of highly developed countries  and “emerging markets” fade away? Will the future course of globalization contribute to these differences vanishing gradually?

Undoubtedly, with reference to emancipating countries, these processes must continue for many, many years to come, while keeping a fast economic growth. In this case, there will be no development and progress without a significant increase in the output. What does a “fast growth” mean? It’s not an absolute but rather a relative term. “Fast” should be defined as emancipating economies growing twice, three times higher than rich countries that enjoy a GDP per capita of USD 30 thousand. This means a growth dynamic of almost the double of the world average. In terms of quality, fast growth is a rate which provides economies at a medium level of development with a chance to achieve the present level of highly developed countries over the span of one or two generations and, in a similar time horizon, poorly developed countries with a chance to achieve the level now typical of medium developed countries.

Doubling the income in one decade

Let’s emphasize the power of the compound interest here. To double the income level in just one decade, an average annual growth of 7.2 per cent is enough. To double the output level in twenty years, you need to maintain an average of 3.5 per cent rate. In the former case, after half a century the income is 32 times higher (sic!), in the latter it’s also higher, by a pretty impressive 460 per cent. Let’s stress, right away, that, in the economic practice, the dynamic of the former kind is impossible in such a long period on a macro scale, while nearly a six-fold increase of production in five decades under certain very favorable circumstances should not be ruled out. Of course, this observation does not hold good for the world as a whole, as in this case maintaining such a high growth rate for the whole fifty years is neither possible, nor desirable. There are emancipating countries that are able to double their income, and, at the same time, consumption, although this is neither automatic nor tantamount, in just one decade, for example Taiwan in the past, and Vietnam recently.

In my country, in Poland – where I had been four times at the helm of economic policy as the deputy prime minister and minister of finance – when the mid-term reform and development program was underway in the years 1994-97, known as the “Strategy for Poland”, the average GDP growth per capita was 6.4 per cent and by the end of that period, it stood at 7.5 per cent. So it would be enough to maintain that dynamic to get the income twice as high in 2007 and fourth as high in 2017. Instead of being still an “emerging market”, Poland could have already become an emancipated economy.

Policy and politics versus growth and development

Unfortunately, a faulty economic policy based on wrong economic theories and with badly formulated goals, made it impossible. Even if objective external circumstances also had some adverse effect, then, undoubtedly, chances were wasted mostly due to subjective errors caused sometimes by the neoliberal bias, some other times by populism, and yet some other times, worse, by a hybrid mutation of them both. This was particularly the case during the rule of post-Solidarity AWS–UW (Solidarity Electoral Action – Freedom Union) coalition in the years 1998-2001, as a result of which the growth rate fell in the last quarter of 2001 down to the stagnation-level of 0.2 per cent. It turns out that when somebody can commit enough errors in the economic policy, then they will manage, in four years, to drag a country down from a fast growth path of 7.5 per cent to a stagnation of measly 0.2 per cent. Hence, no way to catch-up.

Yet there are some countries able to catch-up with the advanced economies. Just in 2003 the per capita GDP in China stood at modest 8 percent of the American GDP. In 20123 it is approaching 20 percent. Quite remarkable, isn’t it? But is such a trajectory sustainable?  Only to the extent and at much slower pace in the foreseeable future. I don’t think there is a serious risk for China for so-called hard-lending, yet there is for sure coming a period of slower than in the rent past growth. It’s disputable what “Hard-lending” implies, but I agree with my friend, the leading Chinese economist, professor Justin Yifu Lin, that slowing down below annual rate of growth of 5 percent would be indeed a sort of hard-lending

What economic growth for China?

gwk-Premier-Li-Keqiang_29_VI_2013.jpg (305×358)

While I visited recently Beijing, I had a chance to meet also the China’s Prime Minister, Mr. Li Keqiang. I do agree also with him, that there is a chance for sustaining the average annual rate of growth around 7.5 percent for the next ten years. If this is going to be the case, the Chinese GDP per person, an purchasing power parity basis, PPP, will reach almost 20,000 USD in 2023. Consequently, the share of Chinese economy in the world output will be significantly larger than now, since the world economy most likely will expand by no more that 2.5-3 percent during the next decade. Such catching-up for China will be difficult yet feasible, and depending a lot on the success of undergoing rebalancing of the economy.

Interestingly enough, “The Economist” weekly (“The Great Deceleration”, “The Economist”, July 27th, 2013) is somehow pessimistic towards the future. “China will be lucky if it manages to hit its official target of 7.5% growth in 2013, a far cry from the double-digit rates that the country had come to expect in the 2000s. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Collectively, emerging markets may (just) match last year’s pace of 5%. That sounds fast compared with the sluggish rich world, but it is the slowest emerging-economy expansion in a decade, barring 2009 when the rich world slumped. This marks the end of the dramatic first phase of the emerging-market era, which saw such economies jump from 38% of world output to 50% (measured at purchasing-power parity, or PPP) over the past decade. Over the next ten years emerging economies will still rise, but more gradually. The immediate effect of this deceleration should be manageable. But the longer-term impact on the world economy will be profound.” Indeed, the time we must consider the long-term consequences of slowing down the pace of growth in the leading emancipating economies has already arrived.

Professor Kolodko, member of the European Academy of Science, Arts, and Letters, is the author of international bestseller “Truth, Errors, and Lies: Politics and Economics in a Volatile World” (http://cup.columbia.edu/book/978-0-231-15068-2/). He writes a blog at www.volatileworld.net