The last decade has been an extraordinarily good one for developing nations and their mostly poor citizens, so good in fact that it has become commonplace to look upon them as potential saviors of the world economy. Their economies have expanded at unprecedented rates, resulting both in a large reduction in extreme poverty and a significant expansion of the middle class.
The differential between the growth rates of developing and advanced nations expanded to more than 5 percentage points, assisted in part by the decline in the economic performance of the rich countries (Figure I.1). China, India and a small number of other Asian countries were responsible for the bulk of this superlative performance. But Latin America and Africa resumed growth as well, catching up with (and often surpassing) the growth rates they had experienced during the 1950s and 1960s.
Economic growth is a precondition for the improvement of living standards and lifetime possibilities for the “average” citizen of the developing world. Can this recent performance be sustained into the future, decisively reversing the “great divergence” that split the world into rich and poor nations since the 19th century?
In answering this question, the optimists would point to the improvements in governance and macroeconomic policy in developing nations and to the still not-fully exploited potential of economic globalization to foster new industries in the poor regions of the world through outsourcing and technology transfer. Pessimists would fret about the drag that rich countries exert on the world economy, the threats to globalization, and the obstacles that late-industrializers have to surmount given competition from China and other established export champions. The weights that one places on these diverse considerations – and many others – would depend on one’s views as to the ultimate drivers of economic growth in lagging nations. Extrapolation is tempting, but not necessarily a good guide to where we are headed.
We can also turn the question about the sustainability of growth around, and pose it in a different form: what kind of changes in the institutional framework within nations and globally would most facilitate rapid growth and convergence? This is a normative, rather than positive, question about the needed policies. But answering it requires yet again a view on what drives growth. The more clearly articulated that view, the more transparent the policy implications.