Progress Daily

On back page of The Economist there is a column showing the GDP growth rates of 27 developing countries. In a typical copy from the late 1990s as many as one-third to one-half of these could have minus signs in front of them. Today, every one of these developing countries’ growth rates is positive. The slowest growth rate, in Brazil, is still a respectable 3.4 percent.

In the 1990s, the GDP of developing countries grew at an average of 3.6%. In 2003, developing countries’ economies grew by 5.6%. In 2004, they achieved a sizzling 7.1%, then settled back to a still-impressive 6.4% in 2005. Rich countries are growing, too — the OECD economies grew at 3.2% in 2004 and 2.7% in 2005 — but at more a pedestrian pace.

China’s economy grew at 11.3% in the second quarter of 2006. India’s busy economy is growing at about 8%. US GDP grew at a 5.6% annual rate in the first quarter.

When poor countries grow faster than rich ones, the result is convergence, a narrowing of worldwide economic inequality. Economists have long predicted convergence, which should be caused by technology transfer, international trade and capital flows, and (to a small extent) foreign aid and migration. But convergence has never seemed to materialize.

In the 1990s, strong growth in China and India caused a slight narrowing in worldwide individual inequality, despite the ongoing crisis in Africa, economic collapse in the former Soviet bloc, and stagnation in Latin America and the Middle East. Today economic growth has spread to all major regions of the world. The biggest turnaround is in the former Soviet bloc, where average annual economic growth from the fall of the USSR to 1998 was negative 6.9%, but, from 1999 onward, has bounced back to positive 6.9%.

Except Western Europe is beating its 1990s average. Latin America averaging 3.4% GDP growth in the 1990s. It grew at 6% in 2004, 4.4% in 2005, and is expected to grow 5% in 2006. The Middle East and North Africa region grew at 3.8% in the 1990s. It grew at 4.7% in 2004 and 4.8% in 2005. Sub-Saharan Africa has improved from 2.9% average GDP growth in the 1990s to 5.6% in 2004 and 5.3% in 2005. East Asia (excluding Japan) is beating its 1990s average of 8.5%; in 2004, it grew at 9.1%, in 2005, 8.8%.

High commodity prices help to spread economic growth from high-performing sweatshop and ex-sweatshop countries to struggling commodity exporters. China is now the world’s biggest importer of steel, copper, stone, soybeans, and the second largest importer of oil.

According to the World Bank’s 2005 Little Data Book, in every developing country in the world, the birth rate (births per woman) in 2003 is equal to or lower than in 1990. The only countries where the birth rates rose were rich countries: Denmark, France, and the Netherlands.

When the birthrate falls, the first effect is that there are fewer kids to support and educate. At the same time, there are still relatively few old people. This situation is called a low dependency ratio, meaning that people who don’t work (children and seniors) are a small share of the population. A low dependency ratio means low public spending. At the same time, workers are saving for their old age, so savings rates are high. Entrepreneurs turn savings into investment, and capital formation accelerates. As workers become scarcer, and capital more abundant, wages and living standards rise. Eventually, the dependency ratio rises again, as a baby-boom of workers turns into a baby-boom of retirees, and growth slows down again.

This process is called the demographic transition. It was part of the reason for the explosive growth performance of East Asia over the past generation. Now, with birthrates falling everywhere, a worldwide demographic transition is underway. This also explains the “savings glut” which Ben Bernanke (now Fed Chairman) posited last year as an explanation for why dollar interest rates remain low, in spite of America’s huge budget and trade deficits.

“Don’t Look Now, But the World Economy Is Booming,” by Nathan Smith

This entry was posted on Sunday, August 20th, 2006 at 9:38 pm and is filed under Demographics, Mechanization, Trade. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.