Lessons from the developing to the advanced economies

This paper talks about the changing dynamics in the world with the role of emerging economies increasing and developed economies decreasing. It discusses how each needs to adjust their policy to these changing dynamics.  

Growth in developing countries has depended largely on growth in exports. This has been true for Japan in the early years after the Second World War, followed by Korea, East Asia and, more recently, China. In all these countries, aggressive pro-trade, particularly export-led, policy regimes provided the stimulus for massive and sustained GDP increases. Perhaps, the first sizeable country to register high growth rates in spite of a very small presence in international trade was India. For India, the engine of growth was domestic demand fuelled by the gradual dismantling of the constraints that prevented the realization of market efficiencies.

Another significant development in recent years has been the increase in South-South trade. Large developing countries like India and China have significantly increased their trade volumes with other developing and emerging countries. Of course, access to OECD markets has historically played a major role in improving developing country productivity growth through higher standards of quality and efficiency in developed country markets. However, trade between developing countries is increasingly becoming a major opportunity for emerging countries and more and more countries are cashing in on this. As the barriers to trade among South countries are gradually dismantled, there will be greater scope for specialization and efficiency gains even without increased access to developed country markets.

Investment, labour force growth and technological developments directly impact a country’s growth process. Developed countries are facing a problem in all these three aspects --- investment opportunities are more attractive in emerging countries, there is a slow down in the growth of the productive labour force and much of the future innovations are likely to be based on what is happening in the emerging countries. Capital will flow to where it gets a better return and emerging countries are attracting this capital by offering low priced labour with increasing amounts of skill and in larger numbers. In addition, sustained growth in emerging countries is making it possible for them to generate resources for massive infrastructure investments that are opening up new business opportunities and higher levels of economic activity. In other words, the engine for global growth is moving away from the developed countries to the developing ones.

The financial crisis that started in the US and led to a crisis in many of the developed country financial institutions has resulted in most of these countries moving away from the very same fiscal restrictions that emerging markets were asked to implement after the so-called Washington consensus. This has further reinforced the desire of the emerging countries to look towards each other and away from the rules and regulations that developed countries have been pushing for in emerging markets. The emerging countries want to enhance both the South-South policy coordination as well as consolidate the growing trend in South-South integration and economic interaction. The developed countries, therefore, have to focus on growth policy regimes against the backdrop of a world order where a large group of growing economies are forcing much of the changes that one is about to see in a global world.

The point being made here is that the approach to generating policy for growth in developed countries has to take into account the fact that they are no longer calling the shots in how the world should evolve or, acting as the leaders that developing countries must follow. While in the past developed countries could focus a lot of their attention on the US, Japan and European countries, now their growth strategies will have to take into account the dynamic economic forces unfolding in the emerging economies and their strategic postures. For example, it was natural that FDI flowed to developing countries, increased their domestic productivity that finally led to exports into the developed countries. The world is seeing more and more reverse direct investment with China, India and other Asian economies acquiring firms and investing in developed countries. While China has till recently been focussing its resources on acquiring energy and natural resources abroad with the help of the state, the Indian private sector has been acquiring manufacturing and service sector facilities. Both are big, and growing, economies with very different strategic views about the future global economy and developed countries have to factor in the activities on the global arena of these countries when formulating their own growth strategies.

Given this changing global context, developed countries will have to remain flexible enough to manage shocks originating outside their economic boundaries. Attempts to create protectionist barriers, for example, through NTBs based on the environment or employment protection will be counter-productive. This will only push emerging countries away from the developed countries and strengthen their interaction with their own types. On the other hand, emerging countries are entering a phase of experimentation not only to achieve their social goals but also on issues like climate change and, more importantly, local environmental concerns like water, land erosion, soil degradation, urban pollution, etc. These will be the new growth areas in emerging countries and the developed countries can facilitate these activities with finance, technology and R&D activities. If instead, they try to push specific technologies or standards, a huge opportunity for global growth will be lost. Such pressures will create a set-back to emerging country prospects as they are shut out from developed country markets. However, this will be a short run effect only since emerging countries will continue to grow by interacting with each other and cementing the economic relationship they have been developing in recent years. For the developed countries, on the other hand, this will mean a long run negative effect.

• 547 reads
• Calendar
• Printer-friendly version
• Email this page