Lessons from the developing to the advanced economies: Promoting a sustainable redirection of world growth patterns

This article talks about strategies which would promote a sustainable redirection of world growth patterns including more South-South trade, expanding intraregional integration, freer immigration, reform of IMF, looking at alternative reserve currencies like SDRs, international agreement on a cap and trade system in C02 emissions shared by emerging and industrial countries alike.

Under the pressure of population and economic activity, the earth’s climate is dangerously warming up;   a major catastrophe lies ahead if this tendency isn’t somehow reversed. But this reversion needs to be achieved while at the same time allowing developing countries to catch up with the living standards of the advanced economies. The hope is that this can be attained through CO2-saving-and-absorbing technologies and changes in life styles that make increasing well-being possible without the need of CO2-intensive economic activities, particularly in advanced economies, where demographic pressures are rapidly abating. GDP as currently measured may as a result grow more slowly in advanced economies, even as they recover from the 2008-09 financial crisis.

The problem is that slower growth in advanced economies seems contradictory with the view that developing countries need the markets of these economies to grow faster.  There is indeed a close association between the cyclical patterns of advanced and developing economies in the short-run. Because of globalization, there is a tendency for all economies in the world to move together. But one thing is the cycle, other is the trend. Developing countries have been growing systematically faster than advanced economies in the last decade; indeed, this is the only way that catching up can occur. Export-orientation towards advanced economies has been a characteristic of the growth pattern of high-saving developing Asia. But, both because of global warming and demographic dynamics, from now on the catching up process needs to be made largely independent of demand stimulus from advanced to developing countries.

Fundamentally, high growth rates depend on institutional improvement, capital accumulation, education, and innovation in the developing countries themselves. Bigger markets are important for scale economies, competition and specialization. But intra-developing country trade and cross-investment -- matching up labor-intensive and high-saving Asia with resource-rich Africa and Latin America, as well expanding intra-regional integration -- can provide an alternative to exports to advanced economies.  What developing countries need from advanced economies is repudiation of protectionism and support for the free flow of capital, ideas, and humans among nations.

To facilitate this change of paradigm, developing countries shouldn’t be afraid of growing faster because of the perspective of balance of payments crises -- the fear that rising imports from developed countries would not find a counterpart either in secure capital inflows (in the short run) or additional exports (in the medium run). The confirmation of this fear by the Asian crisis in 1997, the Russian crisis in 1998, and the Brazil crisis in 1999 led many of them to save more, reinforce export-orientation, and accumulate large, expensive international reserves. Partial as it is, the ‘savings glut’ interpretation of the 2008-09 financial crisis owes much of its fame to this reaction. Banishing developing countries’ fear of balance of payments crises caused by sudden stops of capital inflows and furthering an open international economy should be the priorities for the reform of the world trade and financial systems. A reformed International Monetary Fund along the lines that Keynes originally envisaged, with a central role in international transactions for a redefined SDR basket that includes the BRICS’ currencies, may well be the way to advance. This could provide the basis for a reliable alternative to currency depreciation and international reserves accumulation by developing countries. A recent proposal by John Williamson to replace the non-system of floating exchange rates by a system of reference exchange rates should be analyzed in the context[1].  In a complementary way, freer immigration into industrial countries would speed up the catching up process, while contributing to cultural diversity and population rejuvenation in these countries.

  The world economy can function according to an economic logic different from previous decades, when the dominance of the dollar made it dependent on the U.S. consumer.  World economic growth can instead be made dependent, from the point of view of demand, on the increased consumption power of developing countries; it’s the reasonable way to proceed. But an adequate international financial mechanism must be available, to liberate emerging economies from the fear of dollar volatility, thus allowing them to spend more, according to their long-run income perspective. The extra spending would provide a much needed stimulus for short-run economic activity in advanced economies, and be consistent with a redirection of world economic growth towards developing countries.

 It is in this context that the need arises for an international agreement on a cap and trade system for CO2 emissions, shared by emerging and industrial countries alike, and embedding strong incentives for renewable energy sources and other technological innovations that save and absorb such emissions. The objective should be to make higher developing countries’ growth rates consistent with the preservation of the world’s climate and an improving quality of life for all humans. 

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