Slaughter & Rees Report - Growth in Springtime
April 8, 2013 --
Here in the Northern Hemisphere, spring has sprung. Spring is the season of renewed growth, with its cherry blossoms, azaleas, and dogwoods.
The world financial crisis notwithstanding, one of the best features of the global economy over the past generation has been the surge in economic growth in so many “BRIC and beyond” emerging markets. From 1991 through 2011, growth in U.S. GDP averaged about 2.4 percent. This was slower than what much of the world achieved during this time: averages of 3.4 percent for the overall world, 5.0 percent for emerging and developing countries, 6.6 percent in India, and a remarkable 10.4 percent in China.
The cumulative impact of these growth differentials has been a steadily falling U.S. share of world GDP—from 32.3 percent in 2001 to just 21.6 percent in 2011—and steadily rising shares for fast-growth emerging markets. Most notably, China in 2010 surpassed Japan as the world’s second-largest national economy. And broad and fast economic growth has translated into surges in the standard of living for billions of people. One recent study estimated that real per capita incomes in Africa rose more than 30 percent between 2000 and 2010, versus a decline of nearly 10 percent from 1980 to 2000.
Amidst all this growth, what is often underappreciated is how much more growth is still to be had should good policies and good luck continue. Consider this question: In 2012, per capita GDP in Brazil, China, and India was approximately what fraction of per capita GDP in the United States? (Go ahead and write down your answers—we are humming the “Jeopardy” theme for you.) Did you answer 26 percent ($13,000); 12 percent ($6,100); and 3 percent ($1,600)? If so, A for the day for you. These small shares are remarkable. Despite all the rapid growth of the past generation (or more), so many emerging markets still have tremendous potential to grow even more.
No one has a clear crystal ball to foresee how quickly and where this potential will be realized. But it is important to remember that economic growth often accelerates in the wake of economic crisis, and so this potential can spark in unexpected places. Amidst its balance-of-payments crisis in 1991, almost no one was predicting that India was on the cusp of creating world-class industries such as information-technology services. Amidst the political, economic, and social turmoil in the wake of the death of Chairman Mao in 1976, almost no one was predicting that China would soon become the world’s manufacturing powerhouse.
For the leaders of these emerging markets, the policy challenge will be to continue to expand the role of markets—especially in relatively protected sectors such as retail trade and finance, and especially through international trade and investment. For the leaders of advanced markets, the policy challenge will be how to create millions of jobs connected to the economic dynamism beyond their borders. Let’s hope policymakers are up to the task to provide the world economy a warm spring breeze.
Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.
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