Rodrik: No More Growth Miracles

Dani Rodrik argues that the future for developing countries is not as bright as many people believe:

No More Growth Miracles, by Dani Rodrik, Commentary, Project Syndicate: A year ago, economic analysts were giddy with optimism about the prospects for economic growth in the developing world. ... Today, such talk has been displaced by concern... Recent economic data in China, India, Brazil, and Turkey point to the weakest growth performance in these countries in years..., there are strong reasons to believe that rapid growth will prove the exception rather than the rule in the decades ahead.

To see why, we need to understand how “growth miracles” are made. Except for a handful of small countries that benefited from natural-resource bonanzas, all of the successful economies of the last six decades ... were exceptionally good at moving their labor from the countryside (or informal activities) to organized manufacturing. ...

But this time-tested recipe has become a lot less effective these days... First, technological advances have rendered manufacturing much more skill- and capital-intensive ... even at the low-quality end of the spectrum. ... Second, globalization ... has greatly increased competition on world markets, making it difficult for newcomers to make space for themselves. ...

Moreover, rich countries are unlikely to be as permissive towards industrialization policies as they were in the past. Policymakers ... looked the other way as rapidly growing East Asian countries acquired Western technologies ... through unorthodox policies such as subsidies, local content requirements, reverse engineering, and currency undervaluation. Core countries also kept their domestic markets open...

Now, however, as rich countries struggle..., they will apply greater pressure on developing nations to abide by World Trade Organization rules... Currency undervaluation à la China will not go unnoticed. Protectionism, even if not in overt form, will be politically difficult to resist.

Manufacturing industries will remain poor countries’ “escalator industries,” but the escalator will neither move as rapidly, nor go as high. Growth will need to rely to a much greater extent on sustained improvements in human capital, institutions, and governance. And that means that growth will remain slow and difficult at best.