How covid-19 could impede the catch-up of poor countries with rich ones

on May20
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IT ONCE SEEMED possible that covid-19 might deliver a softer blow to poor economies than rich ones. Instead, the virus seems likely to set the emerging world back in its quest to attain advanced-economy incomes. Real GDP per person in America shrank by about 4% in 2020, only about half a percentage point more than the average across emerging markets, in purchasing-power-parity terms. But projections made by the IMF in April suggest that American growth is set to outpace that in the emerging world this year; with the pandemic still ravaging places like Brazil and India, poor-country growth will probably lag even further behind. More worrying still, the pandemic may reshape the global economy in ways that make continued convergence towards rich-world incomes a tougher slog. Worse prospects for poor countries will in turn make managing future crises, from pandemics to climate change, harder. The rich world should take note.

Economists once reckoned that incomes in poorer economies should naturally catch up to those in richer ones, based on experience in Europe in the 19th and early 20th centuries, when industrial laggards caught up to (and frequently overtook) Britain. Backward countries could borrow the latest know-how from leading ones, the thinking went, and their limited capital base promised hefty returns to investors. In the 1950s two economists, Robert Solow and Trevor Swan, separately developed models of economic growth in which higher returns to capital in poorer countries than in rich ones lead to more investment, generating faster growth and convergence. As scholars gathered more data on more countries, however, it became clear that the 20th century was not a period of convergence, but rather of “divergence, big time”, in the words of Lant Pritchett of Oxford University.

Then, just as economists had all but given up on the idea of convergence, poorer countries began outgrowing rich ones in an extraordinary way. Between 1985 and 1995 incomes per person in the emerging world fell behind those in rich countries at a rate of 0.5% per year, according to a new paper by Michael Kremer of the University of Chicago, Jack Willis of Columbia University and Yang You of the University of Hong Kong. But from 2005 to 2015, incomes converged at a rate of 0.7% per year. Slower growth in the rich world aided the shift, but more important was a broad acceleration in poor-country growth. Crucially, the share of developing economies experiencing disastrous downturns shrank dramatically, according to recent work by Dev Patel of Harvard University, and Justin Sandefur and Arvind Subramanian of the Centre for Global Development. Average annual growth rates were negative in 42% of low-income countries in the 1980s, compared with only 16% in the 2000s and 2010s.

This turn in fortunes had enormous consequences for matters from global poverty, which has tumbled over the past generation, to geopolitics. Yet economists are not certain why growth suddenly took off, and thus struggle to assess how likely convergence is to continue. Even before the pandemic there were puzzling trends. Low-income countries outgrew high-income ones by 1.5 percentage points a year in the 2000s (and middle-income countries did better still) but the gap shrank to just 0.65 percentage points in the 2010s. Convergence also became less widespread, geographically, as the 2010s wore on. While incomes in Asian and European emerging economies continued to gain on those in America, Latin America, the Middle East and sub-Saharan Africa began to fall further behind around 2013.

The decline in real output per person in 2020 erased roughly a decade’s worth of income gains in those lagging regions. Some countries might quickly recover those losses, though plodding vaccinations and continued outbreaks complicate matters. Rising commodity prices could boost the fortunes of exporters of natural resources, while the migration of more services online after covid-19 could open up opportunities for trade. In some ways developing countries have also become more economically resilient. Mr Kremer and his co-authors examine 32 indicators of the quality of governance, macroeconomic policy and financial development, and find that, for 29 of them, performance improved more in poorer countries than in rich ones between 1985 and 2015. Convergence also took place across measures of culture, such as survey-based attitudes towards inequality and work. Having become more like rich countries, poor places may find it easier than in the past to maintain stable growth, as rich economies tend to.

Yet other factors that buoyed growth in the 2000s and 2010s—such as rapid Chinese development and the explosion in trade associated with the spread of global supply chains—cannot easily be repeated. Rich-world worries about supply-chain reliability, exacerbated by the logistical bottlenecks now besetting the global economy, could in fact bring some trade retrenchment. Perhaps most worrying is the possibility that the trauma of the pandemic could fan political and social instability, particularly in lagging regions, undermining the basis for stable growth.

Closing arguments

Poor countries can scarcely afford such setbacks. Even at the pace of catch-up of the past two decades it would take the average developing economy about 170 years to close half its income gap, say Mr Patel and co-authors. Recent growth has not much reduced the poor world’s dependence on rich-world benevolence, as a yawning gap in vaccination rates demonstrates. And the costs of climate change only loom.

Rapid growth earlier in this century encouraged rich-world governments to see developing countries more as lucrative markets or strategic rivals than charity cases. But poor places remain more vulnerable to crises. And with every crisis, attaining stable growth becomes even harder. Rich-world policy on matters from trade to aid must take this into account.

Dig deeper

All our stories relating to the pandemic and the vaccines can be found on our coronavirus hub. You can also listen to The Jab, our podcast on the race between injections and infections, and find trackers showing the global roll-out of vaccines, excess deaths by country and the virus’s spread across Europe and America.

This article appeared in the Finance & economics section of the print edition under the headline “Separation anxiety”

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