Is the Great Catch Up slowing down?

One optimistic observation in economics is that poor countries should be able to catch up with the richer ones, since it’s easier to grow from a low level of GDP to a higher one. This observation was made by Nobel-winner Robert Solow in 1956, and is based on the idea that low income countries are poor because their workers have access to less capital. This capital shortage (i.e. insufficient infrastructure) implies that the return on investment should be high, so capital should flow from rich countries to poor ones, leading the two worlds to converge on similar levels of productivity and income.Furthermore, in this theory, growth in rich countries is driven by new technology which, once developed, could be adopted by poorer economies too. Indeed, the poor could potentially learn from the mistakes made by the rich, and leapfrog directly to more productive ways of doing things.And so it seemed. From the late 1990s to 2008, poor countries were catching up fast. But that catch up seems to have slowed down (see chart above).

According to the Economist, over the past 15 years the currents that take people from such hinterlands of poverty to the broad open reaches of wealth have been flowing at an unprecedented rate (see the video travelling along the Pearl River to get the idea). The gap between the developed and developing worlds narrowed quickly. Whilst inequality was on the rise within countries it was falling between countries.

This burst of growth struck an extraordinary blow against deprivation, with hopes of more progress to come. So why is this progress slowing down?

Despite Solow’s theory, before the late 1990s poor countries growing faster than rich ones were rare, and doing it persistently was rarer still (see below). From the mid-1940s to the mid-1990s less than a third of developing economies were growing faster than the rich world at any one time. In any given economy one decade’s gains were often reversed in the next. There were a handful of exceptions. In 1998 GDP per person in Poland was just 28% of that in America, while China’s was just 7%. By 2013 those figures had risen to 44% and 22%, respectively. But other countries made less progress.

What might explain the favourable conditions for catching up? In the 2000s interest rates were low and capital flowed freely. Another was rapid growth in commodity prices; many emerging economies rely heavily on natural resource exports. Government improved. But the biggest push—which was not unrelated to the commodity-price boom—came from global trade.

• From 1980 to 1993 global trade grew at about 4.7% per year on average, or a bit more than the 3% rate of global growth.
• Between 1994 and 2007, however, trade grew at almost twice the rate that the world economy did. Goods exports soared to about a quarter of global GDP.
• Trade liberalisation culminated in the establishment of the World Trade Organisation in 1995, with China acceding to it in 2001.
• By the 1990s container shipping had made transporting goods around the world easier and cheaper than ever before, and the new ports needed to add trade capacity could be built quickly and easily.
• Cheaper and easier international trade allowed supply chains that had been segregated within countries and regions to expand across the globe.

This, according to the authors allowed for a much faster pace of catch-up. Where Japan and South Korea needed to build industrial and technological capabilities from the ground up, more recent sprinters needed little more than a supply of cheap labour and the regulations and infrastructure required to move products quickly in and out of factory towns.

Yet growth in world trade has slowed, and technological progress is raising doubts that industrialisation can provide the levels of employment that it did in the past.