Even though developing world imports are about half of the imports of high-income countries, they are growing at a much faster rate. As a result, they accounted for more than half of the increase in world import demand since New Poles of Growth. The world economy is rebalancing. Some of this is new. Some represents a restoration. According to Angus Maddison, Asia accounted for over half of world output for 18 of the last 20 centuries. We are witnessing a move towards multiple poles of growth as middle classes grow in developing countries, billions of people join the world economy, and new patterns of integration combine regional intensification with global openness.
This change is not just about China or India. Developing countries are likely to show robust growth rates over the next five years and beyond. Southeast Asia has become a middle income region of almost million people, with growing ties to India and China, deepening ties with Japan, Korea, and Australia, and continuing links through global sourcing to North America and Europe. The Middle East region is an important source of capital for the rest of the world, and increasingly a business-service hub between Asia — East and South — and Euro-Africa.
If the Maghreb can move beyond historical fault lines, it can be part of a Euro-Med integration linked to both the Mideast and Africa. In the Latin American and Caribbean region, 60 million people were lifted from poverty between and a growing middle class boosted import volumes at an annual rate of 15 percent. Africa as a Potential Pole of Growth.
Tectonic plates could shift further. But Africa no longer needs to be left behind. Today, in many African countries even small, inexpensive items, such as soap or slippers, or basic tools or consumer goods, are imported.
If Africans remove the barriers to producing these goods domestically and to local entrepreneurship, while creating conditions for outside investors to shift production to Africa, then African development could begin to look very different.
Unlike past failed efforts to favor import-substitution interests behind protectionism, this approach can capture benefits from regional integration within global markets. What would it take? Agriculture is the main source of jobs and an early opportunity to boost productivity and income. To do so, investment is needed all across the agricultural value chain: property rights; seeds; irrigation; fertilizer; finance; basic technologies; storage and getting product to market.
Since about two-thirds of African farmers are women, we need to help them get legal and property rights, and access to services. With slightly higher incomes and living standards, local manufacturers can target or customize for the local market, and eventually for export.
To grow further, Africans need the things that Europe and Japan needed after World War Two: infrastructure; energy; integrated markets linked to a global economy; and the conditions for a vibrant private sector. These public goods will foster much more than local manufacturing.
Chinese companies can be encouraged to relocate manufacturing for both domestic production and export. These manufacturers bring know-how, machinery, as well as access to marketing and distribution networks. The World Bank is working with Africans and Chinese to create industrial zones.
Early investors are sensing the promise in Africa and are not dissuaded by the risks — after Lehman Brothers and Greece, investors know developed markets can be risky, too.
Changes in government policies can create opportunities for private sector growth, which in turn offers services to other entrepreneurs. Increased income and growth in the developing world means increasing influence. The old world of fireside chats among G-7 leaders is gone. But it will take more than words on paper. Arranging a new sharing of responsibilities among mutual stakeholders in international systems will not be easy.
But happen it must. The failure of led to countries that could not cooperate in and the start of a new war in Europe in Today, we already see the strains. The Doha World Trade Organization round and the climate change talks in Copenhagen revealed how hard it will be to share mutual benefits and responsibilities between developed and developing countries. Those debates also exposed the diversity of challenges faced by different developing countries. If it is no longer possible to solve big international issues without developing and transition country involvement, it is also no longer possible to presume that their biggest members, the so-called BRICs -- Brazil, Russia, India and China -- will represent all.
And this will be the case for a host of other looming challenges: water; diseases; migration; demographics; and fragile and post-conflict states. In discovering a new forum in the G, we must be careful not to impose a new, inflexible hierarchy on the world. It should recognize the interconnections among issues and foster points of mutual interest. This system cannot be hierarchical, and it should not be bureaucratic.
It also must prove effective by getting things done. The Danger of Geo-Politics as Usual. The danger of the political gravity dragging countries back to the pursuit of narrow interests is that we address this changing world through the prism of the old G-7; developed country interests, even if well-intentioned, cannot represent the perspective of the emerging economies.
We cannot afford geo-politics as usual. Financial Reform. Take financial reform: the world has paid a big price for the breakdowns of the global financial system in lost jobs and ruined lives. Of course we need better financial regulation, with stronger capital, liquidity, and supervisory standards.
A new supervisory framework should consider systemic risks, reverse regulation that reinforces the ups and downs of cycles, consolidates supervision to avoid gaps, and considers inflation in asset prices as well as in goods and services.
But beware unintended consequences. We should not compound costs by encouraging financial protectionism or unfairly constraining financial services to the poor.
Regulations agreed in Brussels, London, Paris or Washington might work for big banks. But what about the smaller ones, whether in developed or developing countries?
These regulations could choke off the financial sector, innovation, and risk management in developing countries. They could make it harder to invest across national borders.
Derivatives now have a bad name. This is understandable when one remembers AIG. But derivatives are used by farmers in the American Midwest to protect against volatility in grain prices.
The World Bank pioneered currency swaps, and uses swaps to protect against foreign exchange and interest rate risk. Our loans offer hedging opportunities to protect borrowers from foreign exchange or interest rate risk and even other risks such as droughts and catastrophes. By helping to develop local currency borrowing, linked to global markets, we helped shelter developing countries from the financial tidal waves of the recent crisis.
Financial innovation, when used and supervised prudently, has brought efficiency gains and protected against risk: the World Bank has pioneered livestock insurance for Mongolian herders; a Malawi weather derivative against drought; and the Caribbean catastrophe insurance pool.
As former President Zedillo of Mexico has cautioned, the problem for poor people is not too many markets, but too few: We need markets for microfinance or small and medium-sized enterprises, especially if run by women; markets to move, store, and sell goods; markets to save, insure, and invest. Wall Street has exposed the dangers of financial innovation, and we need to take heed and serious actions.
But development has shown its benefits. A G-7 populist prism can undercut opportunities for billions. Climate Change. Take climate change: The danger is that we take a rule book from developed countries to impose a one-size-fits-all model on developing countries.
And they will say no. Climate change policy can be linked to development and win support from developing countries for low carbon growth — but not if it is imposed as a straitjacket. This is not about lack of commitment to a greener future. People in developing countries want a clean environment, too. Developing countries need support and finance to invest in cleaner growth paths.
The challenge is to support transitions to cleaner energy without sacrificing access, productivity, and growth that can pull hundreds of millions out of poverty. Avoiding geo-politics as usual means looking at issues differently. We need to move away from the binary choice of either power or environment. We need to pursue policies that reflect the price of carbon, increase energy efficiency, develop clean energy technologies with applications in poorer countries, promote off-grid solar, innovate with geothermal, and secure win-win benefits from forest and land use policies.
In the process, we can create jobs and strengthen energy security. The developed world has prospered through hydro electricity from dams. More generally, does productivity growth in one country raise or lower real incomes in other countries? An extensive body of theoretical and empirical work concluded that the impact of productivity growth abroad on domestic welfare can be either positive or negative, depending on the bias of that productivity growth—that is, depending on the sectors in which such growth occurs.
Sir W. Arthur Lewis, who won the Nobel Prize in economics for his work on economic development, has offered a clever illustration of how the effect of productivity growth in developing countries on the real wages in advanced nations can work either way. This global economy produces not one but three types of goods: high-tech, medium-tech, and low-tech. As in our first model, however, labor is still the only input into production. Northern labor is more productive than Southern labor in all three types of goods, but that productivity advantage is huge in high-tech, moderate in medium-tech, and small in low-tech.
What will be the pattern of wages and production in such a world? A likely outcome is that high-tech goods will be produced only in the North, low-tech goods only in the South, and both regions will produce at least some medium-tech goods.
If world demand for high-tech products is very high, the North may produce only those goods; if demand for low-tech products is high, the South may also specialize. But there will be a wide range of cases in which both regions produce medium-tech goods. Competition will ensure that the ratio of the wage rate in the North to that in the South will equal the ratio of Northern to Southern productivity in the sector in which workers in the two regions face each other head-to-head: medium-tech.
In this case, Northern workers will not be competitive in low-tech goods in spite of their higher productivity because their wage rates are too high. Conversely, low Southern wage rates are not enough to compensate for low productivity in high-tech. A numerical example may be helpful here. Suppose that Northern labor is ten times as productive as Southern labor in high-tech, five times as productive in medium-tech, but only twice as productive in low-tech.
If both countries produce medium-tech goods, the Northern wage must be five times higher than the Southern. Given this wage ratio, labor costs in the South for low-tech goods will be only two-fifths of labor costs in the North for this sector, even though Northern labor is more productive.
In high-tech goods, by contrast, labor costs will be twice as high in the South. Notice that in this example, Southern low-tech workers receive only one-fifth the Northern wage, even though they are half as productive as Northern workers in the same industry.
Now suppose that there is an increase in Southern productivity. What effect will it have? It depends on which sector experiences the productivity gain. If the productivity increase occurs in low-tech output, a sector that does not compete with Northern labor, there is no reason to expect the ratio of Northern to Southern wages to change.
Southern labor will produce low-tech goods more cheaply, and the fall in the price of those goods will raise real wages in the North. But if Southern productivity rises in the competitive medium-tech sector, relative Southern wages will rise.
Since productivity has not risen in low-tech production, low-tech prices will rise and reduce real wages in the North. What happens if Southern productivity rises at equal rates in low- and medium-tech? The relative wage rate will rise but will be offset by the productivity increase. The prices of low-tech goods in terms of Northern labor will not change, and thus the real wages of Northern workers will not change either.
In other words, an across-the-board productivity increase in the South in this multigood model has the same effect on Northern living standards as productivity growth had in the one-good model: none at all. It seems, then, that the effect of Third World growth on the First World, which was negligible in our simplest model, becomes unpredictable once we make the model more realistic.
There are, however, two points worth noting. First, the way in which growth in the Third World can hurt the First World is very different from the way it is described in the Schwab letter or the Delors White Paper. Third World growth does not hurt the First World because wages in the Third World stay low but because they rise and therefore push up the prices of exports to advanced countries. That is, the United States may be threatened when South Korea gets better at producing automobiles, not because the United States loses the automobile market but because higher South Korean wages mean that U.
Second, this potential adverse effect should show up in a readily measured economic statistic: the terms of trade, or the ratio of export to import prices. For example, if U. The potential damage to advanced economies from Third World growth rests on the possibility of a decline in advanced-country terms of trade.
In sum, a multigood model offers more possibilities than the simple one-good model with which we began, but it leads to the same conclusion: productivity growth in the Third World leads to higher wages in the Third World.
What changes if we now imagine a world in which production requires both capital and labor? From a global point of view, there is one big difference between labor and capital: the degree of international mobility.
Although large-scale international migration was a major force in the world economy before , since then all advanced countries have erected high legal barriers to economically motivated immigration. But most labor does not move internationally. In contrast, international investment is a highly visible and growing influence on the world economy.
During the late s, many banks in advanced countries lent large sums of money to Third World countries. This flow dried up in the s, the decade of the debt crisis, but considerable capital flows resumed with the emerging-markets boom that began after Many of the fears about Third World growth seem to focus on capital flows rather than trade.
Even Labor Secretary Robert Reich, at the March job summit in Detroit, attributed the employment problems of Western economies to the mobility of capital. In effect, he seemed to be asserting that First World capital now creates only Third World jobs.
Are those fears justified? The short answer is yes in principle but no in practice. As a matter of standard textbook theory, international flows of capital from North to South could lower Northern wages.
The actual flows that have taken place since , however, are far too small to have the devastating impacts that many people envision. To understand how international investment flows could pose problems for advanced-country labor, we must first realize that the productivity of labor depends in part on how much capital it has to work with.
As an empirical matter, the share of labor in domestic output is very stable. But if labor has less capital at its disposal, productivity and thus real wage rates will fall. This might be because a change in political conditions makes such investments seem safer or because technology transfer raises the potential productivity of Third World workers once they are equipped with adequate capital. Does this hurt First World workers?
Of course. Capital exported to the Third World is capital not invested at home, so such North-South investment means that Northern productivity and wages will fall. Northern investors presumably earn a higher return on these investments than they could have earned at home, but that may offer little comfort to workers.
Before we jump to the conclusion that the development of the Third World has come at First World expense, however, we must ask not merely whether economic damage arises in principle but how large it is in practice. How much capital has been exported from advanced countries to developing countries? In developing countries, low production rates and struggling labor market characteristics are usually paired with relatively low levels of education, poor infrastructure, improper sanitation, limited access to health care, and lower costs of living.
Developing nations are closely watched by the International Monetary Fund IMF and the World Bank , which seek to provide global aid for the purposes of projects that help to improve infrastructure and economic systems comprehensively.
Both organizations refer to these countries as lower-middle or low-income countries. Developing nations, or LMIC, can be the target of many investors seeking to identify potentially high returns through possible growth opportunities, though risks are also relatively higher.
While developing countries are generally characterized as performing poorer economically, innovative and industrial breakthroughs can lead to substantial improvements in a short amount of time. First-World countries were known as the most highly industrialized nations whose views aligned with the North Atlantic Treaty Organization and capitalism.
Second-World countries supported communism and the Soviet Union. Most of these countries were formerly controlled by the Soviet Union. Many countries of East Asia also fit into the Second-World category. Now, in part because the Soviet Union no longer exists, the definition of Third World is outdated and considered offensive.
Alfred Sauvy, a French demographer, anthropologist, and historian, is credited with coining the term Third World during the Cold War. Sauvy observed a group of countries, many former colonies, that did not share the ideological views of Western capitalism or Soviet socialism. In the modern-day, most countries on Earth fall into one of three general categories that some refer to as developed, emerging, and frontier.
The world segmentations have somewhat migrated to fit within these categories overall. The developed countries are the most industrialized with the strongest economic characteristics. The emerging countries are classified as such because they demonstrate significant strides in various economic growth areas though their metrics are not as stable.
The frontier markets often closely mirror the old Third-World classification and often show the lowest economical indicators. The evolutions of the worldly segmentations have become historic and obsolete. This index includes the following countries:. The WTO divides countries into two classes: developing and least developed. There are no criteria for these classifications so countries self-nominate, though statuses can be contested by other nations.
The WTO segregation comes with certain rights for developing country status. For example, the WTO grants developing countries longer transition periods before implementing agreements that aim to increase trading opportunities and infrastructure support related to WTO work.
The HDI measures and then ranks a country based on schooling, life expectancy, and gross national income per capita. This list is reassessed every few years. These indicators are a combination of gross national income, human assets nutrition, life expectancy, secondary school education, adult literacy , and economic vulnerability population size, remoteness, merchandise export concentration, agriculture, exports, and natural disaster preparedness.
Marcin Wojciech Solarz.
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