A Game of Catch-Up

Written on September 29, 2011 by Ángeles Figueroa-Alcorta in Americas, Asia, Europe, Globalization & International Trade, Political Economy

The shift in economic power from West to East is accelerating, says John O’Sullivan. The rich world will lose some of its privileges.

Quarry Bank Mill is a handsome five-storey brick building set in the valley of the river Bollin at Styal, a small English village a few miles south of Manchester. It was built in 1784 by Samuel Greg, a merchant, who found profit in supplying cotton thread to Lancashire’s weavers. The raw cotton shipped from America’s slave plantations was processed on the latest machinery, Richard Arkwright’s water frame. Later Greg extended the factory and installed coal-fired steam engines to add to the water power from the Bollin. All this gave a huge boost to productivity. In 1700 a spinster with a pedal-driven spinning wheel might take 200 hours to produce a pound of yarn. By the 1820s it would take her around an hour.

Greg’s mill was part of a revolution in industry that would profoundly alter the world’s pecking order. The new technologies—labour-saving inventions, factory production, engines powered by fossil fuels—spread to other parts of western Europe and later to America. The early industrialisers (along with a few late developers, such as Japan) were able to lock in and build on their lead in technology and living standards.

The “great divergence” between the West and the rest lasted for two centuries. The mill at Styal, once one of the world’s largest, has become a museum. A few looms, powered by the mill’s water wheel, still produce tea towels for the gift shop, but cotton production has long since moved abroad in search of low wages. Now another historic change is shaking up the global hierarchy. A “great convergence” in living standards is under way as poorer countries speedily adopt the technology, know-how and policies that made the West rich. China and India are the biggest and fastest-growing of the catch-up countries, but the emerging-market boom has spread to embrace Latin America and Africa, too.

And the pace of convergence is increasing. Debt-ridden rich countries such as America have seen scant growth since the financial crisis. The emerging economies, having escaped the carnage with only a few cuts and grazes, have spent much of the past year trying to check their economic booms. The IMF forecasts that emerging economies as a whole will grow by around four percentage points more than the rich world both this year and next. If the fund is proved right, by 2013 emerging markets (on the IMF’s definition) will produce more than half of global output, measured at purchasing-power parity (PPP).

One sign of a shift in economic power is that investors expect trouble in rich countries but seem confident that crises in emerging markets will not recur. Many see the rich world as old, debt-ridden and out of ideas compared with the young, zestful and high-saving emerging markets. The truth is more complex. One reason why emerging-market companies are keen for a toehold in rich countries is that the business climate there is far friendlier than at home. But the recent succession of financial blow-ups in the rich world makes it seem more crisis-prone.

The American subprime mess that turned into a financial disaster had the hallmarks of a developing-world crisis: large capital inflows channelled by poorly regulated banks to marginal borrowers to finance a property boom. The speed at which bond investors turned on Greece, Ireland and then Portugal was reminiscent of a run on an overborrowed emerging economy. Read more…

As published in www.economist.com on September 24, 2011 (from the Print Edition; Special Report)


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