Based on the original article by Dr. David L. Blond, Principle Researcher and President, QuERI-International. QuERI International helps businesses and governments quantify the world through use of sophisticated and integrated econometric modeling and forecasting. Based on over 40 years of economic forecasting experience, QuERI’s proprietary models cover 72 countries and 166 ISIC 3 industries and commodities with all data based on a consistent definition and units of account. Learn more about QuERI-International here.
The views expressed are those of the author(s) and do not necessarily represent the views of Knoema Holdings and its Executive Board.
Here it is, sans sugar coating: The global economic trajectory once COVID-19 vaccines are widely available and the pandemic ends appears much less promising for hundreds of millions of people than was true of the post-World War II recovery even despite the hyperconnectivity of global markets and populations today.
Last year the World Bank warned that thanks to the COVID-19 pandemic for the first time in 20 years global poverty is on the rise. Between 2020 and 2021 an estimated additional 150 million people will be pushed into extreme poverty with daily income below $1.90 per day.
The latest estimates based on modeling from QuERI back up the World Bank findings and show that in the post-COVID globalized order, persistent and growing poverty will set the stage for increasingly difficult social. economic, and political crises that will accompany climate change, food insecurity, and mass migration. No walls can stop a mass migration if they happen because people have no hope except to breach the barriers and take what they need. No walls can stop viruses from spreading. In our globally-interconnected, co-dependent existence, lifting the lives of the poorest people in far off places may be part of the mandate for the next half century.
In this article we will look closely at a specific group of developing economies, namely the poorest countries in Europe, South America, South Asia, and Africa, for which the income gap is widening with emerging markets and discuss local and global policy measures that stand to accelerate their social and economic development.
Developing Countries are Falling Further Behind
The vast majority of the world’s 200+ economies have fallen further behind the victors of decades of globalization (read more on globalization here). And, it’s getting worse. Many emerging Asian markets managed to productively transform their concentrated labor pools into engines for rapid growth from relatively low baselines. These economies are expected to continue growing in the post-COVID period out to 2030, narrowing the gap between their growth trajectories and that of developed countries. That’s excellent news.
According to post-COVID economic model from QuERI, however, while real annual growth of per capita income in emerging markets excluding China will be positive (1.8%), as will be growth in China (1.9%), developing countries show no real per capita income growth for at least the next decade. QuERI estimates also reveal that the gap between emerging markets and the larger group of developing economies—which have already failed to fully benefit from the nearly 40 years of rapid trade growth and wealth creation—will only widen.
For most developing countries globalization failed to raise incomes sufficiently. Most of the benefits of the outsourcing of jobs and technologies that characterized globalization were concentrated in a few of the better geographically situated and educated developing countries of the time, particularly in Asia. The shift in share of manufacturing from Europe and the United States to China (and a handful of other emerging markets) came largely at the expense of development in other parts of the world. This monopolization of new trade and industrial development has made it difficult, if not impossible, for the poorest countries to grow and cast nearly one third of the world’s population to perpetual poverty.
There are reasons for the system failure, good ones that explain why so much of the manufacturing capacity of the world has become concentrated in China and emerging Asia.
One reason is the targeted investments made by companies from advanced countries as they sought new markets. With markets saturated in wealthier countries, investments and transfers of technology in recipient countries enabled more rapid growth, higher standards of living, and opening of new markets for existing product lines as well as new products.
A second reason is the routine cost benefit analysis and risk mitigation strategy of companies. For many of the largest and most successful companies, setting up in developing Africa or in other developing countries encompases a variety of complex challenges, ranging from guaranteeing seamless transportation between sources of supply and demand to finding and securing a common accepted currency for trade outside of the dollar. Without the inflow of investment, many of these countries are left to domestic investment that is insufficient to accelerate income growth.
And, Now We Know, Past Success is No Guarantee in a Global Race
Once upon a time, there were the Asian tiger economies, and along came China. The end.
Well, not quite, but nearly so for the manufacturing sectors of Latin America. As the tigers—South Korea, Taiwan, Singapore and Hong Kong—grew during the latter half of the 20th century and China moved onto the global stage to develop its robust manufacturing sector, Latin America failed to keep pace. In the mid-1990s, the combined manufacturing sector output of Latin America was roughly equivalent to that of China. Fast forward to 2020 and the Chinese manufacturing sector had grown 13-fold above that of its western hemisphere neighbors.
What happened, you ask, to the Latin American manufacturing sectors? In some ways, the region may have fallen victim to its own past success. For example, before World War II, Argentina had a higher standard of living than Great Britain. Educational levels were relatively high throughout the region, but the social divide was equally great and long standing. In some ways, China’s vision of a classless society ideally prepared it for rapid growth as rural poor were ushered into the growing urban areas living in self-contained, manufacturing-oriented villages.
Some countries of Latin America also oriented their development programs to the early works of economists such as Raul Prebisch, the Argentine economist and first Secretary General of UNCTAD, who framed the problem of Latin American development in terms of declining terms of trade between coffee and cars. By limiting imports of manufactures to improve the terms of trade, Latin America actually fell further behind the rest of the world with respect to technology. Large economies, such as Brazil, stagnated behind high tariff walls, making Latin America a more costly place to make finished products to sell into advanced countries.
Balance Local Prices and Wages, but the Global Trade Model Needs a Makeover, Too
The split between emerging and developing country groups in terms of economic success as globalization progressed was not inevitable. To reverse the split today, given the pace of technological change and wealth gaps, will require conquering a variety of domestic challenges and overturning ingrained global business patterns, none of which are likely in the near-term, even in the high-velocity of change expected in the post-COVID world. Let’s talk about local sticking points first before considering global solutions with local roots.
Rigid supply chains. Emerging nations are increasingly integrated with other emerging nations, with a catch. The integration is often facilitated by the supply chains of buyers in the same markets that the final products are destined for—wealthy, Western markets. This truth makes future changes in the supply chains more difficult to set in motion, locking in developing countries as (largely) suppliers of raw materials or cheaper labor as opposed to manufacturing centers and technology sources.
Wealth and size. Developing countries, aside from the Soviet-era ‘laggards’ of Eastern Europe, are geographically disadvantaged, with smaller populations, lower urbanization rates, and more difficult geographies in terms of proximity to richer markets and physical terrain (think Bolivia, Columbia, Ecuador, and Peru).
Strains in the socio-economic fabric. Add to these factors varying degrees of political uncertainty, social unrest, insurgencies, and wealth inequality, so that even without piling on climate change, drought, and food insecurity, we are left with the possibility that billions of people will never rise much above the level of income they are locked into today.
What if there is no way to manufacture something in developing countries as inexpensively as in China, even after taking into account transportation costs to neighboring countries in the region? How do we transition these economics and a whole generation of young people through the final (manufacturing) stage of development and onward to higher levels of personal income?
A micro-regional strategy is not efficient, but it would create manufacturing jobs and finished products. We just need to reorganize global trade flows a bit.
Reengineering at the Global Level Requires Micro-Level Shifts
Relationships between Asian factories and Western buyers are well established and would be difficult to change in the short-run. Undoubtedly, the US trade deficit with emerging Asia will remain the trillion dollar range for the foreseeable future. We also know that changing global supply chains may be impossible without major economic disruptions in the United States and other major developed and emerging economies, and yet some cracks are emerging.
In recent years we have seen some migration of manufacturing out of the Pearl River area of Southern China, for example, to Mexico to be closer to the US market. But, the main reason that China developed so rapidly was that it had the necessary ingredients for success – entrepreneurs, financial support, a rural labor supply that was able to be moved to urban areas, and government investments in the necessary port infrastructure to insure rapid transport markets around the world. China also had advantageous access to specific resources within the region – an educated workforce, easily accessible raw materials, including, for example, hardwoods from Indonesia and domestic iron ore and coal deposits, and even family ties to wealthy Chinese diaspora communities across Asia.
How do developing countries without these advantages regain their footing? A micro-regional strategy that would unify markets through preferential trading for a select group of essential products, leveraging contiguous or near contiguous borders and existing trading patterns with advanced and emerging markets, is one option (and not an entirely novel concept in the region; hello, Mercosur!). Components of the strategy could include:
Direct investments by governments and the private sector in protected product categories would encourage development of localized production and distribution within the market.
Discounts could be offered for trade within the micro-trading region and trading group conferences might be established to reorganize market access.
A single external tariff for the selected products sufficient to limit close foreign substitutes, and forbearance from WTO rules for these “preferential” product categories to limit retaliation, are also required.
Multilaterals like the IMF and the World Bank, despite mediocre track records and therefore reception in some of these developing countries, could provide financial capital for these subcritical financial arrangements and for low cost loans to companies investing in manufacturing capacity.
Last, but certainly not least (as this section’s title already told you), further support would come from export taxes on raw materials that would help to lower domestic prices sufficiently to bring them into balance with local wages to make domestic production of near substitutes possible. Balance between local prices and local wages is important because when wages and costs of finished products are misaligned, as is the case for some emerging and many developing markets, then the natural pattern of industrial development and entrepreneurship fails to maintain growth.
Why should we worry about the poorest countries and not about poverty at home? This is the question that electorates ask politicians in advanced countries everyday. It may even shock you to know that memes exist on this very theme to pressure politicians to redirect aid to domestic beneficiaries, a pressure especially evident during the economic downturn that spiraled out of COVID last year.
The issue comes down not to equity or even closing the income gap but rather to the larger issues that we will have no choice as an interconnected ‘globalized’ community but to face together: Adaptation to a changing climate and fragile environment that could leave populated areas of the world uninhabitable and economic stranded.
The world has a short window to solve the problems that uncontrolled development in the decades of globalization has caused. Closing the gap for many of these poor countries is critical not just to their futures but to all. In this article, we’ve brought into the light some of the past, current, and future in hopes that as systems recalibrate to the post-COVID future, so too can models for economic cooperation that improve upon the lessons we’ve learned from globalization to date.