The optimism running through the developing world stands in sharp contrast to the pessimism found in the developed world of rich countries.
The developing countries feel the 21st century belongs to them, with China, India, Brazil and Mexico leading the way. The rich countries worry where were their next jobs will come from.
The latest Index of Consumer Confidence from the Conference Board of Canada shows that only 14.8 per cent of survey respondents expected there would be more jobs in Canada six months from now, than there are today.
This is an excessive degree of pessimism. But it reflects serious worries about the future, especially for young Canadians just entering the job market — and whether everything we buy will end up being made in China or Mexico or elsewhere in the developing world.
Certainly we have seen dramatic changes in the world economy, with the developing world last year accounting for half the world’s economy and most of last year’s economic growth.
The rich countries see a future of sluggish growth and stagnant incomes; the developing world sees a future of strong growth and a rising middle class. While we struggle, they seem to be booming.
The automotive industry provides a good example. Twenty-five years ago, Mexico did not have much of an automotive industry. Today it ships more auto parts to the U.S. than Canada, assembles more cars than Canada and attracts more auto industry investment than Canada.
Of course, not all parts of the developing world will see dynamic growth and nor will all parts of the rich world experience stagnation. Economic development is more complicated than that.
But will the developing world close its gap in productivity and living standards with the rich world, with increased convergence between the two? That depends on many things.
What we are likely to see, though, is growing competition for jobs and investment and an increasing risk of trade and currency wars, especially if the rich countries cannot find a new growth model and decide instead their futures depend on slowing the rise of the developing world.
Dani Rodrik, a Harvard University expert on globalization, argues we should not assume the developing world will be able to continue its rapid rise. In a paper published by the National Bureau of Economic Research, he argues that “the rate at which lagging economies catch up is determined by their ability to absorb ideas and knowledge from the technology frontier.” Some developing countries will do this better than others.
At the same time, the success of the rich countries depends on their ability to continue advancing the technology frontier through innovation.
But as Rodrik finds, once a developing country gets its foot in the door in manufacturing or business services, it can also move towards the technology frontier. “Once an economy gets to produce electric generators, say, or motor vehicles, labour productivity in that industry is placed on an automatic upward trajectory.”
The trick, he says, is to get a toehold in the industry, so that resources are moved from low-productivity industries into “those sectors that are on the automatic escalator up.”
It’s why South Korea worked so hard to get toeholds in electronics, vehicles and steel, why Taiwan invested heavily in the electronic components industry, why Brazil pushed hard to develop its aircraft industry, why China’s latest five-year plan targets advanced manufacturing and why India is now trying to develop its automotive industry.
Government support played or plays a key role in all these economies.
“It is rather difficult to identify instances of non-traditional export success in Latin America and Asia that did not include government support at some stage,” Rodrik says.
But with the rich countries struggling with slow growth, there is the risk that they will choke the ability of developing countries to pursue these kinds of policies through trade barriers and penalties, raising the risk of economic conflict.
While the flagrant deviation from international trading rules by developing countries should be challenged, these countries will insist on pursuing industrial polices of their own, just as the rich countries do in a different form.
The more constructive approach is for the advanced countries, with their rich knowledge base, enormous research capacity and well-developed educational and financial systems, to continue to advance the technology frontier and continue to improve their own productivity.
Trade and currency wars will make the world a poorer place. Innovation can make it a richer, sustainable and equitable place.
Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.