Shifting wealth: does the developing world hold the key to building a stronger economy?

Reuters | Jul 2, 2010 | 13:33 EDT

The following is a guest post by Angel Gurría, Secretary-General of the Organisation for Economic Co-operation & Development. The opinions expressed are his own.

The world’s economic center of gravity is changing. Global GDP growth over the last decade owes more to the developing world than to high-income economies. If these trends continue, by 2030 developing countries will account for nearly 60% of world GDP on a purchasing-power parity basis, according to OECD calculations. While high-income countries have been languishing in the worst recession since the 1930s, China and India have continued to power ahead. This is not a single stand-alone event, but a sign of an important structural transformation in the global economy, a process we call “shifting wealth.” The tangible signs of shifting wealth are widespread. In 2009 China became the leading trading partner of Brazil, India and South Africa. The Indian multinational Tata is now the second most active investor in sub-Saharan Africa. Over 40% of the world’s researchers are now based in Asia. And by 2009, developing countries were holding USD 5.4 trillion in foreign currency reserves, nearly twice as much the amount held by rich countries.

Some commentators talk about these new trends with trepidation. But the “rise of the rest” is not a “threat to the west:” overall, the newfound prosperity in the developing world represents an enormous opportunity for citizens in the developing and developed world alike. Improvements in the range and quality of their exports, greater technological dynamism, better prospects for doing business, a larger consumption base – all these factors can create substantial welfare benefits for the world. Moreover, imagine the consequences if the Asian Giants had followed the industrialised countries into recession? These large developing countries have helped soften the impact of the most serious global recession since the 1930s. Through their trade and investment links they have also mitigated the impact of the crisis on the rest of the developing world. Africa, for instance, is forecast to post growth of 4.5 percent this year – a figure below its pre-crisis level, but far in excess of that of the OECD average. 

As world leaders work on the recovery and strengthening of the global economy and financial system, more attention deserves to be paid to South-South linkages, which promise to be one of the main engines of growth over the coming decade. Take trade, for example. Between 1990 and 2008, South-South trade multiplied more than twenty times over, while world trade expanded only four-fold. Yet trade barriers between developing countries are still high. By reducing tariffs to the levels prevailing among advanced countries, our calculations suggest that developing countries could achieve substantial welfare benefits – worth more than double the gains from similar reductions on North-South trade. Policy makers also need to make sure that low-income countries are beneficiaries of the dynamism in South-South trade. Over recent years, Brazil, India and China have offered quota-free market access to less-developed countries. These schemes need to be extended and deepened.

Opportunities to benefit from South-South links are not limited to trade but also include aid, foreign direct investment, technology transfer and migration. Here we need to fully harness the power of peer-learning. Therefore, we should not lose sight of the major challenges that still confront the developing world. Chief among them is poverty reduction. Since 1990, the number of people in the world living on less than a dollar-a-day has fallen by more than a quarter. Yet much of this progress has been concentrated disproportionately in China – which accounts for 90% of this drop. Other countries have made progress but at a pace insufficient to counter the effect of population growth. Inequality, too, has risen quite sharply in many countries over the last two decades.

For social development to match pace with growth, deliberate and determined interventions are necessary to make growth pro-poor and to establish social policies that protect and promote well-being. Once again, policy innovations in the South provide at least part of the answer. Cash transfer schemes have been adopted by a number of emerging economies – Brazil, India, Indonesia, Mexico, South Africa and China – since the late 1990s, and they now benefit 90 million households. These schemes are not insurance-based or contributory-based schemes, but rather are financed through government taxes.

Thanks to the newfound wealth in emerging economies, governments can now afford to boost public spending on social protection. Without this, rising inequality will not jeopardise future growth and prosperity exclusively in the developing world, it will threaten the global economy as a whole. We need to seize this opportunity to create a fairer, cleaner and stronger global economy – for that to become a reality, the contribution of the developing world has become more essential than ever.


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