Recent decades have brought impressive gains in prosperity for many developing countries. By attracting investment and opening up to the world, many countries have been able to grow more quickly than rich countries that operate at the technological frontier. However, this process of growth has not benefited all countries. Worse, many poor countries have fallen behind, becoming relatively poorer.
Convergers in emerging markets can broadly be separated into two categories: first, countries attracting foreign direct investment and participating in the globalization of trade; second, countries starting from a very low base and achieving high growth because of successful economic reforms leading to increases in productivity. Highly successful convergers (e.g., China, Vietnam) have benefited both by launching economic reforms and by integrating into the global economy.
The chart below shows increases in GDP per capita, measured in 2015 constant USD, for the 1995-2022 period, as calculated by the World Bank. 1995 is used as a starting point because this is when the World Bank starts showing data for “Eastern Bloc” countries. We can see in the chart that the U.S., with GDP per capita growth of 50% over this period, is near the middle, so about half the countries in the sample “converged” by growing more than the U.S. benchmark, and about half fell behind. About 20% of the sample, typically countries undergoing revolutions, wars, or environmental disasters, had zero to negative growth. The chart highlights China and Vietnam as star convergers, Brazil as a laggard, and Zimbabwe as a country suffering a severe institutional breakdown.
Convergers
Northeast Asia, Southeast Asia and Eastern Europe have been the major beneficiaries of capital flows and trade liberalization and have all experienced GDP per capita growth well in excess of the United States. We show this in the charts below for the 1986-2022 period using data from the World Bank. 1986 is a convenient starting point as it marks the initiation of MSCI’s Emerging Markets Index and, approximately, the beginning of globalization and financialization of the world under the “Washington Consensus.” For Eastern Europe, the World Bank data is available only starting in 1995.
The Asian “Tigers” have all followed similar mercantilistic policies, subsidizing exports through subsidies and repressing domestic demand and wages to support competitiveness. All of them have benefited greatly from U.S. policy support and easy access to the U.S. consumer market. This U.S. support of China has been significantly reduced since 2019 when China was determined to be a strategic adversary, which raises serious doubts about future convergence. (Data for Taiwan is not included because the World Bank neglects to include the country in its database)
The chart below shows the growth of GDP per capita for the major economies in South-East Asia plus India. The countries in this region, with the exception of India and the Philippines, have largely followed the same policies as the East-Asia “Tigers,” including direct and indirect subsidies for exports and foreign direct investment (FDI), especially after the hard-earned lessons of the 1997 Asian Financial Crisis. These countries have all achieved significant convergence. The Philippines has traditionally been a more concentrated, financialized, and volatile economy with less attractiveness for FDI and less support for exports, but in recent years, it has improved its performance and also achieved some convergence. India has experienced strong growth since economic reforms in the 1980s and is starting to attract more FDI, even though its growth is driven more by infrastructure spending and rural support than by manufacturing. India, benefiting from a starting point of exceptionally low GDP per capita, has rapidly converged over this period. Pakistan’s efforts to grow by attracting FDI into manufacturing export industries have been undermined by political instability, but still, it has achieved some convergence.
The following chart shows the countries of Eastern Europe. These countries have all benefited from the collapse of the Eastern Bloc, which freed them to promote private investment and integration into western Europe. Greatly helped by support from the European Union, they have become manufacturing centers for global corporations, taking advantage of low wages to access the European market. All of these countries have experienced significant convergence relative to both the U.S. and the Euro Area since 1995.
Middle-East and Africa (EMEA)
The EMEA region is a motley group, including both rapid convergers and laggards. Turkey, which is more like an Eastern European country in its success in attracting FDI and exporting to the European market, leads thisregion in convergence. In the Middle East, Egypt has converged, starting from a very low level of GDP per capita and benefiting from ample U.S. support. On the other hand, the UAE and Saudi Arabia have significantly lost pace due to rapid population growth, volatile and declining oil prices, and costly initiatives to reduce dependence on the oil sector. In Sub-Saharan Africa, Botswana has achieved convergence through sound and consistent macroeconomic policies and successful diversification away from diamond exports. On the other hand, both South Africa and Nigeria have lost ground because of corruption, political instability, and sustained flight of human and financial capital.
Laggards – Latin America
Finally, Latin America is the major outlier in emerging markets in its sustained poor economic performance and lagging GDP per capita growth. This conundrum has been called by economists the “Middle-Income Trap” and is loosely attributed to inconsistent and poorly designed policies and deteriorating “institutions.” Other possible contributors to Latin America’s decline have been extreme wealth concentration and sustained human and capital flight. Also, the region’s excessive and increasing dependence on commodity exports have subjected countries to highly destabilizing boom-to-bust cycles (referred to in economics as the “Natural Resource Curse).
The three largest economies in Latin America—Brazil, Mexico, and Argentina—have all grown GDP per capita at a rate well below the U.S. and can be considered poster children for the “Middle-Income Trap.” Chile, the strongest economy in the region, has stagnated over the past decade and faces increased political discord and policy confusion. Colombia and Peru have also stagnated and face similar uncertain policy environments. The highlight of the region is Uruguay, a small economy that has avoided the pitfalls of its neighbors and quietly pursued prudent policies.