Internationalization and Economic Convergence

Very few countries in emerging markets have sustained high GDP growth levels long enough to  aspire to convergence with  the developed world. These include the members of the club of Asian “tigers ,” originally formed by Taiwan, Korea and Singapore,  and now being joined by China, Vietnam, Thailand and Malaysia. Outside of Asia, Poland, Hungary and other formerly Comecon states have made huge strides towards catching up.  One thing all of these success stories have in common is openness to trade and integration into international supply chains.

The chart below shows the internationalization rate for the primary emerging markets.

The successful convergers have a high level of internationalization of their economies, as measured by total trade (imports plus exports) divided by GDP  minus net trade.  Asian countries have followed  a mercantilistic framework of  industrial planning and subsidies supported by  currency manipulation to maintain export competitiveness. Eastern Europe and Mexico have relied more on integration into regional trade networks. The focus on international trade has required that these countries focus on comparative advantages and market-based decisions, and this process has facilitated an accumulation of knowledge and skills which can lead to gradual moves up the industrial value chain.

This path of convergence is obviously not easy to follow or else more countries would do it. It requires long-term planning and economic stability, including a stable and competitive currency. Countries that experience frequent boom-to-bust cycles because of economic instability or commodity cycles will not succeed in this path. Moreover, many countries fall into the “middle-income trap”  which is caused by  dominant interest groups lobbying against open-market policies and other reforms.

Latin America is where the middle-income trap has become most prevalent.  The region suffers from a high dependence on commodities and repeated  phases of “Dutch Disease,”  the destructive aftermath of commodity busts, such as the one the region has experienced since the end of the 2002-2012 commodity super-cycle. The region also bought into the wrong elements of the neo-liberal “Washington Consensus.”  It adopted financial liberalization while failing  on fiscal reforms.

Brazil has become the poster child of the middle-income trap. Its gross mismanagement of the commodity boom (overvalued currency, corruption) left behind increased de-industrialization, debt and financialization of the economy. Ironically, while developmentalist policies are back in favor in Biden’s Washington, they are totally out of favor in Brazil where the finance minister espouses 1970s style Chicago School economics.