Tuesday, July 26, 2011


. Tuesday, July 26, 2011

Dani Rodrik has a couple of posts [1, 2] and an op-ed describing how, for the first time, growth in developing countries is outpacing growth in developed countries. Arnold Kling links this to the current US economy:

Again, I want to suggest that there is a connection between this trend and the stagnation of median incomes in the United States, and even to the decade-long drop-off in employment here. New patterns of trade are developing that are reducing the advantage that a person enjoys merely for being located in the United States. There still are advantages, as evidenced by the excess supply of people who wish to immigrate herte. However, the Great Factor Price Equalization is underway, thanks to the fall of Communism, the rise of the Internet, and sporadic progress in institutional development in the emerging-market countries.

Remember that only 2% of jobs created in the US over the past 20 years have been in tradable sectors, and that while US manufacturing output has kept increasing, manufacturing employment has declined [1, 2, 3 and see comments]. Over the past 20 years, the global industrial labor force has increased by several billion in India, China, and Eastern Europe. How could there not be some convergence?

The two questions I'm most interested in are: 1. Will this convergence be sustained over a long period of time; 2. What will the effect be on politics? Regarding #1, as Rodrik mentions in his op-ed, if history is any guide there are good reasons to be doubtful. Sustained growth, particularly among low- and middle-income, has been rare. This is especially true for those that have grown via high commodity prices or other exports to developed countries that now suffer from depressed demand. Regarding #2, the effects will obviously be asymmetrical across countries, but we've seen interest groups pressure many governments over currencies, trade protection, investment policies, and growth concerns. I don't see those pressures lessening in the near term, especially if the global economy re-enters crisis mode.


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