31 October 2014

Zeno’s paradox: why emerging economies are not catching up


Why do poor people stay poor? In theory, we know how to go from misery to prosperity, thanks to a right combination of capital and work. We also know that this combination works best when handled by private entrepreneurs, watched over by a legitimate state.

When, after the collapse of the Soviet pseudo-model, the whole world turned to this liberal solution, it seemed obvious to most economists that all nations, by following these rules, were all heading towards prosperity. Experience initially seemed to confirm this convergence theory: between 2000 and 2009, according to the World Bank, poorer countries were progressing by 7.6% per year, while by 3% only in richer countries. At this pace, in thirty years, 80% of the poorer people would more or less catch up with the per capita income of Western Europeans and Americans.

We are talking here of per-capita income, and not national production, which has to do with the number of inhabitants but does not say much about the actual living conditions of the said countries. China is the second-largest global economy, but it is the 93rd in terms of income per-capita according to the World Bank index. To live well, it is better to be American or European than Chinese, even though some ideologues tend to tamper with statistics to fool us.

Convergence of income is a purely Western phenomenon. In the early 19th century, British income was at least one-third higher than income on the continent. On the eve of World War II, all Europeans had a similar income, after they put into practice the British industrial method at home.

Convergence theory, which for a time was considered received wisdom, collapses when we think about developing economies, giving way to its less satisfactory alternative: divergence. While the United States appears to be recovering, poorer nations around the world, far from catching up with the richer countries, are falling behind. The World Bank, according to its latest statistical forecast, estimates that they will catch up in about a century, instead of thirty years, while the International Monetary Fund estimates three centuries. Of course these are only estimates, assuming that there would be no major changes in the desire for growth (a relatively new idea in our history), or the technical and political means available. These hypotheses are not so much about wondering if an Indian will live as comfortably as a European in thirty years or three centuries from now, but rather to understand why the poorer world has suddenly switched from economic convergence to divergence.

Most likely the period of fastest emergence, 2000-2009, was a serendipitous accident and not a long-term historical norm. By giving up on socialism, China, India, or Brazil gave way to entrepreneurship, imported production techniques and Western capital, moved millions of peasants to factories, benefited from the sudden opening of worldwide trade, swift internet communication, and containers transportation. Never in the history of economics had so many favorable elements come together for the emerging countries. Yet the party is over, because these countries have failed to develop their own domestic conditions for long-term prosperity – based on scientific innovation and  domestic consumption. Emerging countries thought they could endlessly exploit their cheap workforce and natural resources. They did not anticipate new technological revolutions (for example: shale gas, 3D printing), which allow for the reindustrialization of richer countries.

We can illustrate the failure of emerging countries by an old philosophical riddle: Zeno’s paradox of the tortoise and Achilles. If the tortoise starts first, Achilles will never catch up with it. To catch up, he would have to cross the median line, which separates them. The more Achilles keeps moving, the shorter the line gets, but it never disappears.

The median line which separates emerging and developed countries bounds innovation, science, intellectual property and rule of law. The Asian Tigers – Japan, South Korea, Taiwan, Singapore – have caught up with the developed world in one or two generations because they understood this, and did not let themselves get caught with the immediate short-term benefits of globalization. The Tigers had invested their profits in the long-term development of political and educational structures. We thus understand why, today, some countries diverge instead of converge. Argentina, for instance, brings down the rule of law; China closes its inside market and copies more than its innovate; India refuses to expose its farmers to competition; African states collapse; and in Egypt the government renationalizes its economy.

Economics is, indeed, a dismal and unfair science since it favours the tortoise, only because it starts first and rarely diverts from its path.

Guy Sorman is an economist at the University of Paris and author of many books on classical liberalism including: The American Heart, In Praise of Giving, 2014. He is also publisher of France Amerique and founder of Action against Hunger.