When economists talk about global convergence, what they usually have in mind is that developing economies grow more rapidly than advanced economies, and the incomes of the world’s poor rise to levels in richer economies. The irony nowadays is that we are experiencing downward rather than upward convergence.
CAMBRIDGE – At the heart of development economics lies the idea of “productive dualism.” The economists who founded the field of development economics, such as the Nobel laureate Caribbean economist W. Arthur Lewis, noted that poor countries’ economies are split between a narrow “modern” sector that uses advanced technologies and a much larger “traditional” sector characterized by extremely low productivity.
When economists talk about global convergence, what they usually have in mind is that developing economies grow more rapidly than advanced economies, and the incomes of the world’s poor rise to levels in richer economies. The irony nowadays is that we are experiencing downward rather than upward convergence.
Dualism was long held to be the defining feature of developing countries, in contrast to developed countries, where frontier technologies and high productivity were assumed to prevail across the entire economy. This marked development economics as a distinct branch of the discipline, separate from conventional neoclassical economics.
Development policy, in turn, traditionally focused on overcoming the disparities in incomes, education, health, and life chances more broadly. Its task was to overcome productive dualism through new institutional arrangements that would alter how markets work and expand access to productive opportunities.
While this distinction may have made some sense in the 1950s and 1960s, it no longer appears to be very relevant. For one thing, the methods used to study developed and developing countries have essentially merged: development economics today is essentially the application of standard frameworks of public finance, labor economics, industrial economics, or macroeconomics to low-income settings. But perhaps more importantly (and interestingly), productive dualism has become a critical and visible feature of advanced economies as well, requiring remedies that come straight out of the development policy toolbox.
In his 2017 book The Vanishing Middle Class, the MIT economic historian Peter Temin pointed out that the Lewis model of a dual economy had become increasingly relevant to conditions in the United States. A combination of forces – de-industrialization, globalization, new technologies that favored professionals and capitalists, and declining protections for labor – have indeed produced a widening gap between the winners and those who are left behind. Convergence between poor and rich parts of the economy was arrested, educational attainment increasingly polarized labor markets, and regional disparities widened.
In Europe, the increase in inequality was not as marked, owing to a stronger welfare state, but the same forces operated there, too. The gaps between leaders and laggards among firms and regions grew, and the middle class shrank.
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As a result, policymakers in advanced economies are now grappling with the same questions that have long preoccupied developing economies: how to attract investment, create jobs, increase skills, spur entrepreneurship, and enhance access to credit and technology – in short, how to close the gap with the more advanced, more productive parts of the national economy.
The starting points may be different, but the problems of a region where good jobs have disappeared look distressingly familiar to a development economist: Scarce productive employment, mushrooming social problems such as crime and substance abuse, and low trust in the government among various social groups and the business community. The obstacles that racial or ethnic minorities, recent immigrants, or low-educated workers must surmount in such settings are the bread-and-butter of development economics.
To be sure, left-behind localities in advanced economies may have access to vastly greater financial resources. In the US, state and local governments spend tens of thousands of dollars, not very effectively, on tax incentives and other subsidies to attract large firms. But their officials typically operate under structural and bureaucratic constraints that would be familiar to their counterparts in poor nations. As one experienced US practitioner recently put it at a meeting held at Harvard University, “we are at the center of everything, but control nothing.”
They also face similar limits on the available remedies. Industrialization has been the traditional vehicle for overcoming dualism; as workers are absorbed into more productive manufacturing activities, wages rise and the economy’s overall productivity increases. But, in both developing and advanced economies, manufacturing has lost its ability to create many jobs, owing to automation and other labor-saving innovations. Manufacturing employment has shrunk (as a share of total employment) even in countries that have maintained strong industrial sectors, such as South Korea or Germany.
In high- and low-income countries alike, then, economic development will have to rely in the future much more on services and on small and medium-size enterprises. Both types of economies will need a new breed of coordinated policies aimed at the supply and demand sides of labor markets, combining skill training programs with support for firms. Good jobs require good firms, and vice versa.
National policy frameworks will need to support these local productivist experiments with resources and enabling macroeconomic policies. In particular, that means reconsidering national innovation policies that blithely encourage technological changes that are biased in favor of capital and highly educated professionals. Taking a fresh look at the direction of innovation, and incentivizing technologies that augment rather than replace prevailing workforce skills, would help greatly in addressing the labor-market challenges that rich and poor countries face.
When economists talk about global convergence, what they usually have in mind is that developing economies grow more rapidly than advanced economies, and the incomes of the world’s poor rise to levels in richer economies. The irony nowadays is that we are experiencing downward rather than upward convergence. Developed countries’ problems increasingly resemble the problems found in poor countries. The models and frameworks used to study developing economies are increasingly relevant to the problems confronting rich countries.
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Writing for PS since 1998
195 Commentaries
Dani Rodrik, Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, is President of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017).
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it is good to see that a mainstream economist starts talking reality, for a change.
Reality is that the world population growth in the last 50 years is putting enormous pressures on all resources. What it means is that there is a relentless downward pressure on living standards in the developed countries and an invisible lid on the development for the developing countries. Markets translate these factors into inequality and the political systems translate this inequality into political resentment and instability.
Likewise, population growth is responsible for greater susceptibility of populations to climate fluctuations. It is not carbon dioxide, but much greater population that creates huge crisis in response to the same drought or flood.
Likewise, uneven population growth, concentrated in poorer countries, creates growing migration pressures. Not climate crisis. Wars are a factor, but wars do not happen without a reason.
The answer, if there is one, is to put the problem in the open. For reasons that I do not fully understand the political and the economist class likes to talk about everything except this elephant in the room. We need substitutes for scarce resources. The technologies that give us alternatives need to be developed and the discussion needs to be how to develop them as fast as possible. Redistribution has it's place but you can't redistribute what you don't have. For instance, we need "green new deal" of some kind not because of the climate crisis, but because dependence on the fossil fuels is a dead end.
Maybe politicians think that people are not able to handle the truth? Try them. If you don't, assorted demagogues will give them the truth of their own. It is the other guy that takes something away from you. A Jew, a Muslim, a different skin color, the works. War seems always to be the answer that demagogues have in mind and today it may very well be war with nukes on day one.
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When economists talk about global convergence, what they usually have in mind is that developing economies grow more rapidly than advanced economies, and the incomes of the world’s poor rise to levels in richer economies. The irony nowadays is that we are experiencing downward rather than upward convergence.
The US-China trade war and the recent freezing of much of Russia’s official foreign-exchange reserves have again raised fears of an exodus from the dollar. But no one should write the greenback’s obituary just yet.
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