Throughout much of human history, economic output was firmly yoked to the size of a country’s labor force. Because productivity growth was negligible, the countries with the largest populations, such as China and India, could put the most people to work. They reigned as the world’s largest economies. Things changed suddenly during the late 1700s. A number of economic, institutional, and other factors coalesced in England to unleash the Industrial Revolution, which was transformational — at least in the handful of Western countries that rose to dominance through their economic prowess and resulting military and political power. Everyone else fell behind.
Incredibly, this great divergence has persisted for more than 250 years. Today, the global economy still consists of only 30 or so high- income countries, roughly the same number of middle-income countries, and a very long tail of 140 or so low income countries. This last group is still finding it difficult to industrialize, and at least 34 of these countries remain fragile and vulnerable to outright collapse.
This circumstance doesn’t really jibe with orthodox economic theory. As access to new technologies and other know-how opens up, and as domestic savings and investment are complemented with external financing, theory predicts that growth in low-income countries should accelerate and the gap with wealthier counterparts should narrow.
In reality, developing countries almost invariably get caught in various types of growth traps that make it difficult to reach high-income status. Since the 1950s, at least 80 countries, in every major region of the world, have achieved an increase in annual per capita income of at least 2 percentage points for at least eight consecutive years. Yet during that same period, only a handful managed to escape the dreaded middle-income trap (classified by the World Bank as having a median gross national income [GNI] of US$6,750 in 2011 dollars).
Several interrelated issues explain why emerging economies have found it so difficult to achieve convergence. But ultimately, the root cause is the lack of integration among the three primary disciplines that must inform any coherent catch-up strategy: development economics to guide a country from low- to high-income status, political science to design the enabling institutional environment, and strategic management to create competitive world-class firms over time.
Click to Add the First »