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IS THE NEXT CONVERGENCE WORTH OUR TIME?

Mahendra Raju
31 March 2019

There have been two economic epochs in the history of mankind and we might have
already begun our journey to the third possible epoch. And should our prediction turn out to
be true, we could all boast of being witnesses to something spectacular. For centuries
together, living standards showed no long-term trends, be it variation in terms of time or
cross-country. Then, sometime around the 1700s came the first movement in economic
history. The Industrial Revolution caused a significant jump in living standards after take-off
in Britain and then elsewhere. However, the movement was limited to just the countries of
European descent and Japan. As a result of this, for over 250 years after the Industrial
Revolution, the world’s living standards diverged. Only one-tenth of the world’s population
were able to alleviate their income status as the remaining nine-tenths continued to live in the
agricultural past. And thus, by 1950, the world was exceedingly unequal.

The second epoch came after 250 years. Asian countries that were labouring it out in
the fields started witnessing unprecedented growth rates of about 7% every year allowing
them to close the gap with the economies that had already advanced. For over 68 years now,
these economies have been converging as economic development has spread to the other
majority of people living in less advanced economies.

More recently, China and India, the two most populated countries in the world have
begun to grow at extraordinary rates of close to 10. If they continue their current growth
trends, the entry of these countries will result in the third great historical swing in economic
powers. In this manner, the elite pool of developed economies will no longer be elite. Rather
it would be the standard. It is this phenomenon of convergence that is the topic of discussion
in Michael Spence’s The Next Convergence.

The math that explains the convergence is easy to follow. It is the ‘rule of 72’. The
rule states that on dividing 72 by the average growth rate we get the number of years it takes
for a country to double its GDP and thus it’s living standards. So for example, if a country
grows at the rate of 9%, it would double in 8 years. Or in other words, if a country has a per
capita income of $1000 and it grows at 9% every year, it would reach $32000 in just 40
years. And given that the other advanced countries are growing at much smaller rates, the
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poorer countries are bound to catch up at some point. Catch up they will provided they grow
at these rates forever.

But fact is that this proviso is hard to achieve. Growth is a puzzling process. A
handful of Asian countries, Brazil and Botswana have been able to sustain a growth rate of
7% over a 25-year period. And of these 13 countries, 6 countries have joined the elite pool of
advanced economy levels. But in the end, catch up is going to be inevitable.

Having established the inevitable, Spence abstains from speculating about what the
converged world would be like. Instead, in his book he explains what countries have done to
get there and how they can get there. Are the keys to success just as simple as what Solow’s
model indicates? Are high savings rate, low population growth rates and technological
progress within the ambit of policy? We really don’t know the recipe to success and whether
it’s feasible for the world as a whole. But economists like Spence have some sort of idea. As
Nobel laureate and Chairman of Commission on Growth and Development, Spence’s current
book is the fruit of all those years of research and thinking.

Spence explains how poor countries grow using the standard economic consensus on
economic development in poor countries. First, they acquire knowledge from the rich
countries. And then the diffusion of technology allows these countries to produce the results
that developed nations have already produced without having to invest in R&D. Global trade
allows these countries to then find a niche in specialization, and to produce and export the
surpluses of the domestic economy. In other words, the recipe for economic growth is
investment in education and the subsequent integration of the population into world
economy. Spence is rather optimistic about this process, and predicts that about 75% of the
world will live in a developed nation by 2050.

Spence in his book analyses discusses three main questions:

1. What are the attributes that are curtailing the advanced economies from growing at the
pace of the developing economies? And will these developing countries face similar
constrains as they reach a certain threshold of income?
2. What must India and China do to get through the ‘middle-income transition’ and complete
the change from labor-intensive to more human (and) capital intensive growth.
3. Will the global economy with its increased inter-dependency allow for sustainable growth
for a prolonged period?
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It is the answer to the third question that is contentious. Spence is generally optimistic
that high growth can be sustained under the condition of co-ordination. He believes that thus
far, the United States has been benevolent hegemon that has provided some global public
goods. But with the emergence of a multi-polar world, there exists the obvious dangers that
there might be a conflict of interest given the interdependencies and the spirit of competition
that could hinder further progress. Spence points out that with the entry of large developing
countries such as China and India into the global economy, they will be called upon to
assume global responsibilities as never before while the rest of the world must let that happen
in an orderly manner. As more and more countries develop, there would be no single
hegemon meaning that we would require institutions to facilitate collective action. These
international institutions will perform the functions of providing global public goods,
identifying and closing gaps that come from informational asymmetries and co-ordinating
among countries to balance domestic and international concerns. He points to the European
Union as a sample experiment that could serve as an example to follow for transnational
governance.

But why would the advanced economies and the rest watch subsidize the growth and
development in India, China and the rest of the developing world at the cost of
underemployment and unemployment in the name of openness and free trade? Would not the
rising inequalities compel countries to respond by raising protectionist barriers thus stopping
the cycle of growth? And given the current agonies of the European Union (which has the
added advantage of having relatively homogenous populations), will global governance be
effective or even half as exemplary as the optimistic Spencer believes it to be? And what after
this ‘enhanced coordinated oversight’ and ‘global effective government'? Spence is not clear
about what this entails or what good it would do. The book almost seems as if it were a
transcript of a discussion on a string of vague solutions to contemporary economic issues.

What is even more puzzling in this regard is that Spence suggests that policies for the
global economy must be determined by and applicable to the G20 alone. The G20, because
of their size can have systemically important external effects. His argument is that the other
economies of the world account for less than 15% of world output, and thus excluding them
would help ease out decision-making.

But weren’t the developing economies ill-served by the world trade regime during the
General Agreement on Tariffs and Trade period because they were not represented? Would
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not their incorporation into the global economy (Spence credits them for playing a vital role
in recent economic success) have occurred if more had been demanded during the GATT
period? Is it in their best interest to exempt them from global practices in the future?

One must credit Spence for the use of data and history in explaining the next
convergence. He offers deep insights and makes perfect economic and mathematical sense in
that it is in line with the models for economic growth in developing countries. However, the
obvious haunting spectre is whether it is environmentally sustainable. It is here that we begin
to question whether his cards are along the same lines as that of other economists whose sole
focuses are growth, growth and growth.

Michael records his points on global warming, carbon, climate change and potential
energy shortages in a rather unrealistic manner. His only detailed essay from among 41 of
them is one in which he advocates the concept of carbon credits for advanced countries. He
intentionally leaves the developing countries out of this under the assumption that they would
sell their credits in exchange for capital inflows. He gives them the privilege of delaying cuts
in their carbon emissions but hopes for stronger international institutions that are capable of
enforcing worldwide tradable carbon permits. “Climate-change agreements need to find a
way to accommodate the growth in developing countries. We don’t want to say, ‘I’m sorry,
you arrived late. The world’s changed; you don’t get to grow.’ It just isn’t right.” His carbon-
credit system does not deal with the problem at hand, it merely increases the price countries
have to pay in an economic sense. His solution effectively reduces to doing nothing for about
20 years in allowing the countries to catch up and then not doing so much damage after the
countries have caught up in 50 years.

Spence pins his hopes on technology to insure the world against climate change
without compromising the growth of emerging economies. He counsels against the safer ploy
of long-term global mitigation agreements in favour of step-by-step approaches as per the
economic levels of the country. While this wouldn’t affect growth rates in most of these
countries, which seems to be of greater importance to him and those alike, one wonders
whether it would sit well with readers who are even slightly concerned with the
environmental scheme of things. As a reader, one gets the sense that Spence deals with
environmental challenges as a fantasy in the background, and entirely ignores energy policy.

To summarize, The Next Convergence surveys the growth and development of

countries, touching on the role of globalization, trade liberalisation, devaluation of currencies,
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carbon credits and the hurdles that a country will have to overcome in transitioning from
middle- income nations to more advanced economies. While useful to an intelligent
layperson, Mr Spence hardly breaks new ground and merely sticks to broad generalities
making it a not-so-profitable read for those already in the field. He offers little in terms of
empirical examples or research to prove his optimistic hypothesis while neglecting more
pressing environmental issues. The primary reason as to why he failed to convince me is that
all his extrapolations are based on the premise of continued growth without cataclysmic
environmental consequences. While he does give lip service to the environmental hurdles,
Spence barely engages with it and relies on the same optimistic expectations of greater
cooperation and technological development. Despite these shortcomings, we ought to credit
Mr Spence for his critical analysis on the issue of balance between national and international
economic interests, and short-term fixes and long-term sustainability. For a beginner, it
serves as an excellent overview of the global economy, major historical trends and
contemporary economic issues.
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WORKS CITED

Spence, Andrew Michael. The next Convergence: the Future of Economic Growth in a
Multispeed World. 2012