Before the financial crash, economists tended to attribute the explosion of growth in the emerging world to three main factors: improvements in fiscal and monetary policy, legal reforms to property rights and reductions in barriers to trade in order to encourage integration with world markets. It was widely believed that these three ingredients were both necessary and sufficient to unleash a process of convergence, whereby emerging economies would gradually import technology from the developed world, and would consequently close the productivity gap with countries such as the US.
Some thought that the convergence process, once started, would become semi-automatic, and would persist until the productivity gap had been closed entirely. This view (discussed by Ricardo Haussman in this 2006 paper) is the core reason why many economists’ medium term extrapolations of growth show the share of global GDP produced in the emerging markets increasing almost indefinitely.
Other economists, however, believe that the process of convergence is not automatic, but is the outcome of complex institutional forces which might not remain in place as economies and political systems develop. Harvard’s Dani Rodrik, a leading advocate of this view, presented fascinating new evidence on the subject in a paper at the Jackson Hole conference last week. His work demonstrates that it is in fact quite rare for a growth take-off to persist for as long as three successive decades (China’s started in the early 1990s), and it is quite common for the convergence process to stall in mid stream.
Rodrik shows that the outcome depends to a large extent on which sector of the economy dominates the growth process.....