Catch-Up Growth

As the world's eyes remain fixed on political change in the Arab world, it's worth looking back to where the crisis began -- unrest over higher food prices in grain-importing countries -- to get a sense of the fundamental challenges facing the region. In the short term, the run-up in food prices was mostly driven by bad harvests in Russia and Australia. In a deeper sense, however, raising prices for both food and other commodities such as oil are all driven by a fundamental shift in the world's pattern of economic growth.

To oversimplify a bit, you can think of the world as featuring two paths of economic growth. One is frontier-pushing growth, where high-tech countries dream up new ideas -- someone invents Facebook, or a better industrial robot, or a faster train. Another is catch-up growth in which a poor country prospers by copying ideas that have already been developed in countries closer to the frontier. That's what happens when an apparel factory opens up in Bangladesh or a Mexican bank branch starts using ATMs. Of course in the real world, all countries are doing a bit of both all the time. Rich countries copy each others' inventions and poor countries come up with some new ideas. But it works as a rough and ready distinction.

Now, in theory catch-up growth ought to be easier. The inventing's already been done, all you need to do is copy it. And, indeed, economic theory has long postulated that poor countries should converge with rich ones quite quickly.

Historically, though, it hasn't happened. Since the industrial revolution, the overwhelming tendency has been for the rich countries to keep getting richer, and poor countries to stay poor. There are a few exceptions of course. Japan caught up in the 1960s and 1970s. Then South Korea, Taiwan, Spain, and Portugal caught up in the 1980s and 1990s. But the vast majority of economic growth between 1900 and 2000 occurred in countries that were already rich in 1990.

The past ten years have been quite different.

For the rich world, it's been a bad decade. The bleak American economic situation is well-known. Things look better in some parts of Europe, but in Ireland, Spain, Greece and Italy things look a good deal worse. For Japan it's actually been the second decade of funk. But we've had lots of catch-up growth. The numbers that Brazil's been putting up would signal the greatest economic success ever if not for the fact that India's done even better. And the past ten years of growth in India would unquestionably count as the greatest triumph for human welfare ever if not for the fact that China's done even better than that. And these three aren't alone. Turkey and much of Southeast Asia are doing well, too. These countries -- all still quite poor -- have accounted for the vast majority of the world's economic growth. We're living, in other words, in a world dominated by catch-up growth.

What does this have to do with the Arab world?

The issue is that we were already pretty good at extracting natural resources from poor countries? land. Foreign firms have long been great at pumping out the oil from Nigeria, Saudi Arabia, Venezuela, and all the rest. And better farm machinery lets you grow food with fewer, but better-paid farmers, it doesn't do much to increase the productivity of the land.

In that sense, catch-up growth upends the old logic of a world in which better technology means we get better and better at extracting natural resources. The catch-up countries are getting much better at using natural resources, and they're doing it at a rate that outpaces the development of new technologies.

For the catch-up countries, there's no problem. Chinese people are paying more for food and fuel, but they're also much richer. Their greater wealth swamps everything, and they're consuming more. For Americans it's annoying -- you hear more and more about commodity prices on the news -- but we'll survive. America's a rich country, food and fuel consume a much smaller share of income than they did a few decades ago, and as a society we could stand to consume a bit less food and gasoline. But for poor and middle income countries that are growing much slower than China and India -- your Egypts, your Tunisias, and even your relatively rich Bahrains -- this is a huge problem. And it's a problem that's not going to vanish just because a dictator leaves the scene. But if new regimes in Egypt and elsewhere do manage to get their countries aboard the catch-up train, then the momentum in their direction will be unstoppable and change will almost certainly continue to sweep the region. Under the circumstances, the biggest question facing outsiders is less what can be done to nudge autocrats aside than what can be done to help newly empowered reforms solve the problems that discredited the old regimes in the first place.

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