Covid-19 May Keep Developing

Countries From Catching Up to

Rich Ones
Pandemic’s economic shock could exacerbate stagnation in emerging
markets; Indonesia struggles as manufacturing declines

A tanker ship nears Rio de Janeiro. Brazil’s fast growth slowed in recent years, even
before the coronavirus pandemic hit.
PHOTO: DADO GALDIERI/BLOOMBERG NEWS

By
Jon Emont
Aug. 5, 2020 7:00 am ET
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Even before the pandemic, developing countries struggled to sustain the high
growth rates of a decade ago that had promised to catapult them into the
economic big leagues. The coronavirus is making their path much rockier,
potentially entrenching the divide between the world’s rich and poorer parts.
In the first decade of the 21st century, economic growth allowed some
developing countries to gallop faster than wealthier nations in North America
and Europe. It was the era of Brics, the acronym for the fast-growing markets of
Brazil, Russia, India, China and South Africa that showed the potential to close
the gap with more-developed nations.
Shrinking GapThe difference in growth rates betweendeveloped and developing
countries hasnarrowed since 2013.Annual change in GDPSource: World Bank
%Low/middle income countriesHigh income2000'05'10'15-4-202468

Their rise appeared to support an economic theory known as convergence, which

predicts that developing countries will often grow faster and catch up to
wealthier ones as they adopt technology from abroad and receive investment to
upgrade their industries.

From 2000 to 2012, low- and middle-income countries grew at an average of 6%

a year, compared with 2% for high-income countries, according to World Bank
data. But their pace slowed to 4.5% from 2013 to 2019, while that of richer
countries remained largely unchanged. Nigeria, Brazil, South Africa, Angola,
Thailand and Peru all grew relatively quickly from 2000 to 2012, only to falter in
the following years.

Some countries such as Vietnam and Bangladesh were able to maintain

momentum even after 2012. But broadly, the developing-world slowdown
becomes even more acute if giants China and India are removed from the
equation. Without them, emerging-market countries have grown nearly as slowly
as developed ones over the last eight years, according to data from the Institute
of International Finance, a finance-industry association based in Washington, D.C.

“That undercuts one of the premises for emerging markets—it’s supposed to be a

high growth, traditional convergence story,” said Robin Brooks, chief economist
for the institute, which has observed secular stagnation in emerging markets,
meaning slow growth over the longer term.

Economists cite factors including lower commodity prices, trade protectionism

and automation that reduces the need for cheap labor as reasons developing
countries are receiving less investment and struggling to catch up. The pandemic,
which is devastating the health systems and economies of many low-
income countries, is the latest factor.
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This is due in part to weak demand for emerging-market export commodities
such as oil, and because wealthy nations such as the U.S. are expected to begin
reshoring manufacturing of goods such as health equipment from the developing
world.

Many poorer countries have large parts of their workforces in sectors hit hard by
the coronavirus, like transportation services, construction and tourism, with
governments that lack funds for the sort of large-scale stimulus that has been
deployed in wealthier countries such as the U.S. and Japan.

Meantime, migrant workers abroad are sending less money to their families back
home, hitting countries from El Salvador to the Philippines.
In Brazil, unemployment has ticked up, with the economy projected to decline
9% this year, according to a June report by the International Monetary Fund.
Indonesia’s first- quarter growth was its slowest since 2001.

Stalled Convergence
The rapid gains in wealth achieved by some
Asian and Eastern European countries
in past decades...
GDP per capita*
$60
thousand
Singapore
50
Japan
40
30
20
Lithuania
10
China
0
’70
’80
’90
’00
’10
...remain elusive for many developing
countries today.
Brazil
$10
thousand
Indonesia
Nigeria
0
India
’70
’80
’90
’00
’10
*In constant 2010 dollars
Source: World Bank

The International Monetary Fund projects that advanced economies will face a
steeper drop in growth than developing countries this year, but that next year
the two groups will grow at a relatively similar pace—around 5% for advanced
economies and 6% for emerging markets and developing economies.

In the decades after World War II, relatively poor east Asian nations such as
Singapore, Japan and South Korea grew quickly, with their citizens becoming just
as wealthy—or wealthier—than those of advanced Western economies as export
manufacturing boomed.
Then, after the end of the Cold War, less-developed nations emerging from
Communist rule, including Poland, Lithuania, and Bulgaria, grew faster than the
European Union average, with some nearly catching up in terms of wealth, after
foreign investors poured money into their newly opened economies.

An average Lithuanian had just 40% of the buying power of the average EU
citizen in 2000, but had nearly 80% by 2016, according to a 2018 paper on
convergence in Europe published by the European Central Bank.

But alarm bells rang as early as 2016, when Christine Lagarde, then-managing
director of the International Monetary Fund, gave a speech on how the
developing world’s catch-up was happening at a slower rate than anticipated and
warned that the global community “cannot afford the costs of stalled
convergence.”

Consider Indonesia, the world’s fourth-most-populous country. Its annual

growth, which averaged nearly 7% from the 1970s to mid-1990s, has moderated
over the last two decades to around 5%. Manufacturing has declined steadily as a
share of the economy and attracts diminishing foreign investment. Instead,
young people are leaving villages for low-productivity jobs in the informal
services sector, such as street vendors and food-delivery drivers.
Production ProblemsSome developing nations have struggled toexpand their
manufacturing sectors in recentyears.Manufacturing, value added as a share
ofGDPSource: World Bank
%IndonesiaIndiaSouthAfricaBrazil1990'952000'05'10'1551015202530

In early July, the World Bank revised Indonesia’s status from low-middle income
to high middle-income, as income per capita crossed the $4,045 threshold. But
the country’s 5% growth rate isn’t nearly enough to match an earlier wave of
fast-growing economies like South Korea, which grew at around 8% in the mid-
1990s when its citizens had about as much buying power, on average, as
Indonesians today.

Slower growth means fewer Indonesians are pulled from poverty, with huge
consequences. According to an Indonesian government study from 2019, 28% of
Indonesian children under age 5 don’t grow to standard height because of
inadequate nutrition and frequent infections, a condition linked with cognitive
impairment.

President Joko Widodo has said the country can achieve 7% year-over-year
growth and pegged the year 2045 as a potential golden era when Indonesia will
have the world’s fourth-largest economy. His administration has invested in
infrastructure to boost economic competitiveness and announced plans to
simplify regulations to attract investment.

But Indonesian policy makers are aware of the challenges. In a speech last year,
Finance Minister Sri Mulyani noted that manufacturing was stagnant or in
decline after the Asian financial crisis in the late 1990s and that creating good
jobs was challenging.

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Now, travel and movement restrictions linked to the pandemic have taken a
further toll, with key industries such as retail and tourism badly dented. The
International Monetary Fund predicts an economic contraction this year, which
would be the first since the Asian financial crisis. Indonesia averages more than
1,500 new confirmed Covid-19 cases a day despite low testing levels.

Some economists say that if the country continues to depend on natural

resources and cheap labor to fuel its economic rise, maintaining even a 5%
growth rate could prove difficult.

“In the past it seems like developing countries naturally grow faster and they can
catch up with more advanced or developed economies,” Siwage Dharma Negara,
an economist and senior fellow at ISEAS–Yusof Ishak Institute, a research
institute in Singapore. “But recently we have seen a very different pattern.”