HowTo: Catch-up

The principle of “Catch-up” in economic theory is a macroeconomic principle that says countries with lower initial levels of GDP will experience higher levels of GDP growth – i.e. they will catch up.

From the famous Hubbard and O’Brien:

Convergence

The countries along the red arrow – the “line of convergence” – are the ones meeting this principle (this is where the class segues into economic policies that secure sustainable long-run economic growth).

From the even more famous real life:

…investors say emerging markets are just as stable as the U.S., Europe and Japan, and deserve a premium because their economies are growing three times as fast. Stocks in developing nations traded this month at 15.2 times estimated profit versus 14.9 times for equities in industrialized countries, data compiled by Bloomberg show. In 2005, the ratios were 8.45 and 17.3, respectively.

“Investors say” must the financial news equivalent of “some people say … that you hate America because you support civil unions for gay couples.” Thank you, Fox News, for your fine contribution to conventional journalistic integrity. Or what we have now that used to be journalistic integrity, when it used to have integrity. Too harsh? Too bad.

They’re also, perhaps, the same investors that are sending all our financial markets to utter shit, using the same bloody computer models to escalate volatility in trading. Honestly, even when computers take over, it turns out we all get fucked by the herd mentality of speculation at the trading desks.

Anyway.

“Emerging countries, by and large, are stockpiling either trade dollars or petrodollars, in such a degree that they’ve taken the financial risk way down,” said James Swanson, who helps oversee $200 billion as chief investment strategist at MFS Investment Management in Boston.

China, Russia and India will account for half of the world’s economic growth this year, the IMF said last month. Developing countries are forecast to expand 8 percent this year, compared with 2.6 percent for advanced economies, the IMF said in July.

The Washington-based fund boosted its 2007 growth forecast for China the most of any country, raising it 1.2 percentage point to 11.2 percent. The Russian economy is also beating forecasts and is set to grow 7 percent this year, more than the 6.4 percent predicted in April. For the U.S., the IMF trimmed its 2007 growth forecast to 2 percent from 2.2 percent.

On the basis of estimated earnings for the next year, emerging markets traded at a 1.6 percent premium to developed countries this month. That would mark the first time emerging markets are more expensive than developed nations since March 2000, if analysts’ earnings estimates prove correct.

So that’s catch-up. Kind of. At the moment we’re observing in certain countries according to their reserves of commodities (ore, gas or petroleum) or reserves of cheap labour (i.e. ability to manufucture cheap shit, cheaply, for the rich countries). Our economies are slowing down, meanwhile – we’ve tapped most of the growth potential available for our current level of technology.

We aren’t necessarily observing the economic principle of convergence: poor and relatively resourceless countries aren’t experiencing all-too-rapid growth (so far) in exchange for their good policies. With the credit crunch the way it is, attracting foreign capital is probably becoming rather more difficult, and the technological gains of our countries are getting further out of reach of poor ones. I suspect that the poverty trap (all those green dots near the origin, in the graph) just became a little bigger, and a lot stronger.

The trouble is, there isn’t much of a niche for those countries. Some countries ‘do’ finance (the US, Germany, the UK, etc.), some have commodities, some have labour. Countries that don’t have any of those have a hard time even getting in the global economy, forget about catching up.

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