Covid-19 May Keep Developing Countries From Catching Up to Rich Ones

By Jon Emont

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.

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.

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.

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.

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.

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."

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