Friday, 28 August 2015

The Thing That Might Prevent Developing Countries From Catching Up

If you're wondering quite why there is so much fuss made of China's present economic difficulty, it is primarily because China is an economy that 'greatly' impacts the rest of the world. Its own economy accounts for around 15% of the entire global GDP, but its growth constitutes over 25% of the whole world economy, with perhaps as much as 35-40% in the near future. Because of this, any slow down in Chinese growth or any currency plunge is going to put emerging economies under duress, particularly the ones most dependent on China's economy for industry and growth. What underpins this truth is something very interesting regarding what the future might be like for the rest of the world in terms of economic growth.

I've said before that the past 200 years has seen an exponentiation of progress unprecedented in human history. The planet has never had such advanced technology, such a high standard of living, such increased well-being, so few people in poverty, such quality healthcare, and so many people trading in a global economy. As more and more nations have less corruption, a more stable rule of law, freer societies and increased market opportunities, we are seeing more and more prosperity come their way, and we look further ahead to how more and more countries could well join them.

However, one must not assume that the future growth of the next few hundred years will resemble the past growth of the last 200. In spite of the progression-explosion we've seen for so many countries, it is still the case that there about two dozen or so dominant countries that have the lion's share of the market in terms of supply and production. That is what might slow down future economic growth.

You may not have considered this before, but if you're a typical person in one of the many developed countries in the world, you pretty much have all the day to day goods and services you need - everything from a place to live, transport, food, heating, clothes, gadgets, holidays, health care, education, entertainment, and access to pretty much all the non-luxury goods and services you need.

Someone on median income in the UK has a way of life for which most aristocrats of 300 years ago would have given up the majority of their wealth – most notably for things like the internet, the vastly superior technology, the health care and medicine capabilities, and the ability to travel anywhere in the world in under 24 hours. The truth is, apart from buying expensive luxuries for status, enjoying more leisure time, and consuming better versions of what the rest of us consume, the rich have a fairly similar quality of life to the average citizen in Europe.

By and large, then, the diminishing returns attached to the improvements we've seen in recent times indicate that the improvements in the future are going to be of a similar nature. In other words, there probably won't be scores of new consumer goods or services devised to supplement the lives we already have. The corollary of this is that if the leading two dozen or so countries can pretty well cater for the relatively small number of new products devised, and also augmentations to already existent products (technological tweaks here and there) it could mean that there is very limited potential for other nations to break into the leading group of countries already dominating the lion's share.

So the upshot is, given that the citizens of the world's most well off countries are well catered for in terms of goods and services, and that they can also provide for a high proportion of citizens of most developing countries, it may well be that developing countries struggle to attain their own progression-explosion due to the difficulty in joining the dominant countries.

However, there is a flip side to that coin. While it's good avoiding the basic mistakes of sloppy growth economists who just assume the future growth of the next few hundred years will resemble the past growth of the last 200, the contention I just offered has to come with some caution too, because the things we consume (goods and services) are not fixed - there are going to be plenty of innovations that change the way we can be supplied in a global market.

It's a bit like the fallacy I wrote about in this blog - the one that forewarns of robots bringing an end to half of today's jobs by 2025. It’s certainly true that augmentations in technology will mean an end to many roles currently undertaken by humans (one need only think of all the jobs we used to do that are now being done by machines). But that doesn’t necessarily mean what the doomsayers believe it will mean – because as history shows quite clearly, humans have the capacity, imagination and skill to do other things.

Imagine if you were having this conversation with a journalist at the beginning of the Industrial Revolution, and he told you how fearful he was that these new farming, printing and transportation machines would bring a gradual end to humans’ ability to work. You'd simply have to tell him that a lot changed after the Industrial Revolution, and that those changes saw more people on the planet than ever before, and more jobs than ever before. The key reason why there probably is nothing to worry about is that what constitutes ‘work’ (where work means earning a living) changes with growing societies and increasing technological advancements.

In the early 19th century you wouldn’t have been able to imagine how people could earn a living, say, making films or television programs, doing stand up comedy, providing complex domestic litigation, designing cars, driving taxis, flying planes, building speedboats, producing Kindles, playing football, working at a bowling alley, advertising on websites, fixing telephone lines or analysing DNA or quantum mechanics.

The same is true of this generation – the future ‘work’ that lies ahead is currently bound by technological limitations and unawareness of the activities that are currently not jobs but will be one day. As technology increases and those robots do things we used to do, we go on to do things we never used to do. In other words, we lose jobs thanks to technology (and make our lives a little easier in the process) and we create jobs thanks to ingenuity.

The same probably will apply to the global market, as (hopefully) developing countries get wealthier by having more involvement in the global market, and come up with ways to attract buyers' attention, just as it happened in the above cases.

All that said, the point about the two dozen or so dominant countries and the extent to which they dominate the lion's share of innovation at the expense of less developed nations looms large - and it is because those countries can more than easily cater for the future demand of consumable goods that developing countries may find it hard to achieve their own progression explosion any time soon.