That the developing economies led by China and India are in the forefront of the global economic recovery is well known. During 2010, while the emerging economies clocked 7 per cent, developed countries grew by 2.8 per cent. The World Bank in its latest publication, Global Economic Prospects expects the divergence in the growth rates to continue well into the future. This glaring disparity has already had some important consequences for the global economy. For instance, the dollar's status as the world's main reserve currency is under threat, although — as the problems some of the Euro zone countries are facing show — there is a big question mark over the viability of the monetary union and hence of the euro itself. The IMF is being reorganised, with the leading emerging economies set to acquire greater clout. The G20 has replaced the G8 as the world's leading economic grouping.
The divergence in growth rates is easy to understand. The developing countries will obviously grow faster than the rich ones. They can post greater productivity gains as they start from a low base. Eventually, their growth rates would converge on the rates of the West. According to the World Bank, what is surprising is that the developed countries trail the developing ones by such a wide margin. Their decline during the downturn was so sharp that the rebound should have been much stronger. Two important developments explain why that has not happened. One, both individuals and governments in the developed world are reeling under an extraordinarily high level of indebtedness. Consumers are spending less and governments are forced to go for austerity and other belt-tightening measures that are hardly conducive to growth. Secondly, the financial sector of the developed world remains impaired and credit flows have not increased to the desired extent. In contrast, the World Bank report points out that much of the growth in the developing world is supported by strong domestic demand. Indeed, during 2010, domestic demand in the emerging economies accounted for almost half the global growth. If sustained, this trend will help reduce global imbalances. However, the other growth driver for the developing countries, the large capital inflows, has been a mixed blessing. Such flows are the result of ultra-loose monetary policies in the West and they could just as easily change direction. Both the developed and developing countries should work together to minimise volatility and the risks to recovery.
