Globalization Is Narrowing The Wealth Gap, One Nation at a Time

(Bloomberg Opinion) -- Up through the 1980s, the blessings of the Industrial Revolution seemed largely confined to a handful of countries in Western Europe, East Asia, the U.S., Australia and Canada. But in the past three decades, there has been a sea change, and developing countries have made great strides in catching up. Although inequality has risen within some nations, at the global level it’s going down:

Much of this catch-up is happening in countries that are still largely poor, such as India or Indonesia. To an economist -- or someone who cares about alleviating the suffering of the world’s poorest people – this still represents a miracle. But a skeptic of globalization might wonder whether it can really be called a success if broad middle-class living standards still remain the exclusive privilege of a handful of nations, many of them former colonial powers.

Recently, however, a number of nations outside the old developed core are proving the doubters wrong. These newly industrialized countries haven’t yet achieved developed-country living standards, but they’re getting there:

An income of $20,000 may not sound like much compared with the more than $45,000 enjoyed in the U.K., which was the first country to industrialize. But this level of per-capita gross domestic product means a large portion of the population has a comfortable apartment, a family car and/or a well-functioning public transit system, and access to decent quality health care. Most importantly, it means security -- the knowledge that tomorrow won’t bring sudden deprivation of food, shelter, mobility or access to basic comforts. Of course, these countries still have people in poverty – as do rich nations like the U.S. – but it’s no longer the norm.

Furthermore, growth in these countries doesn’t appear to be leveling off. Although some economists have warned of a so-called middle-income trap, most of the newly industrialized countries seem to have been gaining on the rich world even faster in the years since the Great Recession:

So far there are only a handful of newly industrialized countries; though since China is one of them, they account for a hefty fraction of the world's population. But looking at their experience provides some important insights, and offers a lot of hope for the future of globalization.

First of all, it’s immediately apparent that the countries on the cusp of reaching developed-country status represent a broad cross-section of humanity. Turkey and Malaysia are majority Muslim countries, giving the lie to Western chauvinism, which holds that some cultures are incapable of modernization. Mexico, which is now solidly middle income, defies the condescending stereotypes held by some in the U.S. Poland and Romania prove that recovery from communism is possible, while China leaves no doubt that non-Western countries can become technological powerhouses. These countries are becoming sources not just of cheap products for rich-world consumers, but of important technological innovations, burgeoning market demand and even competition.

Second, the success stories of places like Turkey, Malaysia and Mexico yield lessons that can help other countries follow in their footsteps. It’s obvious, for example, that proximity to a big developed market matters a lot. Turkey and Eastern Europe are close to the old industrialized European core, Mexico is adjacent to the U.S. and so on.

But China shows that geography isn’t destiny -- it has export markets all over the world. The lesson is that maintaining good diplomatic relationships with countries with large consumer markets is essential, which tends to also require some level of reciprocity. Ironically, China’s rapid growth is threatened by its trade war with the U.S., which is probably a delayed reaction to China’s aggressive undervaluation of its currency in the 2000s and its theft and forced transfer of American intellectual property.

Another important lesson is that manufactured exports matter. None of these countries is primarily a resource exporter; all concentrate on making either vehicles, computers and electronics, or both:

Of the newly industrialized countries, Mexico has grown the slowest, and a significant factor is probably the difficulty of switching from an oil-based economy to one focused on manufacturing. Manufactured exports provide not just mass employment, but an opportunity for countries to increase their technological know-how. By forcing their companies to compete in world markets, nations can discover what they’re good at and encourage productivity improvements. Also, shifting away from resource-based economies helps avoid the institutional dysfunction that economists call the resource curse.

There are undoubtedly many more lessons to be learned from these countries, and up-and-coming developing nations such as Bangladesh, Indonesia, Ethiopia and Tanzania would do well to study Turkey, Malaysia, Romania and Mexico. What these success stories show is that industrialization isn't confined to any one region, or to countries that once had big colonial empires. With focus and persistence, almost any nation can do it.   

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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