Convergence, Interdependence, and Divergence

• Author: Kemal Derviş
• Position: Vice President and Director of Global Economy and Development at the Brookings Institution.

World Economy

Most feel that we live in an integrated globalized world. But when looking at recent history, what can one really say about the nature of this integration? It seems there are three fundamental trends at work that today characterize the world economy.

Three fundamental trends

The first trend is a new convergence. In his 1979 Nobel Prize lecture, the late development economist Sir Arthur Lewis said, “For the past hundred years the rate of growth of output in the developing world has depended on the rate of growth of output in the developed world. When the developed world grows fast, the developing world grows fast, when the developed slow down, the developing slow down. Is this linkage inevitable?”

Recent data suggest that while there remains linkage, it is now important to distinguish between long-term trends and cyclical movements. Since roughly 1990 the pace of per capita income growth in emerging and developing economies has accelerated in a sustainable manner and is substantially above that in advanced economies. This represents a major structural shift in the dynamics of the world economy.

A second fundamental feature in the world economy is cyclical interdependence. Although emerging and developing economies’ long-term trend growth rates have delinked—or “decoupled”—from those of advanced economies over the past 20 years, this has not led cyclical movements around the trend to delink.

New convergence and strengthened interdependence coincide with a third trend, relating to income distribution. In many countries the distribution of income has become more unequal, and the top earners’ share of income in particular has risen dramatically. In the United States the share of the top 1 percent has close to tripled over the past three decades, now accounting for about 20 percent of total U.S. income (Alvaredo and others, 2012). At the same time, while the new convergence mentioned above has reduced the distance between advanced and developing economies when they are taken as two aggregates, there are still millions of people in some of the poorest countries whose incomes have remained almost stagnant for more than a century (see “More or Less,” F&D, September 2011). These two facts have resulted in increased divergence between the richest people in the world and the very poorest, despite the broad convergence of average incomes.

New convergence

The world economy entered a new age of convergence around 1990, when average per capita incomes in emerging market and developing economies taken as a whole began to grow much faster than in advanced economies. The sharp division between rich and poor countries that characterized the world since the industrial revolution in the early part of the 19th century is now weakening. A key question is whether this new convergence is likely to continue and lead to a fundamental restructuring of the world economy over the next decade or so.

The industrial revolution and colonialism brought about great divergence (Maddison, 2007). Between the beginning of the 19th century and the middle of the 20th, the average per capita income gap between the richer, more industrial “North” and the less developed “South” rose from a factor of 3 or 4 to a factor of 20 or more (Milanovic, 2012). This divergence slowed after World War II, with the end of colonialism, but the relative income gap remained stable on average between 1950 and 1990.

For the past two decades, however, per capita income in emerging and developing economies taken as a whole has grown almost three times as fast as in advanced economies, despite the 1997–98 Asian crisis. Growth in emerging markets sped up in the 1990s, followed by an acceleration in the less developed countries around the turn of the century (see Chart 1).

Chart 2 shows the underlying trend growth rates calculated using a statistical technique, the Hodrick-Prescott filter, to separate cyclical movement from the longer-term trend. The delinking of the trend growth rate of emerging market countries from the 1990s onward, and that of developing countries in the past decade, is quite striking.

Three developments explain much of this new convergence.

Firs...