Everyone heard about emerging market economies. Nevertheless, it was not until the beginning of the current millennium that such classification appeared. Earlier, at the end of the last century such economies collectively grew at approximately the same pace as the rich economies of the developed world but then broke free in dramatic fashion last decade, enjoying a growth advantage of 6 percent.
The graph shows an economic growth dynamics of developed and developing countries.
In their most recent white paper, “The Productivity Prize - Accounting for Recent Economic Growth Among the BRICs: Miracle or Mirage?”, the SKOLKOVO Institute for Emerging Market Studies (SIEMS) examines the sources for this acceleration in economic growth among the larger emerging market economies last decade. We will share with you the key conclusions the authors came to.
The rapid pace of real GDP growth set by the world’s two largest emerging economies last decade was not a mirage. A large share was powered by efficiency gains. China’s rapid growth, for instance, was not just due to heavy investment and labor leaving the farm, but also to the world’s fastest productivity gains.
The research emphasizes that productivity growth is the most important gauge of an economy’s long-run health. Nothing is more critical in determining living standards over the long run than improvements in the efficiency with which an economy combines its inputs of capital and labor. Therefore, a better gauge of an economy’s use of resources is “total factor productivity” (TFP) which assesses the efficiency with which both capital and labor are used.
The authors examined a TFP growth for the last two decades for each member of BRIC and made the following interesting conclusions.
China is faced with a marked slowing of the increase in its working-age population. That said, China still has the potential to sustain much of its economic momentum in future years by continuing to shift its agricultural workforce into the higher productivity industrial and service sectors. This ongoing shift is an important reason why China’s TFP and overall growth has not been fading in recent years. One-third of China’s rural population is expected to move into urban centers over the next two decades.
India has three massive tails winds at its back. Not only will the working-age population be growing rapidly the next twenty years, but its labor force participation rate, has huge upside potential, particularly for females. India’s capital accumulation also appears to be in its early stages and is expected to remain elevated (as a share of GDP) for many years. Because capital formation just recently started in India, returns on capital should remain high. And with over half its workforce still directly employed in agriculture, India has the potential to experience enormous reallocation gains over the next two decades. Moreover, another positive tendency in India is an increased adult literacy rate.
TFP growth in Brazil has been anemic and rising even more slowly than in developed world. Whether the strong TFP upswing Brazil experienced the second half of last decade is the beginning of a trend remains to be seen. Looking forward, unless Brazil finds some way to significantly boost its long dormant efficiency gains, then the only way to maintain or accelerate its recent economic gains in the coming decade will be to dramatically increase its factor accumulations. For Brazil, this would have to come in the form of much greater fixed asset investment. The lack of TFP growth does not mean that Brazilians could not be richer years from now. The discovery of substantial oil reserves in Brazil has the potential to make the nation wealthier in the coming years assuming that the fiscal windfall is not wasted.
It’s clear that labor accumulation will not be a source of economic growth for Russia in the coming years. In Russia the working-age population is expected to drop by 15 million from 2010 to 2025. Productivity gains from the reallocation of labor are also not in the cards. That leaves the necessity of attracting a much larger share of foreign direct investment if Russia wants to
increase its domestic rate of investment.
At the same time Russia has so many structural problems hindering its productivity it is hard to choose just one. But one that would be relatively easy to change over the short-run would be reducing the level of state control over many of their strategic sectors (oil, gas, transportation, banking, etc). Liberalization would encourage greater foreign direct investment in these vital sectors, infusing the technological and managerial knowledge that Russia so desperately needs.
The above are just extracts from the researches done. If you are interested in details, figures, graphs, a general flow of reasoning, we would recommend that you should read a full text of the research.