and Catching-up in Emerging Market Economies
Grzegorz W. Kolodko
Polish Deputy Premier & Finance Minister ( 2002-03
& 1994-97) Republic of Poland, POLAND Director TIGER, Leon Kozminski Aad. of Entrepreneurship
& Mgt. Warsaw, POLAND John C. Evans Professor in European Studies, University
of Rochester, New York, USA
To believe is the privilege of politicians. Economists
should know. The economic policy makers – who are
typically economists put in charge of politics –
usurp the prerogatives of both groups and mistake belief
for knowledge. What they believe is that, the way the
world is made, the poor should be able to catch up with
the rich and reduce the enormous differences in the level
of economic development. Yet, these differences somehow
grow year by year. Today nearly half of the world’s
inhabitants live on less than two dollars a day, and a
billion people – a sixth of mankind – subsist
on less than a dollar.
Faith, of course, can help, but knowledge is of decisive
importance. What then do we know about the capacity of
the emerging, relatively backward market economies to
catch up with the highly developed countries? What systemic
arrangements and development strategies might lead to
this objective? What historic lessons are there to be
learned concerning the management of economic growth in
the future? How to distinguish the inevitable legacy of
the past, which can only evolve in time, from the economic
policy options left open? These are the questions that
should constantly be addressed, all the more so since
the old answers become outdated as the development factors
A third of a century ago, in 1969, the United Nations
set up an expert group, known as the Pearson Panel, to
suggest measures facilitating growth in less developed
countries and to level out the differences in living standards.
The Panel proposed development strategies which supposedly
promised the backward countries (many of which were then
in the process of gaining independence after centuries
of colonialism) to attain a 6-percent growth over the
coming decades. Countries that managed thus to accelerate
their economic growth were expected to become –
mainly through the expansion of exports – self-reliant
partners in the world economy by the year 2000.
The year 2000 has passed. And it turns out that the course
of development outlined by the Pearson Panel is a rare
exception rather than a rule. The United Nations established,
therefore, a new expert group, this time headed by the
former President Ernesto Zedillo of Mexico, whose task
is to advise on policies aiming to foster economic catching-up
and, in particular, to implement the ambitious goals put
on the agenda by the UN Millennium Summit – one
of which was to reduce the number of people living in
extreme poverty by at least half a billion until 2015.
The Zedillo Panel believes that this could be achieved
through rapid economic development, if only the rich countries
would increase their annual assistance for poor countries
to 0.44 percent of their GDP. The trouble is, as we all
know, that they would not (although they should) and so
development aid lags at a paltry 0.22 percent. Consequently,
the numbers of the poor do not shrink, disparities in
development level increase, and distances to catch up
grow. The year 2015 will soon have passed, too, conceivably,
without bringing any noticeable improvement. There will
be few winners, many more losers, and all the remaining
actors are also likely to be dissatisfied with the way
the globalized economy operates and the living standards
achieved. Can we do better than that?
This paper deals with the fundamental theoretical aspects
of and practical prerequisites to the catching-up process
in the emerging market economies. Following this introduction,
Part 2 presents the hitherto efforts in this area and
the actual socio-economic processes going on over the
last decades. Part 3 describes the current phase of globalization
and analyzes its influence on the trends in output change
and its pace. Part 4 contains a characterization of the
young, institutionally immature market economies which
seek to boost their growth rate through integration with
the global system. The disparities in development level
between various countries and regions in the world economy
are discussed in Part 5, along with their implications
for the catching-up process. Finally, Part 6 is devoted
to the policies of systemic reform and to conclusions
concerning a desirable development strategy to foster
fast, sustained growth in the emerging market economies.
2. Back to the future
The past is gone. And so is the present, because in reality
it does not exist, every passing moment turning instantly
and irrevocably into the past. Thus all that is left is
the future. Which is the most important thing. However,
in order to couch our expectations about the future in
rational terms, we need a good understanding of the past.
Otherwise, we will never manage to forecast future development
processes with reasonable accuracy, or to actively shape
these processes (which is even more important). For the
socio-economic aspects of the future are not only the
function of time and some chaotic development processes,
but, first and foremost, depend on a conscious development
strategy combined with a growth and distribution policy.
Throughout history, only about 30 nations, with
a total population of less than a billion – that
is, about 15 percent of mankind – has managed to
attain a relatively high development level, with
GDP per head exceeding $15,000 in terms of purchasing
power parity (PPP). Outside North America and Western
Europe, this group comprises the member countries of the
OECD from the Asia and Pacific region – Australia,
Japan, South Korea and New Zealand – as well as
Singapore. This level has also been achieved by some oil-exporting
OPEC countries (Brunei, Kuwait and Qatar), certain economies
with special structural characteristics (like the Bahamas,
Martinique and Taiwan), and a few overseas territories
of highly developed countries (like French Polynesia or
New Caledonia). In 2001, the highest-income group was
joint by the first and only post-socialist country thus
far – the tiny (2 million inhabitants) Slovenia.
Next in line is the Czech Republic, where GDP per head
is expected to exceed $15,000 in 2004.
On the other extreme are countries unable to overcome
the vicious circle of poverty. Some of them not only fail
to close the staggering gap that separates them from highly
developed countries, but keep plunging in stagnation and
recession, lagging further and further behind not only
economically, but also culturally. It happened in the
past, and it happens, occasionally, today (Magarinos and
Sercovich 2001). No doubt it will also happen in the future.
Why? The answer is that only few countries in history
managed to catch the train of progress. It was only possible
if three favorable circumstances co-occurred.
First, economic development always requires technological
progress. Without the spread of new manufacturing methods
and the implementation of novel technologies that change
the organization of production, no innovation is possible
– and it is innovation that drives economic growth.
Necessary – but not sufficient – conditions
of technological progress also include, obviously, high-quality
human capital, an adequate level of education and science,
as well as efficient system arrangements in these areas
Second, in order to sustain long-term development trends,
it is essential to reform the institutional framework
of an efficient market economy. Otherwise, even a relative
technological superiority is no guarantee of rapid economic
growth, as creative enterprise becomes stifled in such
circumstances. Obviously, creative enterprise is even
less possible in technologically backward countries. Thus,
without the capacity for economic reform, rapid output
growth can hardly be relied on.
Third, a creative feedback between technological
progress and economic reform calls for political determination
on the part of the political elites, who must be willing
to upset the existing balance and to challenge the established
position of conservative interest groups. Only
then can the “new” gain the upper hand of
the “old”, which is necessary for a sustained
productivity growth. The fear of the temporary confusion
that accompanies this kind of change often paralyzes the
authorities, who then begin – through their reluctance
to stimulate and institute the required reforms –
to hamper rather than facilitate economic progress and
One needs to reminisce about the past – including
more distant past, spanning several centuries –
if for nothing else, then in order to realize, at the
outset of a new millennium, that history is happening
at all times. Now, too, because of the three momentous
processes coinciding today: the current phase of permanent
globalization (Bordo, Eichengreen, Irwin 1999;
Frankel 2001; Kolodko 2002a), the post-socialist
transformation (Blanchard 1997; Lavigne 1999;
Kolodko 2000a), and the modern scientific and
technological revolution (Raymond 1999; OECD
2000; Payson 2000; Kolodko 2000d). It is in this context
that we should perceive modern developments, so as to
avoid missing the train of progress once again. Not everyone
succeeded in this task in the past: actually, few did.
The same thing is being repeated now: some will get on
the train, some will be left waiting, and some might even
get pushed off the platform.
Incidentally, this phenomenon has already been observed
for two decades. This is shown, for instance, by a World
Bank report (World Bank 2002a) which distinguishes –
apart from the rich economies – two main groups
of states. Today the term “developing countries”
is less frequently used with reference to these, for the
simple reason that some of them are hardly developing.
Instead, one speaks about more globalized countries (MGC)
and less globalized countries (LGC). This distinction
is based on the participation in the international labor
division, measured by the dynamics of foreign trade. A
third part of the countries where the growth of the proportion
of foreign trade volume to GDP in the 1980s and 1990s
was steepest has been classified as MGCs, and the remaining
two thirds as LGCs.
The group of 24 countries which become more actively involved
in the world economy (MGCs) has a total population of
nearly 3 billion. The 49 countries less tightly integrated
through foreign trade with the world system (LGCs) have
about 1.1 billion inhabitants. The characteristics of
the two groups differ widely, and changes in output level
and dynamics, as well as the living standards, follow
different trends in either group (Table 1).
Table 1: Characteristics of more and less globalized countries
capita GDP, 1980 (USD)
capita GDP, 1997 (USD)
of law index, 1997
(world average = 0)
World Bank 2002a.
1980, GDP per head (in PPP terms) in the MGC group stood,
on average, at less than $1,500; by 1997, it increased to
nearly $2,500 – that is, by almost two thirds. In
the LGC group, the increase amounted merely to about $200,
or less than 10 percent. Taking into account just the last
five years, the respective proportions become even more
striking. While the MGCs have kept developing at an average
rate of about 5 percent annually and managed to further
increase GDP pre head by almost $400, reaching about $3,100
in 2002, the LGCs have recorded an about 6-percent drop
in GDP per head, to about $1,900 in 2002. Thus the difference
in this respect changed from about $500 in favor of the
LGCs in 1980 to about $1,200 in favor of the MGCs in 2002.
These are significant qualitative differences which alter
the face of the modern world.
Such tendencies indicate that within the time span of a
single generation, the economies that take more active part
in globalization managed to double their real income per
head. Unfortunately, the income of other societies, less
involved in the development of international trade, did
not increase, on average, at all. If a shorter time span
is taken into account, and these processes are viewed solely
from the perspective of the 1990s, we will see a 63-percent
increase of GDP per head in the MGC group and a drop by
about 10 percent in the LGC group (Figure 1).
1: Economic growth in the world economy, 1991–2000
(GDP per head in percent)
Dollar and Kraay 2001.
one must not overlook in this context the fact that this
general, fairly encouraging picture of change results mainly
from the unprecedented progress attained by just two countries.
But these were quite special countries, too: China and India,
inhabited jointly by some 2.3 billion people. Therefore,
their growth rate has an overwhelming impact on the indicators
of the entire MGC group.
It is an important and noteworthy fact that both China and
India – although they follow different routes and
their progressive integration with the world economy and
involvement in the worldwide competition likewise takes
dissimilar paths – pursue development strategies by
no means based on the neoliberal orthodoxy and the classical
prescriptions that stem from the so-called Washington Consensus,
which has been invoked so often recently in mainstream economics
and figured promitly
in the recommendations given to many countries by the G-7
countries, the International Monetary Fund and the World
Both China and India are reforming their respective economies
at their own, not too quick pace, but with a great deal
of consistency and determination. They liberalize capital
movements gradually and with moderation, while the exchange
rates are effectively controlled by the state at all times.
Moreover, their monetary policy is subordinated to the overall
national policy, the top priority of which is rapid economic
growth. To this end, state intervention is used in both
countries more extensively than elsewhere, mainly in the
form of industrial and trade policies. Such a combination
of structural reform and development policy brings favorable
Chinese GDP increased in the 1980s by as much as 162 percent,
which amounts to an average real year-to-year growth of
10.1 percent. In the 1990s, growth was even faster, reaching
10.7 percent annually, to produce a cumulative output increase
of another 176 percent. In 2000-02, growth rate has somewhat
declined, fluctuating around 7 percent. Thus over the past
23 years – within the time span of a single generation
– GDP in China has grown by a staggering 780 percent!
Given the population growth at the same time, the increase
of GDP per head was, at 575 percent, relatively lower, but
this too is a giant leap (this time a successful one) in
the field of economic catching-up and, consequently, the
living standards. Yet the disparities remain enormous. It
should be borne in mind that, despite this successful, great
step forward, Chinese GDP per head (in PPP terms), still
comes up to a mere 12 percent of the USA level.
India, in turn, saw in the 1980s an average annual growth
rate of 5.8 percent, which increased to 6% in the following
decade. In the last three years (2000–02), real GDP
growth has been around 5%. Thus the aggregate output growth
within the time span of one generation (1980–2002)
has totaled 264 percent, or 130 percent on a per head basis,
because of the much higher population growth than in China.
Thus when it comes to closing the gap between rich economies
and the MGC group, one should remember that if the world’s
two most populous countries were to be excluded from this
group, the picture would be far less optimistic. The MGC
population would then drop from three billion to 700 million,
among which the income growth would be far less impressive.
On the other hand, there exist countries which have been
thus far unable to cope. Not managing to reduce the gap,
some of them have actually been losing distance. Unfortunately,
from the point of view of the attained development level
(or, to put it differently, relative backwardness), the
latter group comprises nearly all the economies of Central
and Eastern Europe and the former Soviet Union, in the midst
of a lengthy and complex transition from central planning
to free market. This transition is inseparable from the
process of successive opening up to foreign contacts that
will lead in time to full integration with the global economy
(IMF 2000b; Kolodko 2000c).
Characteristically, out of the total number of 28 post-socialist
economies, only Hungary has found its way to the more globalized
group. All the 15 post-Soviet republics, as well as the
remaining 11 countries of Central and Eastern Europe and
Mongolia, showed in the previous decade too low foreign
trade dynamics to qualify, using the World Bank methodology,
to that group.
Of course, this fact by itself does not amount to much.
Far more importantly, in the 1990s, the distance between
these countries and more highly developed and affluent societies
further increased. Whereas GDP in post-socialist countries
plummeted in 11 years (1990–2000) in absolute terms
by an alarming 28 percent, the seven most highly developed
economies of the world – known as G-7 – recorded
during the same years a 28-percent increase. Respectively,
in the 15 European Union countries, growth amounted to 24
percent and in OECD countries, to some 31 percent. Thus
the already enormous gap between the post-socialist region
and the most advanced economies was further dramatically
broadened. Great as the distance was, now it is even greater.
This is highly significant. After all, one of the fundamental
economic arguments in favor of the post-socialist systemic
transformation was – and remains – the conviction
that market transition will contribute to greater economic
efficiency and will soon lead to higher growth rates, compared
not only with central planning, but also with the developed
market economies. Thus far, 13 years into the transition,
this is hardly the case. In time, however, these predictions
may materialize, although – as the experience of recent
years shows – the economic transformation alone is
not enough. What is needed is also an appropriate strategy
of socio-economic development.
3. The contemporary phase of globalization
Globalization is the historical process of liberalization
and integration of goods, capital and labor markets, which
have hitherto functioned to certain extent in separation,
into a single world marketplace. The qualification “to
certain extent” is important, because even seemingly
totally separate national or regional economic organisms
are somehow interconnected, indirectly or directly, and
some economic and financial flows do take place between
them, albeit on a limited scale. As regards specific markets,
their liberalization and consequent integration differs
in scope and intensity.
There are differences between the markets of goods and services,
many of the latter being unsuitable, in view of their specific
form, to be traded globally, as they need to be consumed
on the spot, the moment they are performed. Different still
is the market of capital transfers, which follow different
rules than the simple movements of goods. Yet another set
of differences pertains to labor, whose international transfers
have thus far been liberalized to the least extent –
for economic, but also cultural and strictly political reasons,
although the latter (except for extremist political movements,
like Haider’s party in Austria or Le Pen’s party
in France) is rarely publicly admitted.
To be sure, the scope of market integration has been changing
across the historical phases of the globalization process
(Frankel 2001). Globalization can be divided into periods
in many different ways. Apparently, one can even speak about
its permanent character, because globalization – that
is, the extent to which particular product markets and regional
markets have been liberalized and integrated – has
been deepening all the time, although with varying intensity,
long breaks or even occasional setbacks, as in 1914–45.
In the history of permanent globalization thus construed,
three particularly expansive phases can be distinguished:
- globalization of the Age of Exploration (16th
to mid-17th centuries);
- globalization of the Industrial Revolution (mid-18th to
- globalization of the Age of Computers and the Internet
(last quarter of 20th century and beginning of 21st century)
The World Bank distinguishes three phases of globalization,
covering, respectively, the years 1870–1914, 1950–80
and recent times, past-1980 (World Bank 2002a). However,
this periodization gives rise to serious reservations, for
two reasons. First, it totally ignores earlier (pre-1870)
peaks of international economic activity and links between
numerous regional and national markets, as well as the ensuing
qualitative changes. Second, the years 1950–80 cannot
be considered a “second phase of globalization”,
because, as the World Bank report itself confirms, that
period involved only the integration of highly developed
capitalist economies, that is, those of North America, Western
Europe and Japan. This is quite a lot, but not enough to
be considered a “global economy”. Remaining
outside the scope of those integration processes were some
huge areas: both the “Second World” of socialist
planned economies, and the “Third World” of
Six characteristics of modern globalization can be distinguished.
First, thanks to the significant reduction of customs barriers,
the volume of world trade increases very fast, nearly twice
as fast as output. While the global GDP increased in 1965–99,
on the average, at 3.3 percent a year, the volume of exports
(and hence, in the global context, also imports) increased
at 5.9 percent per annum. Foreign-trade growth was fastest
in the MGC group: in the case of the East Asia and Pacific
region, it stood at 10.1 percent a year, on average. However,
even in some LGCs foreign-trade dynamics exceeds that of
GDP growth. As a result, the share of these countries in
world trade increased from 19 percent in 1971 to about 30
percent in 2001. Moreover, there have been favorable changes
in the structure of these exports. In 1980, merely 20 percent
of exports from less developed countries consisted of processed
manufactured goods; today this proportion exceeds 80 percent
Second, apart from some temporary disturbances caused by
a series of financial crises at the turn of the previous
decade, capital flows have been steadily increasing. Three
decades ago, capital transfers from rich to less advanced
countries stood at less than $28bn; in the record-breaking
(thus far) year 1997, they were 11 times higher, reaching
$306bn. Growth of the transfer volume has been particularly
explosive in the case of private portfolio investments:
from a negligible $10m in 1970 to a record $103bn in 1996.
Third, there are population migrations. Although the modern-time
movements are not as extensive as those in the years 1870–1910,
when as much as about 10 percent of the world population
changed their permanent residence, their economic significance
is considerable. Over nearly forty years (since 1965), the
number of employees who have found work outside their country
of birth has nearly doubled. Interestingly, the scope of
migrations is greatest between less developed countries,
rather than from those countries to rich ones.
Fourth, one should take note of the dissemination of new
technologies, and in particular the spreading impact of
the scientific and technological revolution connected with
information and computer technologies (ICT). We witness
the birth and development of a knowledge-based economy,
with serious implications for countries seeking to catch
up with more highly developed states. Progress pertains
not only to the “hard” manufacturing technologies,
but also to new management and marketing methods, which
greatly boost productivity and hence increase the output.
Fifth, an indispensable element of the current phase of
globalization is the post-socialist systemic transformation.
Indeed, one could hardly speak about globalization without
including in this process this huge area, inhabited by more
than a quarter of mankind. On the one hand, this transformation
acts as a catalyst facilitating market transition in the
former centrally planned economies. On the other hand, it
complements and completes the globalization process itself.
Global economy means global capitalism (Hutton and Giddens
2000) and, therefore, it can only be based on the market.
Thus the inclusion of Central and Eastern European countries,
the Commonwealth of Independent States, China and Indochina
in this process will require the prior transformation of
these areas into open and liberalized market economies.
Sixth, the radical transformation of the financial and economic
structures and institutions is accompanied by far-reaching
cultural change. Greater openness to the transfer of not
only people, but, first and foremost, ideas – not
least through the phenomenal growth of the Internet, which
is a medium resistant to bureaucratic and political control
– means that the world has shrunk considerably and
increasingly acquires the characteristics of a “global
village”. But at the same time it has also enormously
expanded by the creation of vast virtual spaces in which
various cultural trends coalesce as if in a giant melting
pot, while new forms of economic activity are being born
(Kolodko 2000d; Zacher 2000).
Thus defined and characterized, globalizations seems an
irreversible process. But is it really so? From the point
of view of the incredibly accelerated information flow and
decreased communication and transportation costs, it is.
There is no way to undo technological progress and the explosive
growth of the ICT sector – the two factors that have
altered within the time span of one generation, right before
our eyes, the face of the world.
What is it like then, the world’s new face? First
and foremost, it is heterogeneous, for not all the consequences
of globalization are positive. The persistence or even,
in some areas, increase of social inequalities (Dollar 2001),
financial crises and their spread to other sectors of the
world economy (including some economies based on relatively
sound foundations and strong institutions), the dying off
of some traditional branches of manufacturing in certain
countries due to their low competitiveness, which creates
rampant unemployment and poverty – these are but a
few of the disadvantages of globalization. Further problems
arise not only in the social and economic spheres, but also
on the political or even military levels. As an extreme
example, one could point at international terrorism, which,
incidentally, can be viewed as a privatization of wars and
military conflicts, or as an instance of the world trade
in arms running out of control of powerful countries and
the international organizations in which these countries
play a dominant role, such as the UN or the WTO.
Therefore, the possibility that the attained progress of
globalization will be reversed cannot be ruled out. It has
happened so in the past, for instance, after 1914, when
the then achieved level of globalization likewise seemed
secure. Thus although technological progress cannot be checked,
further liberalization of trade and capital movements –
as well as, significantly, the increasingly liberalized
transfer of labor – can be brought to a halt. The
threat of renewed protectionism is real and cannot be ruled
out a priori. That would automatically entail the slowing
down of globalization, which would deprive many nations
of the chance to catch up with more advanced economies.
We keep looking at the world economy from the perspective
of its component countries. This is not only due to the
availability of appropriately aggregated statistical data
(and hence the possibility to carry out various comparative
analyses), but also – and mainly – because of
the domination of the traditional way of thinking. Accordingly,
although it would be more convenient to speak of the increasingly
integrated world economy in terms of various regions, rather
than countries and national economies, the traditional,
“nation-centered” thinking will continue to
hold sway for many years to come. Superposed on it is the
perception of the word economy as clearly divided into mature
economic systems and “emerging markets”.
4. The emerging markets
The notion of “emerging markets” is blurred.
It gets a different reading in the countries in which it
was coined, that is, highly developed market economies (Mobius
1996; Garten 1998; Gilpin 2001), and in the countries to
which it directly applies. The latter is a large, if heterogeneous,
group, with a well-defined center and hazy periphery.
It is easier to say with certainty what is not an emerging
market than what is. One could say that emerging markets
do not include, by definition, either those highly developed
market economies which have long evolved mature institutional
systems, or those countries which have yet to set out on
the path of market development. Thus outside this group
are all rich, institutionally mature countries. These comprise
all the “old” members of the OECD (except Turkey),
and several countries which have attained a high development
level in recent decades, acceding wholeheartedly to the
world economic exchange and liberalizing their economic
It remains a moot point whether every relatively rich country
can be excluded a priori from the “emerging markets”.
Should we include in this group – in view of their
specific economic system and a certain immaturity of their
market institutions, and in particular, barriers to competition
and a lack of liberal deregulation – some oil-rich
Arab countries which owe their relatively high development
level solely to their natural resources? Could it really
be that, say, Qatar or the United Arab Emirates, with a
PPP-adjusted per capita GDP of, respectively, about USD
19,000 and USD 17,000, are more mature – already “emerged”
– market economies than Chile or Hungary? Or do they
just happen to be richer than the latter? It would seem,
therefore, that – at this end of the spectrum –
inclusion in the category of developed markets should be
based on the criterion of market-institution maturity rather
than level of development alone.
At the opposite end of the list of countries that certainly
cannot be included among the “emerging markets”
are four types of economies. The first one, rendered totally
obsolete by the post-socialist transformation, comprises
the orthodox socialist states, like North Korea and Cuba.
The second is made up of countries which either by way of
their own political preference, or through international
sanctions imposed upon them, are largely isolated from broader
contacts with the world economy, like Myanmar, Iraq or Libya.
The third group consists of failed states with dysfunctional
institutions, which are not only unable to take part in
global economic exchange, but even internally appear ungovernable,
such as Afghanistan and Bosnia-Herzegovina, or a fair number
of African countries, like Somalia, Congo (former Zaire),
Sierra Leone or Rwanda.
Finally, the fourth group – which is the most important
source of candidates for an “emerging market”
status – comprises countries which are gradually approaching
a stage in structural reforms, opening and liberalization
where a qualitative change is about to take place that may
soon enable them to take advantage of free global capital
flows or international free trade. One can classify with
this group some post-socialist countries which have belatedly
embarked on the transformation, like Turkmenistan or Uzbekistan,
as well as some of the former “Third World”
countries now facing profound economic and political reform,
like Algeria or Iran, and, finally, countries about to overcome
the turmoil of civil war and armed ethnic strife, like,
formerly, Guatemala and Yemen and now (hopefully) Angola
and East Timor.
Unfortunately, there are processes in the modern world going
in the opposite direction, too. Economies whose markets
were already “emerging” may be set back in this
process. This is particularly true of countries which become
entangled – often quite unexpectedly – in destructive
political and military conflicts, usually, though not always,
of ethnic character. By way of exemplification, one could
mention Kyrgyz Republic and Nepal in Asia, Madagascar and
Zimbabwe in Africa, or Haiti and Colombia in America. Thus,
generally speaking, what is and what is not an “emerging
market” depends on the maturity of its institutions,
that is the rules of the economic market game – the
law and culture – and the institutions enforcing the
adherence to these rules.
Methodologically, it is also possible to treat as “emerging
markets” all economic systems which cannot be considered
fully mature. Then one would also have to include in this
category Iraq beside China, Belarus beside Poland, Libya
beside South Africa, Cuba beside Mexico. Indeed, the classification
here is a matter of convention, rather than sharp distinctions
based on substantive criteria. This is not really the main
point and there is no need to argue whether Singapore and
Slovenia still count as “emerging markets”,
as global investors would have it, or whether Pakistan and
Kazakhstan have already attained this status, although not
as fast as some transnational corporations and the governments
of the most highly developed economies would wish.
Of greater importance is the interpretation of the “emerging
market” category, as well as its theoretical and especially
pragmatic implications. Does the fact that a country counts
as an “emerging market” has a bearing on its
socio-economic development, and in particular, on its chances
for accelerated growth, which are of special interest for
us here? This is one of the issues that the two interpretations
of the “emerging markets” – from their
own perspective and that of the advanced economies –
are concerned with.
From the point of view of (institutionally) developed and
(materially) rich countries, the “emerging markets”
are treated instrumentally. For these countries, they form
yet another segment of the expanding field of economic activity.
Thanks to its “emergence”, a new region of the
world opens up for penetration by creating an opportunity
to invest profitably surplus capitals, sell products and
acquire resources, including relatively cheap labor. In
this way an additional demand “emerges” –
and becomes globalized – which now can be satisfied,
as the political, economic and financial barriers that used
to block access to these regions of the world are being
torn down. Such an approach emphasizes not so much a commitment
to the socio-economic development of an “emerging”
market, as the opportunity to increase one’s own capacity
for expansion and to multiply the wealth of the already
rich countries. The development of an “emerging market”
itself is only important inasmuch as it favors further expansion
of the rich countries in a specific, new sales market. In
other words, under the instrumental approach, rapid growth
of an “emerging market” is not a self-contained,
supreme goal, but only an instrument to further the interests
of other, more powerful actors in the global economic game
– be it the highly developed countries or the great
On the other hand, the “emerging markets” themselves
– which, incidentally, did not insist on being thus
named – have a totally different outlook on this subject.
What matters from their point of view is not the additional
outlet created in their territory for the capital and goods
from other, more advanced countries, but the rapid maturation
of their own economic systems, leading to the emergence
of full-fledged market economies. On this interpretation,
the principal goal is not to create a new sales market for
others, but to build a new, market system which is institutionally
liberalized and progressively opens, much to its own benefit,
to an expanding range of outside contacts.
Such a system should ensure a higher level of efficiency
and faster output growth, hence also improving the living
standards of the societies in countries described as “emerging
markets”. The object of the game is to have market
economies emerge, rather than just markets. This distinction
is significant, for it emphasizes the main objective, which
is rapid growth, to be achieved by the creation of an open,
market economy with strong institutions. But the fact that
a given country can be classified as an “emerging
market” is in itself no guarantee that its economy
is growing. If this is to be the case, many conditions must
5. Development gap and catching-up
How, then, are we to understand catching-up? What is it
supposed to be like and who is to close the distance to
whom? Do we speak about Canada catching up with the United
States, Eastern Europe catching up with Western Europe,
or perhaps Africa catching up with Southeast Asia? And with
Europe, too? What are the prerequisites and implications
of catching- up? To answer such questions, it is good to
realize first what the starting point is, which the world
economy has reached at the beginning of the 21st century.
Different regions vastly differ in attained development
So far some economies have been doing better than others.
Over the past few decades, some have recorded considerable
growth, while others are treading water or even falling
behind with their development level. As a result, huge differences
in development levels exist between specific countries and
regions of the global economy, and thus the less advanced
economies face the task of closing an enormous distance.
In most cases it is plain to see that this distance cannot
be made up for. But there should likewise be no doubt that
for some emerging market economies, including several post-socialist
countries, catching up with the highly developed countries
is within reach (Kolodko 2001b and 2002b).
The potential reduction of distances in development levels
should be seen in various perspectives. After all, we are
not speaking about Sierra Leone catching up with the GDP
of the Luxembourgers, who generate within a working week
as much output (in terms of value) as the Sierra Leoneans
do in two years. Nor are we speaking about Honduras overtaking
the United States. But we do want to see Honduras, as well
as other countries of Central America and the Caribbean,
develop faster than their rich neighbor up north, overcoming
in time their backwardness and poverty. The same can be
said about Ukraine and Germany, Vietnam and Japan, Sudan
and Egypt, or Papua New Guinea and Australia.
Closing the distances should be seen not only – or
even not mainly – in the global context, but in a
regional one. First one needs to catch up with one’s
close neighbors who have attained a relatively higher development
level. In the neighborhood of every country there are other,
more highly developed economies, and reducing the distance
to them should be one of the strategic political objectives.
Especially when these are adjacent countries, like Haiti
and the far more prosperous Dominican Republic, Costa Rica,
which develops much faster than its neighbor, Nicaragua,
Uganda, which does better than Tanzania, or Thailand, which
has greatly outdistanced Laos. Such instances, as well as
many others, demonstrate that the currently existing differences
in development level are not only the function of geographical
location and the available natural resources, but mostly
result from the unequal efficiency of the respective economic
systems and the varying quality of the trade development
policy followed by specific countries (World Bank 2002c).
The same observation pertains to post-socialist countries,
among which the pre-existing differences in development
level changed in various ways over the first dozen or so
years of the transformation, because of the varied duration
and depth of the transitional recession (Kolodko 2000a;
Blejer and Skreb 2001; EBRD 2002). Thus if Poland wants
to improve its position, it should first close in on the
Czech Republic and Hungary; likewise, Uzbekistan should
first attain the development level of Kazakhstan and Russia,
to be able to proceed further.
It seems, however, natural from the political and psychological
points of view that, say, Turkmenistan looks up mostly to
the nearby and culturally similar Turkey, Hungary wants
to emulate the neighboring Austria, Estonia compares itself
with Finland, Poland with Germany and Macedonia with Greece.
The amount of catching-up differs in all these cases. The
distance is least pronounced in the case of Turkmenistan,
whose PPP-adjusted GDP per head is about 50 percent of that
of Turkey. The respective proportion stands at 45 percent
between Hungary and Austria, 37 percent between Estonia
and Finland, and 35 percent between Poland and Germany.
The most severe disparity occurs between Macedonia and Greece,
where the ratio in question amounts to a mere 24 percent.
Let us add that we are not concerned in the present discussion
with the catching up processes among highly developed economies
(which, incidentally, is an interesting problem in its own
right). In order to catch up with the U.S. in terms of PPP-adjusted
GDP per head, Canada would have to increase its output by
25 percent. But the growth rates in both countries have
been very similar in recent years, mainly because of their
strongly correlated business cycles. For South Korea to
overtake Japan, its GDP per head would have to grow by 62
percent. If New Zealand’s per capita GDP were to equal
that of Australia, it would have to be boosted by 35 percent.
For Austria to be level with Switzerland, its per capita
GDP would have to move 17 percent up, whereas a similar
outcome in the case of Portugal and Spain would require
only a 12-percent growth.
Yet even if GDP levels per head were fully equalized, this
would by no means eliminate differences in living standards,
because the latter depend not only on the current income
stream, but also on the resources accumulated – in
some cases over many centuries. This can be illustrated
by the example of Finland and Sweden, which has been the
more prosperous of the two for ages, partly due the exploitation
of its eastern neighbor. Currently – since the turn
of the previous decade – Finland enjoys a per capita
GDP level (in PPP terms) amounting to 105 percent of the
OECD average, whereas the same indicator in Sweden stands
at 103 percent. In absolute numbers, this amounted in the
year 2000 to about $24,900 and $24,400, respectively.
Catching-up has been even more efficient in the case of
Ireland, which has managed to exceed the GDP of the United
Kingdom (respectively, $25,060 and $24,390 at current exchange
rates, or $28,500 and $23,900 in terms of PPP). However,
the consumption level still clearly lags behind in Ireland.
These differences remain conspicuous. A trip from London
to Dublin is enough to see that it was Britain, and not
Ireland, that was for centuries the center of an empire
on which the sun never set. The legacy of that period can
still be seen both in the regional proportions of income
and wealth distribution, and in the functioning of the global
Thus the average income level is greatly differentiated
in modern world. The table below compares the ranking of
70 countries where the PPP-adjusted income per head exceeds
$6,000 (or about a sixth of the current U.S. level) with
the 20 poorest countries of the world. Among the former
group, there are just 12 out of the 32 post-socialist economies
of Europe and Asia (including China and Indochina). In the
latter group, there is just one post-socialist country:
Tajikistan – the poorest of all the countries undergoing
a systemic post-socialist transformation.
Table 2: Countries
with highest and lowest GDP per head in PPP (USA = 100)
1. Luxembourg Korea
Trinidad & Tobago
United Arab Emirates
Post-socialist countries – in bold letters.
the existing differences in development level thus requires
that the output growth rate should be high – markedly
higher than in rich countries. This is obvious. But it is
worthwhile to ask how big the difference in growth rates
should be in order to reduce the distance in a perceptible
way or, in some cases, eliminate in time the existing gaps.
Catching up is possible when the economic growth
in a given country is at the same time: – fast;
So when can we say that growth is “fast”? This
is a relative matter, for the same absolute growth rate
can be in certain cases – in the context of one country
or period – considered to be high, while elsewhere
it is low. Undoubtedly, the average annual GDP growth of
3.3 percent in the United States in the 1990s was very fast.
The neighboring Mexico recorded a similar rate during the
same period, but this meant slow growth, because it not
only failed to shorten the cumulative distance, but even,
in view of the relatively weaker growth dynamics in per
capita terms, resulted in an even greater income disparity.
In 1992–2001, overall GDP increased in Mexico, on
average, by 3.2 percent per annum. But calculated on a per
capita basis, growth was merely 1.5 percent annually. As
a result, the distance between the two economies and the
living standard of their population increased even further.
It should be noted that, from the point of view of growth
rate dispersion and catching-up with the developed countries,
this is the main difference between the market economies
emerging from “Third World” and “Second
World” (post-socialist) countries. Let us compare
Latin America and the Caribbean with Central and Eastern
Europe and the CIS. In the post-socialist economies, overall
output grows at the same rate as output per head, as the
population, generally, does not change. On the other hand,
in the emerging market economies of America, population
is increasing steeply. In extreme cases, the spread between
GDP growth rate in overall and per capita terms exceeds
two percentage points. During the previous decade, it reached
2.6 percentage points in Paraguay (respectively, +1.7 and
–0.9 percent), and 2.1 points in Ecuador and Venezuela
(respectively, +2.0 and –0.1, and +2.4 and +0.3 percent).
In the entire Latin America and Caribbean region, GDP grew
on average at 2.9 percent a year, but on a per capita basis,
the increase dwindled to a lame 1.2 percent annually, that
is, below the social perception threshold. Worse still,
in as many as five countries of the region (Ecuador, Jamaica,
Haiti, Cuba and Paraguay), output per head was lower in
2001 than 11 years before, although it was only in two of
these countries (Cuba and Haiti) that overall output shrank
Thus if growth is to qualify as fast, it should be qualitatively
higher in per capita terms than in highly developed countries.
The term “qualitatively” is used here to imply
that, in time, the differences in development level will
perceptibly diminish. Bearing in mind the disparities existing
at the very outset, it might be assumed that rapid growth
presupposes at least double the growth rate of developed
economies. In the last-mentioned group, the average annual
growth over the last 35 years has stood at 3.2 percent in
overall terms, or 2.4 percent on a per capita basis. Accordingly,
rapid growth should amount to at least 5 percent annually
in per head terms. At this rate, GDP doubles approximately
every 14 years, so within the time span of a single generation
it quadruples. If so, even if the starting point was low,
qualitative changes for the better take place and the distance
to more developed economies is substantially shortened.
What makes this point important is that less advanced economies
– both from the MGC and LGC groups – are characterized
by faster population growth than rich countries. One exception
from this rule is post-socialist countries, where, in general,
population does not increase. In the years 1995–2000,
as many as 17 out of the 20 countries with the lowest natural
increase (which indeed took negative values) were post-socialist
countries. According to UN demographic forecasts, this tendency
will continue to prevail until 2005. Among the top 20 countries
with the largest absolute population decrease during this
period there are 16 countries of Central and Eastern Europe
and the CIS – from –0.1 percent annually in
the Czech Republic, Poland and Slovenia, to –1.0 and
–1.1 percent, respectively, in Bulgaria and Estonia.
Hence, in these cases overall growth rate can be equated
with per capita growth rate.
Unfortunately, situated at the opposite end of the spectrum
are many of the world’s most backward and poorest countries,
including two post-socialist economies which have lost much
of their national income to local conflicts: Bosnia-Herzegovina
and Cambodia. The average natural increase rate in this group
varies these days from 2.8 percent in Cambodia to 3.2 percent
in Mauritania and Chad, to as much as 8.5 percent in Rwanda
3: Fastest and slowest growing population, 2000-05
(annual average growth in percent)
West Bank and Gaza
Post-socialist countries – in bold letters.
If, then, “fast growth” could be conventionally
defined as a real per capita GDP growth of 5 percent
plus annually, another question arises: what is “sustained
growth”? It could be assumed, also by convention,
that sustained growth pertains to a macroeconomic reproduction
process which spans a period of at least ten to twenty
years, allowing per capita national income to double
at roughly half-generation intervals. Such criteria
of sustained growth are undoubtedly met by China’s
economic expansion over the last 25 years or the doubling
of the GDP by Ireland during the 1990s and its continued
growth at about 5 percent annually in the first years
of the current decade.
Likewise, the average growth of per capita GDP by 6.4
percent annually in South Korea in 1965–2002 can
be labeled both rapid and sustained. Unfortunately,
the same cannot be said about growth in Poland over
the last decade. Even though GDP increased in 1994–7
– in the course of the implementation of the policy
known as “Strategy for Poland” (Kolodko
and Nuti 1997) – by as much as 28 percent, likewise
increasing on a per capita basis by 6.4 percent annually
on average, this prosperity was too short-lived, being
prematurely interrupted by erroneous economic- and especially
monetary-policy decisions, implemented since 1998. As
a result, the economy was brought down to near stagnation
in 2001–2, with a mediocre growth of 1 percent
annually. Thus the distance to developed countries began
to increase again, instead of being progressively shortened
– which, by the way, is still possible (Kolodko
The trouble is that few economies indeed are capable
of keeping to the rapid-growth path for an extended
period. Out of the 20 fastest growing countries in the
1980s, which recorded an average GDP increase of 4.5
to 10 plus percent a year, only eight made it again
to the top twenty in the 1990s. These eight countries
with fastest-growing output are: China, Vietnam, Singapore,
Malaysia, India, Taiwan, Oman and South Korea. It should
be noted that the first five countries on this list
developed in the 1990s even faster than in the 1980s.
It is intriguing or, indeed, fascinating to observe
that virtually all of them followed policies which were
a long way off the Washington Consensus and monetary
orthodoxy, which usually inform the IMF-proposed structural
What is more, the situation on the opposite pole was
going from bad to worse during the period in question.
Whereas in the 1980s, there were 11 national economies
with a negative average yearly growth – from –6.8
percent in Iraq to –0.1 percent in Mozambique
and Niger – the number of such countries doubled
in the 1990s, reaching 22. One of the reasons was the
post-socialist transformation, intended to boost economic
growth. But it turned out that this effect could not
be expected at this phase: as many as 16 post-socialist
economies saw a negative average annual growth in the
1990s, while by 2002, only seven out of the 28 post-socialist
countries have exceeded their GDP levels of 1989.
Finally, there is the third prerequisite of the catching-up
process – the endogenous character of growth.
It is indispensable in that only by building, during
one phase of rapid growth, the foundations of continued
expansion in the following phase, can the self-sustaining
character of growth be assured. The endogenous growth
mechanism is thus intimately connected with the market’s
institutional infrastructure and a high propensity to
save and invest. Taken together, these factors should
ensure an adequate level of internal accumulation of
capital and high efficiency of its allocation.
The average per capita GDP (in PPP terms) in OECD countries
will approach $25,000 in 2003. Bearing in mind what
has been said earlier about catching-up with highly
developed neighbors, this amount should be seen as a
long-term goal for countries at a medium development
level, including the relatively less developed OECD
countries, like Czech Republic, Greece, Hungary, Mexico,
Poland, Portugal, Slovakia, South Korea, and Turkey.
And, it should be borne in mind at all times, per capita
income throughout the OECD, which is composed of 30
countries with a total of some 1.16bn people, runs up
to a mere two thirds of the U.S. level. The emerging
markets, including all post-socialist economies, will
keep lagging far behind that last mentioned country
for generations to come. But countries at a lower development
level should strive to successively reduce the distance
to the next richer group.
From the point of view of the attained development level,
the World Bank, as well as some other international
organizations, distinguishes in its reports three groups
of economies: low income, middle income – further
subdivided into lower middle income and upper middle
income – and high income. Superposed on these
statistics in the two lower-income groups is a geographical
division into six regions. Post-socialist economies
are included in the Europe and Central Asia group (Table
4: Populations and income level in the world economy,
the distance to the rich countries that the economies at medium
and lower advancement levels should make up for, is truly
astounding. In many, or, indeed, in most cases, closing the
existing gap is practically impossible – at least in
the foreseeable future. Certainly not in this century. And
what happens afterwards – we will see. For the time
being, let us reiterate, the point is to have poorer economies
develop faster than richer ones. The focus, therefore, should
not be on coming abreast of the richest, but rather on efficiently
closing the distance, and gaining on them rather than lagging
ever further behind. All the more so since the rich do not
intend by any means to stay put. Assuming that their per capita
GDP increases at a similar rate as it has in the last 35 years,
after two more generations it will rich (on a PPP basis) some
$90,000. Even if the less advanced countries manage to maintain
a high growth rate – 5 percent annually, on average
– most of them will still bring up the rear. In some
cases, indeed very far behind the leaders (Table 5).
5: Catching-up in the first half of 21st century __________________________________________________________________________
GDP per capita in PPP (in USD)*
of high income
group in 2000
of high income
group in 2050
Author’s own calculation.
* GDP per capita in a given year under the assumption that
the average rate of growth since 2001 will be 2.4 percent
in the case of high income economies and 5.0 percent in the
case of all emerging market economies.
** East Central Europe and the CIS.
But it is a well-known fact that many countries – both
among the MGC group and, especially, some of the LGC economies,
undergoing marginalization – are unable to attain such
growth dynamics. This is also true of some post-socialist
economies, in the case of which less favorable geographical
location combines with a misguided economic policy and an
institutional weakness of the emerging market. Some countries
not only failed to achieve high growth dynamics in the past,
but will be likewise unable to do so in the future. In recent
history, only a few countries managed to overcome their age-old
backwardness. Among these, one should mention especially South
Korea, whose per capita GDP has attained about 50 percent
of the USA level, Singapore (70 percent), Hong Kong (71 percent),
Ireland (72 percent) or Finland (71 percent), where sweet
herring with potatoes is a national dish not because everybody
loves it, but for the simple reason that as late as the 1950s
many Finns could afford little more.
There is compelling evidence that many other nations have
begun to catch up with more advanced economies. This is true
of the already mentioned Costa Rica in Central America and
the Dominican Republic in the Caribbean, as well as Chile
(an 86-percent GDP increase during the 1990s) in South America.
Countries doing fine in Africa include Uganda and Côte
d’Ivoire (44-percent growth in the 1990s), Egypt (54
percent) and Ghana, where the proportion of population living
in poverty had dropped during the 1990s from 53 to 43 percent.
In Asia, apart from China, Vietnam and India, mention is also
due to Malaysia, which, thanks to its unorthodox strategy,
doubled its income in the previous decade, and Bangladesh,
which saw a 58-percent increase of its national income in
As regards post-socialist countries, there are grounds to
believe that fast growth will continue, among others, in Azerbaijan,
Estonia, Latvia and Kazakhstan, and in Europe – in Albania,
Hungary and Slovenia. Some other economies, too, especially
the countries in the process of integration with the European
Union may – although this is by no means automatic –
enter the path of fast and sustained growth, kept up by the
endogenous mechanism of extended macroeconomic reproduction.
It would be unreasonable to expect that all the countries
from this group will manage, in the space of a generation
or two, to increase their output at a rate conventionally
described as fast, but there are many reasons to believe that
their growth dynamics will be better than in the richer countries,
including the European Union (Kolodko 2001b and 2002b). Alternative
growth paths for this group, differing in output dynamics,
and their consequences in terms of per capita GDP changes
in the current half-century are presented in Table 6.s
6: GDP per head (PPP) in a given year
assuming 3, 4, and 5 percent average annual rate of growth
Source:GDP in 2002 - PlanEcon 2001a and
2001b. Growth scenarios – author's own calculation.
* GDP for 2002 - in 2000 dollars.
distance to the rich countries that post-socialist economies
have to make up is in many cases enormous. For Kazakhstan
to reach today’s income level of the United States,
its GDP would have to grow, until 2050, at the average annual
rate of 5 percent. This seems hardly probable, although this
country does have too the potential for fast growth for ten
or twenty years. In the case of poor countries, like Albania
or Georgia, whose GDP per head (in PPP terms) stood at about
$2,300 in 2002, even if such a growth rate were maintained
in the time span of two generations, they would still be below
today’s income of rich countries. It follows that one
should try to catch up with one’s neighbors. Albania
will need as much as 48 years of an average growth of 4 percent
annually to reach today’s per capita income level of
Slovenia; Georgia in 2025, after 23 years of growth at 5 percent
a year on average, will not yet have reached the level then
attained by Croatia, even if the latter country were to develop
at an average rate of merely 3 percent annually.
In post-socialist economies, the attainment of the current
level of rich countries – that is, a per capita GDP
of $27,000 – would require its current level to increase
by a factor ranging from 1.7 in the case of Slovenia, to more
than 26 in the case of Tajikistan (Figure 2). Even if this
does happen one day, the rich countries will then be still
richer and the pursuit of the moving target will go on (Kolodko
Figure 2: Catching-up with high-income
countries in emerging post-socialist markets
Author’s own calculation.
The coefficients show how many times the country’s GDP
must multiply to catch up with the income level of a rich
country, e.g., 27,000 dollars.
Now, in the 21st century, chances to catch up with more developed
countries, although unevenly distributed, are opening up before
quite a few emerging market economies. This is a result of
the contemporary phase of globalization, which, as we know,
also poses numerous threats. While trying to avoid the latter,
many emerging market economies can make good use of the new
opportunities: Argentina and Ukraine, Brazil and Russia, Chile
and Poland, Nigeria and Pakistan, Iran and Thailand, Costa
Rica and Malaysia, Mexico and Croatia, Tunisia and Sri Lanka.
Half a century from now, some of them will count among high-income
countries, while others may even be demoted to the low-income
group. It is time to address the question of what this will
6. Determinants of fast growth
Many growth factors exist, but the current phase of globalization
brings some new elements into economic theory and policy.
In particular – especially in the case of more globalized
countries (MGC) – the relative importance of the external
environment, in relation to the domestic market, is increasing.
Demand for goods manufactured in a given country and the supply
of available capital increasingly depend on tendencies prevailing
in other parts of the world and in the global economy as such.
A national economy may enjoy a long-term growth only on condition
that both effective supply and real demand are on the increase.
The dynamics of these two flows thus determines the general
economic dynamics, with globalization changing the traditional
proportions of the internal and external components of their
structure, in favor of the latter.
This means that only those countries can succeed in ensuring
fast economic growth which, on the one hand, can stimulate,
in a possibly inflation-free way, the increase of internal
demand, and take advantage of their increasing openness and
international competitiveness to tap the external demand,
and, on the other hand, are capable of not only creating their
own capital, but also attracting foreign savings and turning
them into long-term capital, enhancing their own productive
On taking a closer look at the mere dozen or so emerging market
economies which have succeeded in overcoming the development
lag in the last decades, one can notice that this success
stems from a combination of two sources: macroeconomic stability
and human capital. Without these, no catching-up is possible,
either today, or in the future. Only those countries which
can take care of these two factors will have a chance for
fast and sustained growth. But even this is not enough.
Sustained social development and fast economic growth
crucially depend on six factors:
– human capital;
– financial and real capital;
– mature institutions;
– size of the markets;
– policy quality;
– geopolitical location.
The combination of these factors will decide in the coming
years about the success or failure in catching-up with the
The role of human capital is increasing in the current phase
of liberalization and integration, which unfolds in the course
of yet another stormy scientific and technological revolution
connected with the ICT expansion and growth of the knowledge-based
segments of the economy. For this reason, the high quality
of education at all levels and relatively high spending on
research and development (R&D) will increasingly act as
The trouble is that globalization entails, by definition,
migrations, which also involve the educated. As a result,
instead of education, or brain training, we often witness
brain draining. It is felt in many emerging market economies,
also the post-socialist ones, from which there is an outflow
of mostly highly skilled workforce to more developed countries.
In this way, the relative competitiveness and development
potential of the countries where these people were educated
and trained is adversely affected. This is an aspect of globalization
which limits the catching-up potential.
These migrations are paralleled by large-scale movements of
poorly educated people. Unskilled labor looks for a new and
better place in the global village, thus not only improving
their own material situation, but also contributing in a specific
way to a reduction of development disparities. By changing
the balance of regional and local labor markets, such flows
contribute to the relative increase of wages in the countries
that people leave (supply of unskilled labor is dwindling
so average wages go up) and their relative decrease in the
countries in which they arrive (supply of unskilled labor
increases so average wages go down). Currently, such dependencies
can be observed, for instance, between Mexico and the United
States, Algeria and France, Ukraine and Poland, Vietnam and
Thailand, Indonesia and Australia, Mozambique and South Africa,
or Bolivia and Chile.
Thus if the outflow of workforce – and especially skilled
labor – does not favor high growth rates, measures should
be taken to avoid it. This is no simple task in a liberalizing
world, and is best accomplished by overcoming the vicious
circle of low growth rates and population outflow. The reason
why people leave their native land is not the low income levels
in that country, but, rather, the lack of realistic prospects
for perceptible and speedy improvement in this field. People
do return to their homeland, too – bringing with them
their experience, acquired knowledge and savings – if
they can view their country’s development perspectives
with optimism. Feedback thus arises which can be either favorable,
or detrimental to development.
Poland, for example, recorded in 1994–7 net (positive)
immigration, because of its unprecedented economic dynamics
and a significant improvement not only in the current living
standards, but also in the level of social satisfaction and
optimism about the future. More people were coming back to
Poland – quite often equipped with new knowledge and
experience gained abroad – than were leaving the country.
This tendency was reversed a couple of years later because
of the unnecessarily dampened growth rate. In 1999–2001,
at least a quarter of a million people, mostly young and educated,
left their country for faster developing regions of the world
economy. Some of them, regrettably, for good.
Development must be based on real and financial capital. For
many countries at a medium or low development level, its shortage
is the principal barrier to economic growth (World Bank 2002d).
Achieving and maintaining such growth requires, in the first
place, the formation of domestic capital, while foreign investment
and aid can only play a supplementary role. Systematic capital
formation requires financial equilibrium and a high propensity
to save. Both are difficult to attain in backward countries,
especially in the absence of well developed institutions of
financial intermediation – the banking sector and the
If the low propensity to save is aggravated by capital flight
– which is quite often the case in emerging market economies
– the problem is hopeless. However, when the banks and
other organizations manage to accumulate an increasing flow
of savings and turn it into active capital, a great deal depends
on systemic regulations which should facilitate efficient
capital allocation. Otherwise, the apparent abundance of assets
might not be productively employed as capital (de Soto 2000).
Foreign capital, which should increasingly be referred to
as “originating from other parts of the global economy”,
can only supplement domestic capital in the financing of development.
A strategy for catching-up with the richer countries cannot
be based on the assumption that this process will be financed
by capital from these countries. It can only play an auxiliary
Thi s applies both to foreign investment, especially direct
(FDI), and to the aid of the richer for the poorer.
The influx of FDI itself, and, consequently, the increased
presence of foreign companies on the market of a given country,
is not in itself a guarantee of progress and accelerated growth.
Sometimes it just demonstrates that domestic companies are
weak and their products are unable to satisfy the demand not
only in other parts of the world economy, but even at home.
However, foreign capital may contribute to the growth of output
and an improved efficiency of the emerging market economies
in which it is invested, if four processes take place.
First, the incessant process of “creative destruction”
of the old firms by new ones must indeed be creative in the
sense that the penetration of foreign capital and the influx
of FDI result in the disappearance of obsolete (mostly domestic)
companies which are uncompetitive and unable to expand on
the world market, but this is more than compensated for by
the emergence of new companies, offering more competitive
jobs and better products. Such replacement processes occur
everywhere – also in the most highly developed countries
– and constitute the main vehicle of technological progress
and microeconomic efficiency improvement, which, in the long
run, should translate into faster growth.
Second, changes in the market and price structure should facilitate
competition and foster the economies of scale. Foreign companies
have their obvious interest in driving out domestic firms.
Given the unequal power of companies to resist such pressures,
this affects especially small and medium-size enterprises.
The ultimate impact of this kind of competition on output
dynamics depends, on the one hand, on the openness of the
market, the extent of protectionism and support for domestic
entrepreneurs, and, on the other hand, on the general reduction
of manufacturing costs (and relative prices) resulting from
the extended scope of production and the accompanying reduction
of trade markups.
Third, foreign direct investment function today as the principal
transmission belt for new technologies – including ICT
– being transferred to the emerging markets. The most
important thing here is an appropriate proliferation mechanism
that will spill-over the technologies to related spheres of
economic activity and other enterprises. This is not as obvious
as it might seem at first glance, for this type of impact
would be in the interest of the recipient countries, but not
necessarily of the multinational investors. In fact, these
interests are often at cross-purposes here. This is due to
the fact that over 80 percent of all FDI originates in just
six rich countries – in order of magnitude, the United
States, Great Britain, Japan, Germany, Switzerland and the
Netherlands – and it is these countries that derive
profits from licenses and patent fees, absorbing a total of
90–98 percent of revenues from this source.
Therefore, foreign (global) investors may occasionally hinder,
rather than facilitate, the spread of technological progress.
But an appropriate development policy response to this threat
should not restrict the influx of FDI, but just the opposite,
encourage its increase. The greater the number of modern companies
(including foreign ones) which apply modern technologies operating
on a given emerging market, the faster is its overall long-term
Fourth, the inflow of direct investment involves a constant
know-how transfer, resulting in the improved skills of local
employees in the areas of management and marketing. Quite
often it is the lack of basic skills in these areas that hampers
output expansion and economic growth. Foreign investment is
usually directed to export-oriented sectors – particularly
in those countries where the size of the local market is limited
– and the penetration of foreign markets requires greater
skills. In time, this knowledge accumulates and finds use
on the domestic market as well, with all the beneficial effects
on productivity, efficient goods trade and growth rate.
While most emerging markets, regardless of internal capital
accumulation, may and should count on private foreign investment
to give their rapid growth strategy an additional boost, some
countries may also rely on foreign aid. These need not be
the poorest countries, for transfers of this kind are also
a function of geopolitics, regional policy and regional integration
processes (Hettne, Inotai and Sunkel 2001). Thus, for instance,
foreign aid on an extremely large scale has been directed
in recent decades to Ireland, whose success in catching-up
with the most highly developed countries would not have been
possible without the aid received from the European Union.
Unfortunately, the stream of foreign aid flowing from the
rich to the poor countries largely dried up in the 1990s.
Despite the UN recommendation, undoubtedly appropriate, as
it is, that highly developed countries should bring up the
relative amount of development aid to 0.7 percent of their
GDP, the actual proportion dropped over the previous decade
to 0.22 percent. This resulted from the combination of naïve
belief that private direct investment would be more than adequate
to compensate for this loss, and reasonable doubts about the
ability of some of the poorest countries to absorb the received
aid in a sensible way (Easterly 2001).
Rather than to places where capital seems to be particularly
needed, FDI is far more prone to flow to areas where growth
dynamics is already high and a vibrant emerging market exists.
At the same time many instances can be quoted of misallocation
of funds directed, in the form of non-repayable aid, to countries
in particularly strained circumstances, mainly in sub-Saharan
Africa. Undoubtedly, without a substantial increase of the
scale of assistance to the poorest economies – both
in the form of the cancellation of debt of those highly indebted
poor countries (which cannot be expected to be repaid anyway)
and new funds for the financing of human capital and infrastructure
development – these economies will not only be unable
to enter the category of emerging markets, but will not even
manage to make sufficient progress to join the MGC group,
where growth rate considerably exceeds the average.
Mature institutions are of fundamental importance for sustaining
a high growth rate. The trouble is that the emerging economies
are characterized – by definition – by still underdeveloped
institutions and too liquid, as well as frequently opaque,
rules of the market game. This affects allocative efficiency
and impedes growth. Importantly, weak institutions create
relatively greater inefficiencies and waste. Everything –
with the possible exception of corruption, money laundering
and organized crime – functions in such circumstances
less efficiently than in institutionally mature economies.
This is why structural reform and successive institution building
are so important for the emerging markets (Porter 1990; North
1997; Kolodko 1999b). Today this truth is generally acknowledged
and, thankfully, its importance is emphasized by influential
international organizations (World Bank 2001), although this
was not always the case. The involvement of such organizations
in the institution building in the emerging market economies
appears to go beyond the direct participation in the financing
of various projects. The campaign to overcome the development
lag is largely fought on the institutional front, where the
framework for the functioning of the young market economies
is being strengthened.
The size of the markets also has a bearing on growth rate.
Under globalization, markets undergo integration, and so they
expand in size. At the same time every national economy relinquishes
part of its sovereignty over the part of the world market
it represents. Thus its capacity to interfere with the market
is reduced, which may be a good thing or a bad thing, depending
on the effectiveness of the intervention policy. At any rate,
a larger market provides a better scope for the proliferation
of technological progress and the reduction of manufacturing
costs due to the economies of scale. A larger market also
stimulates enterprise, as it exposes companies to greater
competition from other manufacturers. All this has an impact
on the production pace and thus may be able to enhance the
capacity for catching-up. In a closed economy, the only way
for a market to expand was through the increase of internal
demand (and supply). Now markets expand because liberalization
and globalization are in progress. Some of the emerging post-socialist
market economies face in this context the integration with
one of the largest and best-developed markets – the
European Union. This is often expected to lead to a rapid
convergence and reduction of development disparities between
the Union’s old members and the candidate states. It
should be clearly pointed out, however, that integration with
the European Union by no means automatically entails accelerated
Unquestionably, the integration does create opportunities
for such growth, but if these opportunities are to be utilized,
many requirements, discussed above, must be met. Some countries
achieved this feat in the past, other failed to do so (Daianu
2002). When Ireland joined the European Union in 1973, its
GDP stood at a mere 59 percent of the Union’s average.
Now it takes pride not only in having caught up with, but
also having overtaken others, as this indicator currently
exceeds 120 percent. Greece, on the other hand, joined the
Union in 1981 with an income equivalent to 77 percent of the
EU average, and now its relative position has eroded, as the
indicator in question has dropped to just 66 percent. Similar
mechanisms will continue to operate in the future –
some actors may succeed, and some may not.
This will depend on the quality of economic policy, since
membership in the European Union – or in any other integration
organization elsewhere, be it NAFTA in America, ASEAN in Asia,
or SADC in Africa – does not preclude conducting one’s
own, national development policy. It does restrict, even more
so than globalization does, the members’ political –
and especially economic – sovereignty, depriving the
governments and central banks of the use of certain economic
policy instruments previously at their disposal, but this
does not render this policy totally impossible. Such a policy
should, generally, consist in maximizing the advantages offered
to the emerging markets by globalization and in mitigating
the inevitable risks brought by globalization.
Besides, of course, one can always celebrate or bemoan one’s
geopolitical situation. Its geographical component is unalterable,
but it is possible to endeavor to change the political circumstances
for the better. In the long run, some actors even succeed
in this task. This is particularly likely when they manage
to utilize fast growth to catch up with the economies which
made the forward leap a long time ago.
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