Explaining catch-up growth with China and commodities

The World Bank’s latest Global Economic Prospects report may be a 194-page document, but most of the attention it got was for one little infographic. The Financial Times focused its coverage on the chart, and the Economist also made it one of their charts of the day. As the bank helpfully made the underlying data available, it is easy to reproduce, so here is the original:

World-Bank-EM-catchup

That’s indeed a very nice chart, showing that catch-up growth is not a constant phenomenon, but one that has risen and fallen over the last couple of decades. I like the chart too, but when I first looked at it, I thought: I’ve seen that curve somewhere before. Because I’m interested in regional growth patterns, I have been looking at catch-up growth within China: how quickly have poorer provinces been closing the income gap with the wealthier provinces? (I chose Shanghai as the reference point, since it has been the most developed part of China for many decades.) And when I took my provincial catch-up data and overlaid it with the World Bank’s global data, this is what I got:

catch-up-comparison

I would say those trends are pretty much the same: fewer places experiencing catch-up growth in 1997-2001, a widening of catch-up growth to more places from 2002-2012, and more recently a sharp fall off. So that’s pretty interesting: catch-up growth within China, and catch-up growth across lots of other developing countries, seems to follow the same pattern.

One possibility is that catch-up growth is just a function of growth, and so when global/China GDP growth is slow, catch-up growth is less widespread. But this doesn’t explain why catch-up growth has faded so sharply in the last couple of years: while both global growth and trade volumes are not doing that great, they also have not gotten suddenly worse. What has declined very sharply are commodity prices, thanks to an oversupply generated by producers who thought China’s housing construction boom would go on longer than it actually did. So I think commodities may be more important for the pattern of emerging-market catch-up growth than the World Bank acknowledges.

This does not mean that I’m arguing commodity exports are actually a great thing and that it’s really too bad that commodity prices have fallen. I firmly agree with the conventional wisdom that commodity exports are not an effective or sustainable way for developing countries to become rich. But remember what is being measured in these lovely charts: not the number of people whose incomes are converging with developed-country standards, but the number of countries (basically a diffusion index). And my intuition would be that more developing countries are, if only by default, commodity exporters, simply because the alternative development model–exporting manufactured goods–is in fact quite hard to do.

The data support this intuition. If I split developing countries into two baskets, manufactures exporters and commodity exporters, on the simple criterion of having more or less than half their exports in manufactured goods (a concept I borrowed from Jon Anderson), the majority of developing countries are in fact commodity exporters. For the low and middle-income countries in the World Bank’s World Development Indicators database, only 33 of 96 countries had more than 50% of their exports in manufactured goods in 2011. The same pattern holds internally within China: while most of China’s population is concentrated along the coast, most of its provinces are not. Of China’s 31 provinces, only 10 are officially classified as “Eastern.” The diffusion index for catch-up growth within China will therefore be dominated by the central and western provinces, and these provinces have more commodity-driven economies. To be precise, I estimate that the mining and metals share of GDP is higher than the national average in all but four of the 21 central and western provinces.

This pattern of catch-up growth is not just a statistical artifact, but gets at a real phenomenon. The same economic role has been played by a group of provinces within China’s borders, and a large group of countries outside China’s borders. Both prospered by supplying materials for China’s housing boom (the underlying cause of the commodity boom), and both are seeing that prosperity erode now that the housing boom is fading. I keep discovering that housing is the answer to many economic questions about China; it seems that Chinese housing also explains a lot about the patterns of global growth.

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