Are Developed Countries Leaving the Rest of the World Behind?

Results from this blogpost in short:

• Developing countries have profited from globalization over the last 25 years
• Absolute poverty world wide is down from 35 percent of world population in 1990 to around 10 percent in 2013
• Still the absolute difference between income in the developed and the developing world has increased steadily
• There are several ways developed countries can counter this trend, such as reducing agricultural subsidies and granting less developed countries better access to their markets

Increasing globalization has boosted economic growth around the world in the last few decades. These growth rates have always been higher in emerging countries than they have in developed industrialized nations, but what impact has globalization had on income differences between emerging and industrialized countries?

Emerging and developing countries benefit from globalization

Increasing globalization has undoubtedly promoted economic growth in emerging and developing countries. One indicator of this development is the global decrease in poverty. Unlike in developed nations, poverty in developing and emerging countries is considered in terms of absolute poverty.

One internationally recognized definition states that a person has a ‘low income’ if they have purchasing power parity of less than USD 1.90 per day. Purchasing power parity takes into account the fact that the purchasing power of one US dollar is considerably lower in countries like Japan or the USA than in poor economies such as those of Burundi or the Democratic Republic of Congo.

In 1990, the number of people around the globe affected by absolute poverty was around 1.85 billion (35 percent of the world population). By 2013, despite the higher world population, only 767 million people were poor (10.7 percent of the world population, see Fig. 1)

GDP per capita differences are on the rise globally

An important indicator for global differences in income is gross domestic product (GDP) per capita in various regions of the world. Since 1980, the International Monetary Fund (IMF) has used GDP based on purchasing power parity in USD to illustrate these differences. Figure 2 demonstrates how real purchasing power-adjusted GDP per capita has changed since 1980 in advanced economies and in emerging/developing economies in Asia. It clearly shows that despite the high growth rates of Asian national economies, the gap is widening in terms of GDP per capita.

In the “Globalization Report 2016“, we investigated the impact of increasing globalization on the growth of real GDP per capita. In that report, it was shown that stronger economic, political and social interconnectedness between countries boosts economic growth in all the economies involved.

However, it also became clear that absolute GDP increases caused by globalization are significantly larger for industrialized countries than they are for emerging countries. The main reason for this is the low base level of GDP per capita in emerging countries: if a smaller amount of money (e.g. EUR 10) grows by ten percent, while a larger amount (e.g. EUR 100) only grows by two percent, the absolute difference between the two amounts of money still increases (EUR 11 versus EUR 102 results in a difference of EUR 91).

Consequently, globalization has caused absolute differences in real GDP per capita between, for example, Germany and China to increase between 1990 and 2014 (see Fig. 3):

• At the start of the period under review, real GDP per capita in Germany was around EUR 21,500 higher than in China.
• In 2014, the difference amounted to almost EUR 26,850.
• Without increasing globalization between 1990 and 2014, this difference would have only amounted to around EUR 25,850.
• Therefore, increasing globalization between 1990 and 2014 boosted the difference in GDP per capita by around EUR 1,000.

Economic policy implications

The widening gap in per capita incomes to the detriment of emerging and developing countries is problematic because this trend may lead to such countries rejecting globalization. If the citizens of emerging and developing countries believe that globalization of industrialized countries is leaving them behind, there is a grave danger that they will isolate themselves.

That said, taking protectionist measures would be the wrong course of action, since they would lead countries to miss out on growth and employment opportunities. Instead, we need to better integrate emerging and developing countries into the global economy. Industrialized countries have a duty here.

• They should open their markets up to products from less developed countries, without simultaneously demanding that these countries do the same, because less developed economies are often not competitive enough to take such a step.
• Additionally, industrialized countries should reduce their subsidies for agricultural products because they lead to distortion of competition at the expense of emerging countries, which are more dependent on agriculture.
• Finally, industrialized countries should make financing opportunities available so that these countries are able to finance the infrastructure, educational measures and production systems needed, including vital technology.

All of these measures are ultimately in the interest of industrialized countries as well: should there be a tendency towards economic isolation in emerging and developing countries, this will also impact industrialized countries by reducing their export opportunities, which will damage growth and employment in developed economies.