Sunday, 10 April 2011

Citi’s Global Growth Generators

What have the BRIC countries Brazil and Russia in common? Sure, they’re part of the BRICs – the group acronym coined by Goldman Sachs (see, e.g. “Dreaming With BRICs”, 2003*). And no, they’re not part of the 3G (“short for global sources of growth potential and of profitable investment opportunities”), the new Citigroup selection of “Global Growth Generators”*, released in February 2011. Brazil and Russia share that de-classification with other prominent ‘emerging markets’ (a term whose time has gone) – namely, Chile, Mexico, South Africa or Thailand. So you could be forgiven to think that this is merely a PR exercise by Citigroup to give its distinguished chief economist Willem Buiter a sharper profile also in the investment community. It is much more than that, a dense 81-pages tour de force on global growth trends, drivers and scenarios, lining up scholarly godfathers from Alexander Gerschenkron via Robert Solow to Danny Quah to cement the thesis.

Global Growth Generators” considers a weighted average of six growth drivers that Citigroup and the literature surveyed identify as important. The six components of the so-called 3G index are measures of (1) domestic saving/investment, (2) demographic prospects, (3) health, (4) education, (5) quality of institutions and governance, and (6) openess to trade and investment.Apart from BRIC members China and India, the list of 3G countries includes Bangladesh, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka, and Vietnam. (A similar analysis on regions, cities, commodities and products is announced for later reports).

Developing Asia and Africa are forecast to be the fastest growing regions, essentially driven by a drop in young-age dependency (before old-age dependency turns to burden) and by beta-convergence, the tendency of poorer countries to grow faster once we control for other growth determinants:  

”For poor countries with large young populations, growing faster should be easy: open up, create some form of market economy, invest in human and physical capital, don’t be unlucky and don’t blow it. Catch-up and convergence should do the rest (sic!)”.

That sentence on page 1 almost stopped me from reading on! The naïve growth optimism applied to developing and emerging countries that seems common to reports issued by financial services companies often goes along with neglect of the 50-year lessons of development economics and politics.

Absolute Convergence in Per Capita GDP 2010 - 2050

 Citigroup optimism (best visualised in the Figure above which relates expected annual GDP/capita growth over 2010-2050 to the natural logarithm of 2010 GDP/capita) is underpinned by the authors’ presumption that many emerging countries have opened up to foreign trade and investment, and that they would have surpassed a critical threshold level of institutional quality and political stability.

Political stability? Bad timing, indeed! The first quarter of 2011 has been among the most turbulent of Africa’s history. While peaceful popular uprisings toppled long-standing authoritarian governments in Tunisia and Egypt, Libya descended into a civil war in which the international community intervened with military force.  Civil war in Côte d’Ivoire after a contested presidential election and civil strife in Burkina Faso round up the current situation. The Middle East is largely infected by political instability, with upward risk for oil prices that have the potential to bring the current super cycle to a sudden stop.And 3G country Bangladesh is producing bad headlines with the removal of Nobel laureate Yunus from the Grameen bank he himself has founded. 

As for specific progress in governance and institutions, little convincing evidence is given for the 3G countries.  The quality measures of institutions on which the Citigroup report seems to rely to marshal some general evidence is based on a logical fallacy - post hoc ergo propter hoc. These indicators are based on sentiment of business and diplomats, and thus endogenous to growth – they can’t be used to explain why ‘This Time is Different’! As the developing world has grown and converged during the last decade, sentiment of interviewees has arguably been on sugar high. Who says that 3G country Nigeria, the protype of the resource curse in the past, will do better in the future?  

As for governance indicators, OECD Development Centre analysis Uses and Abuses of Governance Indicators, has shown that most compilers produce composite indicators that lack transparency in themselves. The scoring criteria are opaque because of the diversity and large number of underlying indicators they embody. The underlying conceptual framework – the meaning of governance – remains unclear, so there is lack of clarity about how the scores are finally arrived at. China and India have been classified repeatedly, among others by the OECD, as those countries whose capital account has remained the most restricted in a large sample of countries.

While  3G countries have opened up to foreign trade and investment, there remains large scope to further opening in the South where average trade tariffs remain a multiple of those exerted by the North.  The OECD report Shifting Wealth has estimated that for trade in manufactures average trade tariffs are eight times as high in South-South than in North-North trade. To be sure, further trade opening in developing countries is an untapped source of future (in some cases, more than past) welfare and growth benefits.

The Citi report on the 3G fails to address why there are poverty traps in the first place that have hindered young and poor countries to catch up in the past, except for the past ten years when exceptional global liquidity, unsustainable global imbalances and China’s growth lifted a majority of developing and emerging countries.  Child labour, persistent high fertility, illiteracy, debt bondage, soil erosion, profitable criminality, and conflict in resource-rich rentier economies are just some examples that define the vicious circle of sustained poverty. The lack of social cohesion and rising inequality in the emerging countries, often linked to exceptional growth in a dual-economy setting through Kuznets effects, will perhaps be the most important stumbling blocks for global growth generation. Ignoring them may help sell fancy financial products but is way too easy.

Arndt, C. and Oman, C. (2006), Uses and Abuses of Governance Indicators, OECD, Paris.
Buiter, W, Rahbari, E (2011), Global Growth Generators: Moving Beyond ‘Emerging Markets’ and BRICS, Citi, Global Economics View, 21 February, NYC.
Goldman Sachs (2003), Dreaming with BRICs, Global Economics Paper No.99, NYC.
OECD (2010), Shifting Wealth, Perspectives on Global Development, OECD, Paris.

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