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The Day After Tomorrow: Growth Switchover

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It is becoming common wisdom that developing countries are doing well while the rich world is stuck in long-overdue austerity. Barring another subprime crisis (this time, in public debt), the locomotives of global growth are about to "switch over." How come? Will this hold?

These are just two of the many questions asked and answered in the new book, The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, which collects the views of some 40 World Bank economists.

Released this morning, the book looks at how developing countries are becoming the new locomotives of growth in the global economy, and foresees the major trends for these countries in the next two-to-five years. It includes an analysis on each region and also on issues such as governance, finance, trade, and poverty reduction, of course.

So what's behind the "switchover"? There are mainly five reasons. First, the balance sheet of both the public and private sectors in the emerging economies are pretty clean. As borrowers, they are becoming a better, and perhaps under-rated, asset class. This will make them magnets for some of the new massive savings that advanced-economies will have to generate. Capital eagerly flowing south? Sounds early-eighties, debt-crisis familiar? There is a key difference, though. The money will not go to bank-roll bloated fiscal deficits. More likely, it will go to pay for productivity-enhancing infrastructure investment, much of it led by private companies.

A second reason is learning. There is a large inventory of technologies that the developing world is yet to acquire, adopt and adapt. Transferring them is becoming cheaper and safer. And the break-up of the vertical production chain across borders is allowing poorer countries to insert themselves where it is easier. Japan makes the "electronically-controlled continuously-variable transmission," Vietnam makes the tires. You get the point.

Third, the new middle classes. China has grown by 400 million in the past 30 years. Think of what will happen when Brazil, India and others join the club. It will not just be about larger demand for TV sets, cars and apartments. It will also shift the political game towards the center, limiting the risk of sudden changes in policy course.

Fourth, south-south trade. By now, getting a free-trade agreement with the US or Europe is no longer seen as a sure-shot ticket to faster development. You also need an entry into China, India and the other up-and-comings. This will bring about new economies of scale and scope. It may even unlock new trade flows in services (think of one percent of Chinese tourists visiting the Caribbean).

And, fifth, those infamous commodities for which many developing countries are known will remain pricy. Had you asked twenty or even ten years ago, natural resource wealth was almost a source of preoccupation. Will it appreciate the local currency and make our meager industrial exports even less competitive? Will it further corrupt our already-corrupt institutions? Will our rivers turn into sewers of mercury? Things are different today, not perfect, but better. Central banks in developing countries are, on average, more professional and more independent. Stronger public institutions and hyper-active NGOs (where democracy allows them) make graft more complicated. And, by now, polluters are quickly exposed at YouTube-speed.

Put it all together and you have five, neat "autonomous" sources of growth for the developing world to plough forward, almost irrespective of the lethargy in advanced economies. That, of course, assumes away another global financial meltdown. Keep your fingers crossed.

To access The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, please visit: http://go.worldbank.org/TPPWANWXR0

It can also be read online and purchased (World Bank Publications; ISBN 978-08213-8498-5; $35) at http://publications.worldbank.org/18498, through bookstores, and through the World Bank's network of international distributors http://go.worldbank.org/6XBJT3DJA0.

This blog was originally posted on the World Bank Insititute Growth and Crisis website.

Otaviano Canuto is the World Bank Vice President for Poverty Reduction and Economic Management, and Marcelo Giugale is the Sector Director of Poverty Reduction and Economic Management for the Latin America and the Caribbean Region. Both are co-editors of The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World.