Coronavirus and the decline of the United States deal a blow to the rise of developing countries
RThe past few decades have been glorious for developing countries, where rapid growth has lifted millions of their citizens out of crushing poverty. But the coronavirus pandemic threatens to halt their gains. And in the long term, the decline of the United States could pose an even greater obstacle for developing countries.
From around 1990, poor countries began to catch up with rich countries. South Korea, Taiwan and some countries in Europe have reached a fully developed state. China has propelled one of the most impressive and rapid industrializations in world history. And countries like Malaysia, Turkey, Poland, Romania and Thailand have also reached the threshold of developed country status.
Other countries such as Bangladesh, Ethiopia and Vietnam are embarking on the path to industrialization, while poor countries that mainly export natural resources have benefited from a boom in demand. This global growth has coincided with a wave of migrant remittances. Together, growth and remittances have significantly reduced extreme poverty around the world, thereby reducing global inequality.
Unfortunately, this happy trend is in great danger. In the short term, the biggest threat by far is the coronavirus pandemic. The virus has sent the world into an economic free fall; the International Monetary Fund expects global economic output to fall 4.9% in 2020, the biggest drop since before World War II. And with many migrants out of work, remittances have plummeted.
Although the IMF predicts a rapid return to growth in 2021, there are many reasons why it might not happen. For one thing, even if an effective vaccine arrives in early 2021 — the most optimistic scenario — it will take a long time to get it to everyone around the world who wants it. This means that some countries will continue to see their economies hampered by social distancing. International travel will be difficult and dangerous, further compromising trade relations. And once those trade relations deteriorate, it may take some time for them to rebuild, especially with much of the world heading towards protectionism. The pivotal relationship between the United States and China has already partially unraveled since 2016. The World Trade Organization forecasts a 32% drop in world trade in 2020, with only an incomplete rebound next year.
Disrupted trade relations will make it difficult for industrializing countries like Malaysia, Turkey and Thailand to pursue their export-led growth strategy. These countries now export a lot of electronics, vehicles and other manufactured goods, often to developed markets. In addition to driving down sales, curtailing production and impeding travel, the coronavirus may cause these developed countries to re-evaluate their supply chain strategies. Already, US presidential candidate Joe Biden is promising to shore up supply chains in the country to protect against national security threats. If this becomes the norm, it could be more difficult for industrializing countries to promote exports in order to grow and raise productivity levels. A general decline in global trade could end up looking like the Great Depression, with protectionist policies and economic stagnation reinforcing each other for years to come.
But whether it’s a year from now or five years from now, economies will eventually recover from the coronavirus. As confidence returns and the memory of the pandemic fades, nations and businesses will once again look to expanding global trade. The problem is that at this point developing countries will face a new problem – the diminished global role of the United States.
The United States has traditionally functioned as a buyer of last resort for countries wishing to engage in export-led growth. He purchased large quantities of manufactured goods from Germany, Japan, South Korea and Taiwan, helping these countries develop. The United States has kept capital markets open, allowing the dollar to become the reserve currency, although this has contributed to domestic trade deficits. And he pushed for free trade agreements, including China’s entry into the WTO. Recently, countries like Malaysia and Vietnam have had cheap currencies against the dollar, which has helped their businesses sell in the United States. Additionally, the openness of the United States has allowed developing countries to absorb first-world technology and management practices through joint ventures, study abroad, and supply chains, thereby increasing the productivity of those countries.
But the United States is a nation in decline. It has had the worst coronavirus response among developed countries, exposing deep institutional decay. It also suffers from bitter divisions and ongoing turmoil. And it continues to lose economic ground to China in terms of economic size, exports and high-tech export industries. The status of the dollar as a reserve currency may also be fragile.
This could pose a huge problem for developing countries. China, with its government-dominated economy, capital controls and mercantilist instincts, is unlikely to want to let upstart rivals sell freely in its markets. Nor will China be so eager to let its technology leak across its national borders.
The replacement of a US-centric global economy with a China-centric economy thus jeopardizes the happy trend of global development that has prevailed over the past three decades. In a newly closed competitive world, it will likely be more difficult for underdogs to catch up. – Bloomberg
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