Question

Please provide a detailed answer with justifications to the following question:

Does the economic growth that is taking place in emerging countries undermine the economic and political stability of developed countries?

Answer 1

The economic growth in any country per se can not be a threat to any other country's economic or political stability. The economic and political stability of a country depends on its own domestic economics and politics. There can be temporary external shocks to an economy in today's world where all countries are heavily globalised but the overall system depends on the domestic policies. Since, most developed countries have stable instituitions (Clear and transparent governance, judiciary, law and order etc), there should not be any reason to worry about growth in emerging markets. Also note that the high growth in emerging markets is in line with the concept of Convergence, which states that the countries which start late in the development process (emerging economies of today) tend to grow higher than those countries that start early in development (developed world).

For a detailed analysis, let us look at the possible positives and negatives of economic growth that is taking place in emerging countries.

Benefits:

• Bigger markets: As the third world countries develope, they demand high end goods and services which can be supplied by developed countries. So there is a scope of increasing market size for the already developed countries.This is specially true in case of more populist countries like China and India.
• Reduce poverty: With the high economic growth in emerging economies, there has been significant fall in total poverty ratio in the world because highest number of poor people are in these emerging economies and as they grow faster, poverty falls significantly.
• Communication of ideas: As the gap between developed and emerging countries reduces, the world gets more connected. There is faster communication of ideas, knowledge travels fast, capital travels more easily which reduces the resource constraint, new avenues open up. All this encourages innovation and technological advancements. This is important because knowledge, innovation and technology has played a very important role in improving the quality of life.

Possible risks:

• Loss of advantage: One big risk of high growth in emerging countries is that they can produce some goods more cheaply than their developed counterparts and this may lead to loss in comparative advantage of developed countries. This leads to jobs in these goods sectors going to other countries. This has been experienced by some european countries and even USA. Asian countries like China, India, Japan, S.Korea have become more competitive with their economic growth.
• Maintaining productive workforce: It is to be noted that even if emerging economies have become more competitive in certain sectors like cloths, shoes, toys etc. the natural advantage of developed countries is in their high skilled and highly productive workforce. This labor force produces highly valued goods and services. So the challenge for countries like USA is to maintain this high productive workforce.

The competition from emerging economies that pose challenge to economic development of developed economies can be managed if developed countries are able to maintain their technological superiority. With better techniques of production, advancement in R&D, developed countries will still be more productive even if their traditional production base is shifted. High paying jobs are possible only when workers are highly productive and it is for this reason that advancing the present technology is very important for developed countries. It is difficult to replicate the silicon valley model of USA in any other developing country because of its natural advantage.