Can the wounded West make room for the rising powers?

HUAIBEI, CHINA - JULY 26: (CHINA OUT) An employee counts money at a branch of Industrial and Commercial Bank of China Limited (ICBC) on July 26, 2011 in Huaibei, Anhui Province of China. According to the China Foreign Exchange Trading System, The Chinese currency, Renminbi (RMB), Tuesday rose 33 basis points from previous trading day to a record high of 6.4470 against the U.S. dollar. (Photo by ChinaFotoPress/Getty Images) *** Local Caption *** 119920460.jpgShow less

Perhaps for the first time in modern history, the future of the global economy lies in the hands of poor countries. The US and Europe struggle on as wounded giants, casualties of their financial excesses and political paralysis. They seem condemned by their heavy debt burdens to years of stagnation or slow growth, widening inequality, and possible social strife.

Much of the rest of the world, meanwhile, is brimming with energy and hope. Policymakers in China, Brazil, India, and Turkey worry about too much growth, rather than too little. By some measures, China is already the world's largest economy, and emerging market and developing countries account for more than half of the world's output. The management consultancy McKinsey has christened Africa, long synonymous with economic failure, the continent of "lions on the move".

As is often the case, fiction best reflects the changing mood. The emigre Russian novelist Gary Shteyngart's comic novel Super Sad True Love Story is as good a guide as any to what might lie ahead. Set in the near future, the story unfolds against the background of a US that has slid into financial ruin and single-party dictatorship, and that finds itself embroiled in yet another pointless foreign military adventure - this time in Venezuela.

All the real work in corporations is done by skilled immigrants; Ivy League colleges have adopted the names of their Asian counterparts to survive; the economy is beholden to China's central bank; and "yuan-pegged US dollars" have replaced regular currency as the safe asset of choice.

But can developing countries really carry the world economy? Much of the optimism about their economic prospects is the result of extrapolation. The decade preceding the global financial crisis was in many ways the best yet for the developing world.

Growth spread far beyond a few Asian countries, and, for the first time since the 1950s, the vast majority of poor countries experienced what economists call convergence - a narrowing of the income gap with rich countries.

This, however, was a unique period, characterised by a lot of economic tailwind. Commodity prices were high, benefiting African and Latin American countries in particular, and external finance was plentiful and cheap. Moreover, many African countries hit bottom and rebounded from long periods of civil war and economic decline.

In principle, low post-crisis growth in the advanced countries need not impede the economic performance of poor countries. Growth ultimately depends on supply-side factors - investment in and acquisition of new technologies - and the stock of technologies that can be adopted by poor countries does not disappear when advanced countries' growth is sluggish. So lagging countries' growth potential is determined by their ability to close the gap with the technology frontier - not by how rapidly the frontier itself is advancing.

The bad news is that we still lack an adequate understanding of when this convergence potential is realised. Even unambiguously successful cases have been subject to conflicting interpretations.

Some attribute the Asian economic miracle to freer markets, while others believe that state intervention did the trick. And too many growth accelerations have eventually fizzled out.

Optimists are confident that this time is different. They believe the reforms of the 1990s - improved macroeconomic policy, greater openness and more democracy - have set the developing world on course for sustained growth. A recent report by Citigroup predicts that growth will be easy for poor countries with young populations.

My reading of the evidence leaves me more cautious. It is certainly cause for celebration that inflationary policies have been banished and governance has improved throughout much of the developing world.

But igniting and sustaining rapid growth requires something more: production-oriented policies that stimulate ongoing structural change and foster employment in new economic activities. Growth that relies on capital inflows or commodity booms tends to be short-lived. Sustained growth requires incentives to encourage private-sector investment in new industries. If history is any guide, the number of countries that can pull this off will remain small.

So while there may be fewer economic collapses because of better macroeconomic management, high growth is likely to remain episodic and exceptional.

The big question for the world economy is whether advanced countries in economic distress will be able to make room for faster-growing developing countries, whose performance will largely depend on making inroads in manufacturing and service industries, in which rich countries have been traditionally dominant.

The employment consequences in the advanced countries would be problematic, especially given an existing shortage of high-paying jobs. Considerable social conflict could become unavoidable.

Ultimately, greater convergence in the post-crisis global economy appears inevitable. But a large reversal in the fortunes of rich and poor countries seems neither economically likely nor politically feasible.

A Dani Rodrik, a professor of international political economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy

* Project Syndicate