Economic Miracles to Stagnation
Since the Industrial Revolution, the global economic landscape has been characterized by wealthier nations growing faster than their poorer counterparts. However, the period from around 1995 to 2015 stands as an exception, marked by notable convergence in GDP growth rates between rich and poor nations. During these two decades, global poverty decreased significantly, and public health and education saw substantial improvements, particularly in areas such as malaria prevention and infant mortality reduction. Yet, as we move further into the 21st century, those advancements now feel like distant memories.
Today, the momentum of this golden era has waned. Since 2015, the reduction in extreme poverty has plateaued, global public health progress has slowed, and in some cases, even regressed. Malaria, for example, now kills over 600,000 people annually, a figure comparable to the mortality rates of 2012. Economic convergence between rich and poor countries has ceased. In some cases, poorer nations are falling even further behind, with over 700 million people still living in extreme poverty, and 3 billion remaining in general poverty. The question facing economists and policymakers today is: what went wrong, and what can be done to reverse this trend?
What Drove Past Success?
In the late 20th century, significant gains were made in poverty reduction and economic growth, particularly in countries that embraced market-oriented reforms. China’s rapid ascent under Deng Xiaoping’s leadership, and India’s liberalization efforts in the 1990s, dismantling its “license Raj” system, helped to fuel economic growth. Meanwhile, the integration of post-communist Eastern European nations into the global market economy added further momentum to global convergence. These success stories were largely self-driven rather than externally imposed by Western institutions or international donors.
However, while international aid played a role in improving health and education in the world’s poorest regions, it has not been the primary driver of sustainable economic growth. Much of the progress seen in the 1990s and early 2000s came from internal reforms and market liberalizations rather than the directives of Western financial institutions like the International Monetary Fund (IMF) or the World Bank. Although these organizations have helped in managing crises and promoting reform, they have often been more effective in regions like Africa and Latin America only when commodity prices were high.
Critics of globalization argue that capitalism and the global financial crisis defined this era, but they miss the bigger picture. The most successful growth stories, whether in Asia or Eastern Europe, emerged from within countries that adopted market-oriented reforms. Capitalism, in its varied forms, was the engine driving much of this catch-up growth.
The Reversal of Progress
In recent years, however, the pace of progress has stalled. Since 2015, aid budgets have shrunk, limiting the funds available for crucial health and education initiatives. Global public health efforts that had significantly reduced malaria deaths and infant mortality have lost momentum. For example, the number of people dying from malaria today is comparable to 2012 levels, and the gains made in school enrollment and child mortality have slowed considerably. This stagnation has been exacerbated by the COVID-19 pandemic, which further disrupted development efforts.
One of the key reasons for this slowdown is the global shift away from market-oriented reforms and towards state control, protectionism, and industrial policy. Many developing countries have embraced these approaches, hoping to emulate China’s rise by focusing on manufacturing and state intervention. However, they often misunderstand the roots of China’s success, which involved opening up to global competition rather than shielding industries through protectionism.
Countries that have resisted market reforms are paying the price. In sub-Saharan Africa, where nearly a third of the population lives in extreme poverty, governments continue to waste valuable resources on inefficient subsidies, such as Nigeria’s costly fuel subsidy program. In South Asia, Pakistan continues to prop up inefficient state-backed industries, diverting resources away from potentially more productive sectors.
Even China, once the poster child for rapid economic development, is facing serious challenges. Despite decades of growth, a quarter of the Chinese population still lives on less than $2,500 a year. The country’s present economic slowdown, worsened by President Xi Jinping’s centralization of power and increasing censorship of economic data, has dimmed the hopes of millions for a better life.
A Return to Protectionism
The rise of protectionist policies in the developing world is reminiscent of the failed development strategies of the 1950s, which were centered on insulating domestic industries from global competition. This inward-looking approach did not work then, and it is unlikely to work now. While countries in East Asia, such as South Korea and Taiwan, achieved impressive industrialization, they did so by competing fiercely in global markets, not by shielding their industries from competition.
Unfortunately, the allure of protectionism has grown stronger, fueled by the West’s own retreat from free-market principles. In the United States, President Joe Biden’s administration has embraced industrial policy, promoting state intervention in key sectors of the economy. This shift has emboldened leaders in the developing world to pursue similar strategies, often with disastrous consequences for their economies.
The IMF has warned that poor countries are increasingly resorting to trade restrictions, and research shows that the number of harmful trade measures implemented in the 2020s is five times higher than the number of liberalizing reforms. This shift away from openness is exacerbating the global divide between rich and poor nations.
The Decline a Aid and Ideas
Compounding these problems is the decline of international aid. In the early 2000s, wealthy countries and philanthropists like Bill Gates and Bono argued that the West had a moral obligation to help the world’s poorest nations. Aid played a significant role in reducing poverty and improving public health in countries across Africa and Asia. But since the mid-2010s, aid flows have diminished, and what remains is increasingly diverted to new causes like climate change and refugee support in wealthy nations.
In the absence of substantial aid and with economic growth stagnating, many poor countries are left with few options. The IMF and World Bank have watered down their demands for tough market reforms, but they have also failed to produce new ideas to drive growth. Development economists are increasingly focused on small, incremental interventions rather than bold, transformative policies.
The Way Forward
The world is at a crossroads. While rich countries will likely weather the challenges posed by rising protectionism and declining aid, the poorest nations may not be so fortunate. For millions of people, economic growth can be the difference between a life of poverty and one of opportunity.
Reversing the current trend will require a return to the principles that drove global convergence in the past—openness to trade, market-driven reforms, and a focus on long-term growth rather than short-term political gains. Only by embracing these principles can the world hope to lift millions more out of poverty and ensure that the miracles of the early 21st century are not just a distant memory.
Comments