Absorbing the shock


Just how much damage could a downturn in the US inflict on the world economy? Doom-mongers say the outlook is grim. But a more upbeat assessment from the World Bank suggests that the developing markets might ride to the rescue, with their healthy growth providing a timely shock-absorber to developed-world economic woe.

Spurred on by the rapid adoption of new technologies, the bank says resilience in developing economies is already cushioning the impact of a US slowdown, with real GDP growth for developing countries expected to ease to 7.1 percent over the next 12 months. High-income countries are predicted to grow by a modest 2.2 percent.

Its Global Economic Prospects 2008 report notes that world growth slowed modestly in 2007 to 3.6 percent compared with 3.9 percent in 2006, a downturn due largely to weaker growth in high-income countries. In 2008 global growth is expected to be 3.3 percent.

The soft landing prognosis is a cheering one, but a weaker US dollar, the spectre of a North American recession, and rising financial-market volatility could all spoil the party. These risks would cut export revenues and capital inflows for developing countries, and reduce the value of their dollar-investments abroad. In this context, the reserves and other buffers that developing countries have built up in past years may be needed to absorb unexpected shocks.

“Overall, we expect developing-country growth to moderate only somewhat over the next two years. However, a much sharper United States slowdown is a real risk that could weaken medium-term prospects in developing countries,” said Uri Dadush, director of the World Bank’s Development Prospects Group and International Trade Department. The report’s authors assume that credit turmoil in international markets will persist into late 2008, but that costs to large financial institutions will remain manageable. Moreover, they predict that spill over from problems in the US housing market on consumer demand will remain limited.

Fundamental trends
The World Bank says developing economies are benefiting from more prudent macroeconomic management. And it also highlights a fundamental trend: rapid technological progress has helped increase productivity and real income growth in developing countries over the past 15 years. In fact, technological progress in developing countries has helped to raise incomes and reduce the share of people living in absolute poverty from 29 percent in 1990 to 18 percent in 2004, its report says.

The technology gap between rich and poor countries remains enormous, and the capacity of developing economies to adopt new technology remains weak, says the bank. Nonetheless, “Technological progress increased 40 to 60 percent faster in developing countries than in rich countries between the early 1990s and early 2000s,” said Andrew Burns, lead economist and main author of the report. “Nevertheless, developing countries have a long way to go, given that the level of technology that they use is only one quarter of that employed in high-income countries.”

The World Bank report notes that recent progress reflects increased exposure to foreign technologies. As a share of GDP, high-tech imports and foreign direct investment levels have doubled since the early 1990s. “Rising trade and investment contacts with high-income countries, often facilitated by migrant groups, have been central to technological progress in developing countries,” said Uri Dadush, director of the World Bank Development Prospects Group. “However, openness alone is not enough. To continue catching up, countries need to strengthen educational achievement, governance, basic infrastructures, and links to migrant groups.”

The report stresses that the weak diffusion of technology within countries holds back overall technological achievement in many countries. Thus, while major centres and leading firms in Brazil, India and China may operate close to the global technological frontier, most firms in these countries operate at less than a fifth of the top productivity level.

Technology levels
While the level of technology used in all countries has increased rapidly, it has done so quicker in developing countries and quickest in low-income countries. Of course, the initial level of technology in lower-income countries was much lower to begin with. But there is strong evidence of catch-up between middle-income and high-income countries. In Chile, Hungary, and Poland, the overall level of technological achievement increased by more than 125 percent during the 1990s.

Despite the rapid pace of technological progress, the technology gap between high-income and developing countries remains wide, with developing countries employing only a quarter of the level of technology in developed countries, the report says. Levels of technological achievement in high-income countries are more than twice those in upper-middle income countries. This group, in turn, has levels of achievement that are more than double those in low-income countries.

Technological achievement can also vary widely within a country. Main cities and leading sectors often use more sophisticated technologies than the rest of the economy. For example, the IT-enabled services sector in urban India employs world-class technologies, but less than 10 percent of the country’s rural households have telephone access as of 2007. So, while one might have expected India to have better overall technology diffusion than other countries at similar income levels, in fact, it does not. “Over time, the digital divide between rural and urban India is expected to narrow, especially in high-income states and near major cities, but it may well worsen in some areas,” the report said.

Another key finding of the report is that technological progress in developing countries – almost universally reflects adoption or adaptation of pre-existing technologies rather than at-the-frontier inventions. Scientific invention and innovation – measured by the number of patents and journal articles – plays virtually no role in explaining the level of technological achievement in developing countries. This is not the case in rich countries.

Developing countries are scarcely active at the global technological frontier. This is mainly because many developing countries lack the critical mass of technological competencies necessary to participate at the global technology frontier.

Cutting-edge
This does not mean that top-level scientists do not exist in these countries, the report says. It points to research suggesting that many people from developing countries perform cutting-edge research in developed countries. In the US, around 10 percent of the 21.6 million working scientists and engineers were born in developing countries.

According to the report, improving capacity to absorb foreign technology is critical in low-income countries, as well as in those middle-income countries that have exploited low-wage comparative advantages rather than strengthened domestic competencies. It calls on governments to strengthen domestic technology dissemination channels as a high priority. These include transport infrastructure and the capacity of applied R&D agencies to orient themselves to markets through improved outreach, testing, and marketing.

The weakness of basic infrastructure systems is another area to address, the bank says, as this limits the range of technologies that can be employed in many countries. “Policies should ensure that critical enabling services, such as roads and electricity, are widely available, whether delivered by the private or public sector.” For example, in Sub-Saharan Africa, just 8 percent of the rural population has access to electricity.

Ineffective or uneven access to quality education is another hindrance on countries’ ability to exploit technologies. This is important, as even simple technologies can have big impacts, the report says: “For example, relatively simple skills are needed to build rainwater collection systems, which improve access to clean drinking water and reduce infant mortality by lowering the incidence of diarrhoea.”

Poor infrastructure and chronic inequality are hardly simple problems to solve. But as the economic outlook for the developed world darkens, the renewed incentive to help developing nations to meet these challenges is clear – for reasons of self interest if nothing else

Technology access
Technology now spreads much more quickly between countries. In the early 1900s, new technology took over 50 years to reach most countries; today it takes about 16 years.

Technology tends to spread slowly within countries. Main cities and leading sectors use more sophisticated technologies than the rest of the economy. For example, the IT-enabled services sector in urban India employs world-class technologies, but less than 10 percent of the country’s rural households had telephone access in 2007.

Use of some new technologies, such as mobile phones, has risen quickly. Nevertheless, some technologies have spread only slowly. Three-quarters of low-income countries have 15 or fewer personal computers per 1,000 people, and a quarter have fewer than five.

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