Rich and poor countries see wider growth gap

Developing countries set faster pace than industrial nations

IN 1989, David and Adriana Penaloza embarked on a toll-road building spree. Riding a government-privatization boom, they took their construction company on the express lane to the Forbes magazine roster of global billionaires.

The Penaloza's were in the right place at the right time. After a decade of no oomph, the Mexican economy was bursting with energy. Inflation was falling rapidly. The Mexican government was selling choice chunks of state enterprises.

But north of the languid Rio Grande in 1989, United States business moguls and neophytes faced a far less promising set of circumstances. The economy was starting to sputter. By 1990, Mexico was boasting a bullish 4.4 percent economic-growth rate, while the US was heading for a full-blown recession. This divergence since 1989 of Mexican and American economies fits a global pattern that has emerged between many industrialized and developing nations.

``During the 1990s, these economies generally have been running at two different speeds, and that has created a historically large growth gap,'' says Nariman Behravesh, director of DRI/McGraw Hill's World Economic Service in Lexington, Mass.

In the 1980s, developing and industrialized nations basically followed a parallel growth course, like two sailboats on the same tack. The growth gap stayed within 1 or 2 percentage points. But by 1990, the paths were diverging.

The developing nations (principally those in Asia, Latin America, and Eastern Europe) were accelerating, while many larger, developed nations - such as Germany, Japan, and, until recently, the US - were left with luffing sails. In 1993, the average growth gap had widened to 5 percentage points.

An extreme case of the gap is evident in Asia, where China boomed, while mighty Japan went bust. In 1993, China posted a 13.4 percent growth rate, while Japan limped through its worst recession in two decades.

A benefit of developing nations going their own way, which isn't easy to quantify, is the change in mental climate caused by the split. In Mexico, for example, there is a renewed sense of self-confidence among business people. ``The 1980s were hard on the psyche. At times, the huge debt load made the future seem hopeless. But under this administration, since 1988, we are proud of what we are achieving as Mexicans,'' says Jesus Vega Arriaga, president of the Mexican Shipping Agents Association, in Mexico City.

Examining the causes of this two-speed economic world, Mr. Behravesh says he believes that it is a temporary phenomenon, lasting another three to five years, in most cases, caused by an unusual confluence of events.

He cites several key factors that have contributed to the strong, continuing domestic growth among developing nations:

Free market reforms. In many countries, domestic growth has been stimulated by the sell-off of inefficient state enterprises, the arrival of cheaper imports due to trade liberalization, and strong foreign-investment flows.

Infrastructure spending. In places such as Mexico and China, the governments are spending heavily to improve roads, ports, and telecommunications. In some cases, they are spending with funds gained through privatizing state companies.

Consumer spending. In Latin America and Eastern Europe, the years of economic slump and central planning have created a huge pent-up demand for everything from compact disc players to cars. Rising middle class incomes also fuel this consumer spending.

Improved competitiveness. In many East Asian countries, improved productivity enables export industries to maintain or increase their edge in world markets and improve national living standards.

Another important growth factor is an ongoing surge in intraregional trading. The smaller, developing nations with bustling economies are trading more between themselves and not just with the economic giants. ``While intraregional trade has been particularly buoyant in East Asia, it has also become important for some countries in Latin America, especially Brazil,'' notes the 1994 United Nations Trade and Development report released last week.

Among the leading industrialized nations, Behravesh says a separate bunch of factors has fostered the slow or no-growth mode:

Euroturmoil. Poorly managed German reunification combined with record-high postwar interest rates forced other European countries to also hike rates (or risk devaluation) at a time when their weak economies called out for lower rates.

Fiscal austerity. Budget deficits, exacerbated by low tax receipts and higher social-welfare costs (particularly in Europe) have pushed many industrial nations to tighten up on public spending.

Fragile consumer confidence. Germany, like Japan, is recovering from its worst recession since World War II. European industrial production is up, but unemployment isn't dropping yet, leaving consumers hesitant about making major purchases.

Japan's economic recovery is still feeble, note economists, despite tax cuts designed to perk it up. Unemployment is at the highest level in seven years, reports the New York-based brokerage firm Smith Barney Inc.

Smith Barney research analysts predict that Japan will grow at a relatively slow 3.1 percent over the next five years. Behravesh notes that Japan has become ``a mature industrial economy and, as a result, will see its long-term growth rate slow down to the 3 percent to 3.5 percent range over the next 10 years.''

The US economy, which recovered before Japan and many European economies, is now showing signs of leveling off, many economists say.

As the industrialized nations recover, the growth gap will begin to close. But there will be exceptions among the high fliers, such as China, Thailand, and Indonesia. Bear Stearns & Co. in New York expects China's economic growth to gradually ease back to a mere gallop of 11 percent this year and about 10 percent next year. But Thailand and Indonesia are pushing for yet faster growth. Thailand could hit 8.7 percent this year, up from 7.5 percent in 1993.

The danger for many developing nations is that their infrastructure can't handle the growth. In China, rolling brownouts due to electricity shortages are becoming more common.

While the growth gap is a recent event, developing nations have been growing at an impressive rate, by historic standards, in the last two or three decades.

World Bank figures show that developing nations are doubling their industrial output in much shorter periods now than it took today's industrialized nations at the same stage of development. For example, it took Japan 33 years to double its output at the turn of the century. South Korea, at the same stage in 1966, doubled production in just 11 years.

Economists attribute the faster rate today to a more open global-trading system and the rapid diffusion of new technology worldwide. Technology can help young nations leap over some of the infrastructure problems that once inhibited growth. Cellular telephones are a good example. They are proliferating throughout the developing world where phone lines are poor or simply unavailable.

``In places like Vietnam, Cambodia, and Laos, the infrastructure was destroyed by the war. In Cambodia, there are now more cellular lines than fixed lines,'' says Nigel Cawthorne, editor of the London-based Asia-Pacific Mobile Communications Report.

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