January 31, 2012

· The convergence of fast-growing developing economies with more advanced countries will reshape the world.

· China will play a key role in this shift, but faces a challenge trying to maintain fast growth as it gets richer.

· There is no clear link between a country’s economic performance and its type of governance—whether democracy, dictatorship or something in between. What counts is competent governance.

· The core of the euro zone will hold together, but Greece and Portugal will probably leave.

These were just some of the thoughts of Nobel Prize-winning economist Michael Spence, who gave a wide-ranging presentation on the global economy to a packed auditorium at IMD on January 30. The event was organized by The Evian Group @ IMD.

Dr Spence focused on the challenges posed by big structural shifts in the world economy, which he said could triple in size in the next 20 years, from about $60trn to $180-200trn. His talk centered on the idea of “The Next Convergence” – which is also the title of his new book.

For some 200 years, from about 1750 until the mid-20th century, the global economy saw a divergence as the industrialized west got much richer than the rest of the world. This pattern reversed after World War II, and we are now midway through a century of high and accelerating growth in the developing world. This “next convergence” will see lower-income countries converge with the advanced economies.

“My grandchildren will live in a world where not 15%, but 85-90% of people live in high-income countries,” Dr Spence said.

He highlighted three key factors (among several) that can drive sustained fast growth in developing economies.

One is the overall health of the global economy. The second is inclusiveness and a reasonable degree of equity within a country. And the third is leadership, and the “absolutely critical” need for a new national vision and consensus to trigger fast growth.

All eyes will be on China entering what Dr Spence called “the middle-income transition,” as its per-capita income reaches $4,500-5,000. Many other economies in the past slowed down when they reached this income level (with some exceptions, such as South Korea). Whether China can maintain rapid growth rates will depend mainly on the strength of its domestic demand, according to Dr Spence.

Turning to the euro zone, Dr Spence described the single currency area as “the epicenter of global macroeconomic risk.” The most likely scenario, in his view, is that the euro zone core holds together but Greece and Portugal leave the single currency because they have no viable growth strategy within it.

The US economy, meanwhile, is “stumbling along but vulnerable” as its underlying social arrangements come under pressure and income inequality remains high. “The basic social contract in the US is that you’re on your own, but there’s a lot of opportunity. This is breaking down in terms of opportunity and mobility,” he said.

Compounding all these global economic tensions, at least in the short term, are social media and the ability to mobilize people. “This is a very, very powerful force. It’s changing everything. It may create turbulence in the short run, but may also improve government performance in the long run,” he said.