The path ahead Cottoning on-Texglobe

IT IS A crisp Friday morning in Santa Isabel, a small Brazilian town 60km north-east of São Paulo. Gabriel de Matos, technology director at Paramount Textiles, is taking delivery of the latest machine for dyeing the wool yarn that is made here. It won’t look out of place: most of the equipment is less than ten years old. The machines for spinning yarn are 40% faster than the ones they replaced. The new kit has allowed Paramount to supply finer-grade wools for the men’s suits its customers make.

The factory refit and the move upmarket was a response to competitive pressures that have driven many local rivals out of business. The global market for woollens has halved since the mid-1990s. Consumers these days prefer casual clothes, but Brazil is now too rich to compete with cotton producers in Vietnam or Indonesia. “We need a premium product like wool to cover our costs,” says Mr de Matos. China also produces wool and its land, labour and capital are often cheaper. “Thank goodness we are so far away,” he says. “Time is money and that gives us some breathing space.”

Paramount is copying the tricks long used by rich-world businesses to fend off low-cost rivals from emerging markets: better designs, newer machinery, shorter production runs (to give rarity value to each line) and faster delivery to local markets.

Britain bounded ahead in textile production two centuries ago, and established firms have been looking over their shoulder ever since. An early challenge came from the textile industry in New England, where countless townships called Manchester were founded (of which one survives). That cluster soon faced competition from factories in the low-wage American South.

The cotton industry has carried on travelling: its technology moves easily to wherever labour costs are low. The pattern has been repeated for other sorts of ventures. More complex technologies are harder to copy, so their diffusion has been slower. But technology eventually spreads. It is what drives economic convergence, making large parts of the developing world better off year by year.

Demography is destiny again

For much of the past two centuries the know-how that determines productivity and living standards has been concentrated in the West. That is true of hard engineering technology as well as the tacit knowledge of how best to organise production, support markets and manage aggregate demand. Because large productivity gains were confined to the West, the populous parts of the world stayed poor.

That was anomalous. Population has determined economic power for most of human history. Now demography and productivity are pushing in the same direction. America and Europe are demographic minnows compared with the developing world’s two giants, China and India. And the rich world’s financial crisis and its aftermath is accelerating the shift of economic power eastwards. Just as the catch-up in emerging markets is speeding up and broadening out, the rich world’s economies seem to be grinding to a halt. If China can avoid a blow-up in the next decade, it is likely to become the world’s biggest economy—though its citizens would still be poor by American standards.

The big question for the global economy is whether the rapid growth in emerging markets can continue. The broad economic logic suggests more of the world economy’s gains should come from convergence by emerging markets than from the rich world pushing ahead. Each innovation adds less to rich-world prosperity than the adoption of an established technology does to a poor country. At the start of the industrial revolution the cotton industry alone could make Britain’s productivity jump. But now that the frontier is wider, there is less scope for leading economies to surge ahead. More of the world’s growth ought to come from catching up.

But contrary to some excited forecasts, the growth of emerging economies is unlikely to continue at the same pace, or in a straight line. Economic convergence is a powerful force but cannot knock over every obstacle. And the barriers to growth become bigger as economies enter the difficult middle-income phase of development.

Moving capital and workers from dying to rising ventures is trickier than transplanting poor rural migrants to cities in the early phase of catch-up. As economies become richer they can rely less and less on the brute force of additional machine power to drive their prosperity. They have greater need of a skilled workforce and a financial system that is attuned to where the best returns are likely to be made. Countries that have relied on exports to fuel their growth need to shift to internal sources of spending, with all the associated headaches for monetary and fiscal policy. In the past many middle-income economies have run aground because they have failed to meet such challenges.

Careful what you wish for

The biggest emerging markets, with their huge foreign-exchange reserves, appear to be almost crisis-proof (at least outside eastern Europe) in contrast to the seemingly crisis-prone rich world. But setbacks in making the shift from poor to rich are inevitable. Indeed a lesson of recent economic history is that countries and regions that ride out a crisis well are all the more vulnerable to the next one. Hubris leads to policy mistakes, as the developed world has proved so devastatingly. So thick is the gloom pervading the rich world that the once-regular emerging-market crises have almost been forgotten. But this makes it even likelier that they will one day return.

Those anxious that the rich world’s economic power is ebbing might welcome a few emerging-market slip-ups. A less frantic rate of growth in the developing world would also slow the relative decline of the West and allow it to cling on to some of its privileges for longer. The dollar and the euro could maintain a reserve-currency duopoly for longer; commodity-price pressures on businesses and consumers would ease; and the impact of developing economies on relative wages and jobs turnover might be less jarring.

Yet the emerging markets are the best hope for global growth—for the next few years at least. Japan’s economy is in a funk; the euro zone is in danger of imploding; and much of the rest of the rich world is hung-over from a giant credit boom. America, Britain and others took on debts that now look steep compared with incomes and the value of the homes against which much of the money was borrowed. They are saving hard to fill the gap. Those with cash (including a chunk of the corporate world and not a few households that gained from the housing boom) are clinging on to it because of uncertainty about future demand, job prospects, taxes, the supply of credit and much else.

That is the main reason why a fast rate of catch-up by the emerging markets would be better for the West than a faltering one. A richer and more consumer-led China would be likelier to buy more of the services in which developed countries have a comparative advantage.

It would be healthy, too, if the developing world could break the rich world’s monopoly on international finance. The emerging markets account for almost half of global GDP but have no reserve currency of their own. For now there seems little alternative to the dollar as a financial lodestar and the main storehouse for the world’s precautionary saving. The yuan is the likeliest candidate to supplant it but has so far taken only baby steps to becoming international. The longer it takes for the yuan to emerge, the more risky the global financial set-up will become. The worry is that strong demand for Treasuries as reserves might tempt America to overstretch itself. The wreckage from the rich world’s housing bust shows the dangers of money that is too cheap.

In other ways, too, it might be better for the rich world if China and others caught up with it sooner rather than later. Faster catch-up would narrow the wage gap between emerging and rich countries and help to relieve the downward pressure on unskilled wages. A mature Chinese economy would waste fewer natural resources on hard-to-justify investments. Many in the rich world fear the loss of economic dominance that will be the eventual outcome of convergence. But perhaps losing it is worse than having lost it.

And perhaps the pessimism about America and Europe is as overdone as the optimism about emerging markets. The rich world is an enticing place when viewed from the developing world. For all its troubles, America’s economy is a source of envy. Europe’s high-end industries and luxury goods are not easily mimicked. Emerging-market firms find it easier to do business, to raise finance and to find skilled workers in the rich world. Such attributes are hard to replicate. If it were easy, the emerging economies would already be rich.