Rich and Poor Countries See Wider Growth Gap Developing Countries Set Faster Pace Than Industrial Nations

Article excerpt

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. …