Developing economies continue to grow faster than more advanced countries. In 2010, non-OECD countries’ share in world GDP surpassed that of OECD countries. Since its initiation in 2010, the series of publications Perspectives on Global Development has investigated the trends in the shifting wealth process, following the increasing economic weight of developing countries in the world economy. Shifting wealth has received a particular boost through the rise of People’s Republic of China, which has also led to positive spillover effects on other developing economies that could supply China’s emerging demand for resource-based products and intermediates. However, assuming that trend growth remains the same in the coming decades, the recently accelerated convergence process of developing with developed country incomes is not sufficient for many countries (including many middle-income countries) to reach OECD average incomes by 2050.

This fourth report in our series on shifting wealth raises the question of whether convergence in the living standards of emerging-market economies and developing countries to the level of advanced economies will continue in the years to come. Although convergence implies much more than economic growth, the dynamism of emerging-market economies has been an important driver in gradually bridging the living standards gap. In 2010, the share of global GDP of non-OECD countries in PPP terms surpassed that of OECD countries. This change in relative economic size is being led by China and India, which together already account for almost one quarter of global GDP in PPP. However, the differential rate of economic growth between OECD and non-OECD countries has narrowed recently and there has been a significant slowdown in the rate of growth of emerging-market economies. Boosting productivity growth in middle-income countries could stem this trend and is the focus of this report. At the same time, this growth needs to be inclusive, so a real convergence in living standards can take place.

Many middle-income countries are not on course to converge with OECD per capita incomes: Strong growth over much of the past decade has substantially boosted developing countries’ share of the global economy. But will this process of shifting wealth allow these countries to eventually converge with the average OECD per capita income level? After a long period of impressive progress, growth rates have begun slowing in some middle-income economies. At average growth rates over 2000-12 several middle-income countries will fail to converge with the average OECD income level by 2050.Their challenge is deepened by the slowdown in China, where rapid growth has up to now benefited its neighbours and suppliers, in particular natural-resource exporters.

The chapter begins with an update on recent trends in shifting wealth, examining global growth, trade and investment. The second section discusses the convergence prospects for middle-income countries and highlights the important role of productivity growth in boosting these prospects. This section also looks at trends in total factor productivity (TFP) and labour productivity for manufacturing and services in selected middle-income economies, summarising more detailed analyses found in later chapters. The following section examines the traditional drivers of growth that may be starting to fade in middle-income countries. The final section of the chapter provides a roadmap for the rest of the report and summarises key considerations for boosting productivity and supporting development.

This chapter examines ways to foster competitiveness and increase productivity to avoid the middle-income trap. It begins by contrasting the achievement of developing economies in boosting per capita incomes with their more uneven labour productivity growth. The first section examines trends in diversification and specialisation as a factor explaining low productivity growth and discusses the importance of diversifying into higher value-added sectors. The last four sections of the chapter present some of the core underlying factors that can foster sustainable competitiveness and increase productivity, including: product, labour and financial market institutions and public governance; synergies between education and technology policies, examining educational attainment and the channels through which middle-income countries tap global knowledge and generate knowledge domestically; policies to create equality of opportunity, looking at recent trends in income distribution; and finally, the crucial role that effective governments play in implementing reforms.

This chapter begins with a discussion of the important role of the manufacturing sector and estimates productivity growth rates in several key manufacturing industries in selected middle-income countries. The second section looks at ways to foster a more competitive business environment that could boost manufacturing productivity in middle-income countries. The chapter then moves on to look at targeted policies to improve competitiveness at the firm level. The final section of the chapter addresses energy and carbon efficiency as additional dimensions of competitiveness not always internalised by firms. This chapter uses multiple measures of competitiveness to better describe how firms perform.

Fostering the development of competitive service sectors has great potential to enhance overall competitiveness and to contribute to the convergence process in middle-income countries. They can help create jobs and – with their relatively low resource intensity – drive inclusive, sustainable development. Rapid progress in ICT has allowed economies of scale in the production of most services and spillover effects to be realised. The first section endeavours in particular to show that services can contribute to the movement towards convergence in that they help increase consumption, complement manufacturing, and are increasingly tradeable. Sustained competitiveness in services can be achieved only through higher productivity and efficiency. The second section of this chapter shows that while emerging countries’ productivity levels in some services are still considerably lower than those of the advanced economies, they are catching up. The third section identifies policy options to develop competitive service sectors.

This chapter first discusses regional disparities in economic development across some BRIICS countries and other emerging economies, before exploring the drivers of regional competitive advantages and the policy options and strategies for activating them. Economic development tends to be accompanied by uneven growth between regions, as early drivers of growth may be geographically concentrated and connections within a country may be underdeveloped. Widespread convergence in regional income is not seen in many emerging economies, but there is some evidence that convergence in productivity is underway. Regional disparities are widely considered to lock developing countries in relative income stagnation. In addition to nation-wide policies, regional policies to support overall national objectives of stronger, more equitable and greener economic growth are needed.

The performance of the BRIICS (Brazil, the Russian Federation, India, Indonesia, China and South Africa) will be essential for continuing the process of shifting the weight of economic activity from OECD to non-OECD countries. Moreover, the diversity of BRIICS’ development experiences and the challenges and opportunities they face may be of interest to other developing countries as they craft their own development strategies. This chapter firstly explores the sources of their economic growth and the development of their international integration; highlighting the importance of investment and imports of foreign knowledge for sustained and increasingly productivity-driven growth. Building on this, the chapter also includes individual country notes for each of the BRIICS providing more details on the history of their economic development and the challenges and prospects for them to move beyond the middle-income level; underlining that it requires not only economic policies, but also adjustments to improve equity and environmental sustainability.