The 21st Century: Diverging Paths of Development
№1 2002 December
Leonid Grigoriev

Leonid Grigoriev is chief advisor to the head of the Analysis Center under the Government of the Russian Federation, Head of the World Economy Chair of the World Economy and International Affairs Department of the National Research University–Higher School of Economics.

Leonid Grigoryev — Doctor of Science (Economics), a leading
researcher of the Russian Academy of Sciences’ Institute of World
Economy and International Relations (IMEMO), former Representative
of Russia at the World Bank, a member of the Board of Advisors of
the Russia in Global Affairs journal.

Leonid Grigoryev

How stable is the world economic situation? Answering this
question in the mid-1990s, most politicians and analysts were
optimistic – both developed and developing countries were showing
high growth rates and a large group of states had opted for a
market economy rather than a planned one. Current processes in the
world economy give many reasons to worry. In the late 20th century,
and at the dawn of the new millennium, the growth rates of the
three major groups of countries – developed, developing and
transition – drew closer together and stabilized.

Dynamics of real GDP in developed, developing and transition
countries between 1990 and 2003.
Source: IMF (September 2002), IBRD.

This means that the gap between them is being maintained rather
than bridged and that their development levels cannot be evened
out. On the contrary, these groupsof countries will continue
following their diverging paths and will gradually drift apart.

Nervous Growth

What is happening in the developed world and is there any reason
for the panicky forecasts the press is regularly making to scare
the layman? Generally, it is safe to say that the group of
developed countries is in “good shape.” By the end of 2002, it has
become clear that the U.S. has overcome last year’s recession. The
1991-2000 upsurge in America was one of the biggest and longest in
its history and was not interrupted by a customary recession in
mid-decade. It was based on mammoth investments and the “peace
dividend” (the result of the end of the Cold War) – a factor that,
coupled with other developments, allowed the U.S. to achieve a
balanced budget for three years running. The recent stock exchange
crash “pierced” the speculative “balloon,” but the invested
resources did not vanish and will surely produce a growing economic
effect. Despite the economic problems of 2001, the U.S. has
markedly raised its defense and security spending. (It should be
noted that these expenses are not budget losses – they stimulate a
growing demand.) Now that the crisis is mostly in the past, the
U.S. will get new tangible opportunities for consolidating its role
in the world.

Generally, the developed world is emerging from the past two
years’ stagnation (only Japan is still facing chronic problems).
Most likely, in 2002-2003 the U.S. will remain in the lead and the
euro zone countries will advance more slowly. According to the IMF
world economic outlook for 2002-2003, the real GDP indicator in the
developed world will grow 2.7-2.8 percent. The current real prices
for basic commodities imported by the developed countries from the
developing world are lower than the prices in 1990. The developed
countries’ budgets are balanced better than ever. Thus, the 29
countries that account, by IMF estimates, for nearly 56 percent of
the world GDP may well expect a return to cyclic growth [1].

Of course, today’s growth rates are lower than expected, but
there is no direct threat to development. As usual for a country
emerging from a crisis, it is not absolutely clear which industry
will be playing the role of a new locomotive of growth and what
exactly will serve as the basis for a future upsurge. It is
important, however, that the postindustrial society is no longer
dependent on a limited number of industries.

Yet the developed world is getting nervous – something unheard
of in the 1990s. Mainly external rather than internal factors lie
behind this. In economics, we have the stability of oil imports,
oil and gas prices, as well as corporate scandals and protracted
stock exchange upheavals that, as a rule, precede a crisis, rather
than occur at the stage of transition to growth. Investors’
instinctive desire to find shelter in safer regions – actually, to
go home – is augmented by the feeling of conflict in the political
sphere (the Middle East, Iraq, the Balkans, the threat of
terrorism). Unsettled global problems, such as pollution, climate
changes, poverty and a growing drug trafficking, also cause

The developed world’s main internal problem is the weakening of
the middle class. In Europe, this boosted the spread of right-wing,
racist and anti-immigrant attitudes, something which was manifested
most vividly during the recent parliamentary elections in France
and the Netherlands. The sense of anxiety grew stronger due to the
complex integration processes compelling the Europeans to actively
look for ways and means to adapt themselves to the new way of life.
The totality of these factors compels the leading powers to
increasingly concentrate on their own problems and show less
interest in world development processes. Attempts to combine budget
austerity measures (especially in the EU) with social security
programs for their own poor and destitute, and Europe’s growing
involvement in the U.S. and NATO operations to maintain stability
(in the Balkans, Asia and elsewhere) do not help stimulate an
inflow of resources to the developing world. In the wake of
September 11, the “caution syndrome” in respect to other countries
is increasingly manifesting itself, especially regarding long-term
investments in war risk zones. Today, the West seems to be more
concerned with safeguarding its own way of life and is developing
all by itself, moving away from the rest of the world.

Oil is a Delicate Business

The oil-exporting countries, especially the OPEC member-states,
that combine some features of the industrial countries with many of
the developing nations, stand in a category by themselves. They are
distinguished by a relatively high per capita income (in the Arab
world) and, largely, by the existence of their own stable income
sources. At the same time they are characterized by monoculture
production and export, underdeveloped processing industry and
services, mostly archaic political systems, big government outlays,
export of capital (in some cases, its flight) and limited
development opportunities. Income fluctuations there are so great
that their growth patterns are rather peculiar and differ from both
developed and developing countries [2]. As a
rule, these countries do not borrow from international financial
organizations, but they are burdened with private debts.

At the post-crisis phase, the developed countries need stable
oil prices, and the lower they are, the better. In the 1990s, the
OPEC countries’ revenue totaled nearly $120-160 billion a year. The
1998 plunge to $104 billion was followed by an upswing to $250
billion in 2000 and a gradual decrease to $175 billion in 2002

Price and revenue fluctuations lead to serious shifts in the
trade and payment balances of both oil-exporting countries
(including Russia) and oil importers. They affect cyclic processes
in the developed countries and may also aggravate crises – for
example, in Argentina and Brazil which are facing balance of
payment and debt settlement problems. Each oil price upsurge
affects the poorest countries as well. This again points to the
drawbacks of the oil spot market from the viewpoint of development.
It is also evident that stability at home (ensured by budgets,
foreign trade balances, etc.) in some big groups of leading
countries is based on a shaky balance between the interests of
exporters, major importers (and their companies) and traders. An
intricate swinging mechanism with an accidental function (oil
price) is implanted, as it were, in the process of global

High oil prices do not last long and oil’s role as a development
factor is not a perpetual one (earlier this function was performed
by rubber, copper, etc.). In 1991-2000, when the arithmetic mean
price of a barrel of Brent crude was some $19, world economic
growth reached nearly 3 percent of the real GDP. In that period,
the annual rate of oil consumption grew by 1 percent on average,
totaling 12 percent. Forecasting the future, one should assume that
oil prices higher than $25 a barrel will stimulate energy saving
processes. A decrease in world oil production and consumption can
be expected due to natural price factors and special measures taken
by the OECD countries to reduce their dependence on oil imports.
Thus, the forecast of a 1.5-2 percent growth rate of world demand
for oil looks to be too optimistic [4]. The
oil-exporting countries will lose the chance to develop and
modernize if their high earnings are consumed, exported or used for
aims other than accumulation.

An Elusive Goal

Over the forty years since most of the former colonies had
become independent, experiments with the development of the poorest
countries have yielded meager results. Every decade the world
community has to write off their debts and invent new forms of aid.
In the 1990s, the sustainable development of the poor and poorest
nations remained an unattainable goal [5].

The UN 2000 Millennium Declaration pledged “to cut the number of
people living in absolute poverty by half” by the year 2015, but it
did not specify the means and ways of achieving this goal. The
efforts made by the UN and developing countries at various
international conferences in 2002 to restore the level of aid have
yielded doubtful results. The International Conference on Financing
for Development, held under the UN auspices in Monterrey, Mexico,
ended in the U.S. and EU promising to increase their official aid
to the developing countries during the coming decade by a further
$50 billion. This is an important result, though in reality it
merely restores the past years’ level of aid. The UN goal to make
the developed countries allocate 0.7 percent of their GDP for aid
is still elusive.

The World Summit on Sustainable Development, held
August-September 2002 in Johannesburg, can be considered
successful, especially with regard to some ecology-connected
projects. But organizationally and financially, its results have
not changed the world situation and no new model of development is
discernible yet [6]. The Johannesburg Declaration
states, “The ever-increasing gap between the developed and
developing worlds poses a major threat to global prosperity,
security and stability” [7].

In the 1990s, there was a unique chance to use the resources
saved by ending the confrontation between two ideological camps for
development purposes, but that chance was lost. These funds helped
the developed market democracies to advance further. But a number
of countries (above all, in Africa and Asia) that were at the
growth stage suffered immense losses in terms of accumulated human
and administrative capital in local armed conflicts. The
politically motivated liquidation of White farming in Zimbabwe is a
glaring example of how a nation is destroying with its own hands
the requisites for its own development. The “Black re-allotment”
launched by Robert Mugabe has thrown the country and the region at
large back for decades (Zimbabwe used to be the leading food
supplier for the neighboring countries). Moreover, the limited
resources of the international community are diverted from
development needs to post-conflict rehabilitation (Bosnia and
Rwanda). The “disaster areas” have a depressive impact on the
neighbors – the fact that many conflicts remain unsettled hinders
long-term business planning. Major infrastructure projects are
unrealistic in a setting of terrorist threats, territorial disputes
or uncertain property rights.

In the 1990s, Official Development Aid (ODA) from the developed
countries was shrinking rapidly. There was a feeling of “fatigue”
resulting from preceding attempts to booster development. All these
attempts failed because of local corruption and the inability of a
number of countries to duly use the aid they had received. (The
most striking example is the massive payments to Palestine that had
simply been turned to ashes by the renewed destructive conflict.)
Between 1990 and 1998 (except for 1996 – see Diagram 2), Official
Development Aid (practically, grants) amounted to $45-60 billion,
whereas in 2000-2001 it plummeted below the 1985 level – to some
$35 billion. (In relation to the donor countries’ GDP, ODA
decreased from 0.35 percent to 0.22 percent.)

A search for models of involving foreign aid and capital in the
economic development of countries with emerging markets continues.
The main stress is on cutting debts, developing a market economy
and urging more aid. But any aid will prove senseless without
effective mechanisms for utilizing it.

Dynamics of Official Development Aid, direct and portfolio
investments in developing countries in $ billion in 2001 prices ($
billion, 1985-2002).
Source:World Bank.

Private Capital and Growth in the 1990s

In the mid-1990s, there was an impression that the increased
inflow of private capital from the OEDC countries to the developing
world would help them make a major breakthrough. In the period
between 1991 and 1997, the developing countries had much higher
growth rates as compared to the industrial nations. This served as
the basis for an optimistic assessment of the positive impact of
globalization, particularly more liberal financial activities and
the information revolution, on the growth dynamics.

In reality, however, the general economic boom was based on the
rapid growth of a few leading developing countries, the recipients
of the bulk of direct investments used in the period up to 1997 to
boost their development. Those were some Latin American countries
(Argentina, Brazil, Mexico and Chile), Central and East-European
countries (Poland, Hungary and the Czech Republic) and Asian
countries (Korea, Malaysia, Thailand and Singapore), as well as
China and Hong Kong [8].

Some components of this financial influx were unstable. For
example, private loans varied from $90 billion to –$0.7 billion a

Dynamics of gross and net (gross minus interest on loans and return
on foreign investments) inflow of private capital to developing
countries ($ billion, 1985–2002).
Source:World Bank, 2002.The gross annual inflow of private
investments increased from $30-45 billion in the late 1980s to
almost $290 billion in 1997-1998. True, the growth of private
investments in the 1990s reflected three important additional
factors as compared to the 1980s. Those factors were: the steep
investment upsurge in China, privatization in Brazil and Argentina,
and the emergence of a group of transition countries in Central and
Eastern Europe and the CIS (27 countries) as an object of

Diagrams 2 and 3 show that the inflow of net resources to
developing countries sharply decreased together with ODA at the
height of the Asian crisis in the late 1990s [9].
At the same time, savings are being taken out of developing
countries on a large scale, and this is done mostly by the local
political and business elite, rather than by international
companies. The most mobile portfolio and banking capital makes it
possible to greatly increase financing for a short time, but its
outflow may become an instrument for escalating crises, which
actually happened in the past decade. It became clear that it was
too dangerous to rely on portfolio investments. This is why direct
investments have eventually become the main instrument for
promoting development in the developing countries. One should not
forget, however, that private capital is extremely sensitive to
real and potential risks and cannot compensate for the slack
efforts of the developing countries’ own governments and business

Studies show that guaranteed property rights, black market
restrictions, wider political freedoms and anti-corruption measures
facilitate economic growth. The world of poverty is still
characterized by a limited inflow of resources from outside, the
ineffective use of home resources and continued conflicts that dash
the achievements of stabilization periods. According to UNCTAD data
made public in October 2002, the volume of direct investments
worldwide has decreased by 27 percent this year. Specifically,
investments in Africa have dropped from $17 billion to $6

How Stable Are the Leaders?

The past decade experience has shown that it is not enough to
ensure growth for a period of time – it is more important to
sustain it over a longer perspective. The developed countries are
distinguished by their ability to keep up a high development level
despite wars and crises. A group of countries that are leaders in
their regions – developing, transition and even developed states –
should be analyzed in this connection. Just like locomotives of
growth, they de facto establish stability standards and their banks
play the role of dependable “near abroad” for their neighbors. If
growth is impeded in the leading regional countries, this
invariably results in a general slow-down, a loss of momentum in
the reform process and social and political instability.

For example, the economic collapse and unsettled political
problems in Indonesia had seriously affected the development of
South-East Asia at large. The crisis had affected the “tigers” –
Thailand, Malaysia, South Korea and Singapore – countries that
demonstrated impressive growth rates in the past. Grave crises also
hit Argentina, Brazil and Turkey – the lead states in growth rates
in the 1990s. The drama of the 1990s was in that countries with a
big growth potential and considerable administrative and human
resources (the Balkan states, for example) had fallen victim to
crises and conflicts.

The countries with a medium level of development (Russia’s
neighbors in rating lists) are characterized by a per capita GDP
indicator within a range of $4,000 to $12,000. A new threat to
world economic progress is in the offing – the lost hope for
catching up with the first-echelon countries. Analysis of 15 states
that play a very important role in their regions (excluding North
America, Western Europe and Japan) amply shows that if there is no
growth even in the countries accounting for some 33 percent of the
world GDP, there is hardly any sense in talking about large-scale
global progress. In these countries, mean annual GDP growth rates
fell from 6.3 percent in 1994-1997 to 4.6 percent in 1998-2001.
But, in a way, these are cunning statistics: if Russia, India and
China are counted out, in the remaining 12 leading states on
various continents GDP growth rates dropped much lower – from 4.8
percent to 1.85 percent. Between 1998 and 2001, Russia alone
stepped up its development (even in the default year). In China and
some other countries growth has slowed. India and Egypt have
preserved their growth rates. China, whose weight in the economy of
the developing world is immense, is building up an illusion of
remarkable progress achieved by combining the concentration of
resources with a gradual liberalization of commercial

Many key countries, primarily Argentina, Turkey and, possibly,
Brazil, have gone or are going through an acute crisis. Israel and
Mexico are in recession.

It is the countries with a medium level of development that had
a chance to make large-scale foreign loans. Today they are going
through all the hardships of indebtedness. As Joseph Stiglitz, a
Nobel Prize winner, has aptly remarked recently, “we still do not
know how to manage crises.” [10] Among other
things, regional trade, labor migration and investor confidence
also depend on the positive dynamics of these countries. Regional
and civil conflicts intermitted with economic upheavals make up a
motley picture, in part reminiscent of the situation that obtained
a century ago.

Modernization by Strict Rules

Gradual stabilization in the transition countries (28 states in
Europe and Asia without China and Vietnam, by IMF criteria),
especially the four-year growth period in Russia, has relegated
their problems to the background. The special analysis made by the
International Monetary Fund in 2000 showed that in the 20th century
there was no radical change in the alignment of states in the world
arena [11]. Specifically, the socialist
industrialization in the former USSR did not affect Russia’s
position in relation to most of the developed countries in 2000 as
compared with 1900. True, its lagging behind the leading industrial
countries in terms of per capita GDP increased.

Central and East European countries are reintegrating into the
West almost from the same conventional starting position they
occupied in the first half of the 20th century (40-45 percent of
per capita GDP compared to Western Europe) [12].
In the past century, the developed countries grew faster,
increasingly breaking away not only from the poorest nations but
also from the “second-echelon countries.” China and Taiwan became
champions in moving up the conventional ladder. Japan and Korea
also climbed up visibly. At the acceleration stage, all these
countries were distinguished by the concentration of resources, a
high (30 percent and higher) GDP accumulation rate, export
orientation and “reforms from above.”

In Russia, modernization issues began to be increasingly
discussed as the protracted transition crisis was overcome and the
direct consequences of the 1998 financial collapse were surmounted.
For the first time in history, this country has found itself
bordering to the east and to the west on states having considerably
higher growth rates and characterized by sustainable management and
purposeful economic strategies (such as integration into the EU).
The list of negative consequences of the 1998 crisis is topped by a
huge foreign debt, a lack of trust in financial institutions on the
part of the population and businessmen, a low accumulation rate (18
percent against the world average of 23 percent) and a low
capitalization of even leading Russian companies. But the main
thing is a low rate of development of the middle class, a limited
access to resources and a rent-oriented behavior of participants in
the accumulation process. In this context, a discussion has started
on the problems involved with catching-up development, advantages
and disadvantages of an industrial policy and the like.

The 1990s defined the character of the economic and political
systems that have emerged in the transition countries. The latter
can be divided into several groups passing through different stages
of development. Slovenia, Poland, the Czech Republic and Hungary
are European leaders in shaping market institutions and in economic
growth rates. The Baltic states are closer to them. But a big group
of countries are finding themselves in an increasingly precarious
situation resulting from external and civilian conflicts, hapless
economic policies and other factors. Many post-socialist states
have found themselves in the group of least developed countries by
one of the UN criteria (a per capita GDP indicator less than $800,
etc.). These are: Albania, Bosnia, Moldova, Azerbaijan, Armenia,
Georgia, Tajikistan and Kyrgyzstan. Even Ukraine is closer to that

Russia, Kazakhstan and some other countries stay apart because
their economies started growing despite the immense problems, the
uneven development in the past and the inadequate institutional
base. Today, Russia and the more advanced group of countries are
facing similar problems: there is some growth, there is a market
now recognized by the EU and there is social and political
stability. What remains to be done now is to develop an effective
market economy and modernize it by hoisting it up to the level of
West European countries (from a $5,000-10,000 per capita GDP
indicator to $15,000-20,000 in the foreseeable future). The
admission of Central and East European countries to the European
Union will give them new markets, strict financial rules (with
respect to budget deficits and the like) and grants for regional

The physical aid of international financial organizations, such
as the IMF, is gradually becoming an insurance policy rather than a
supporting pillar for Russia. The emphasis on the role of private
capital in IMF programs and on (somewhat belated) institutional
development amply shows that the developed world considers the
transition to a market economy in Eastern Europe actually
completed. This means that the transition countries will
increasingly be treated as normal states with a medium level of
development (or developing nations). The poorer states are also
gradually dissolving in normal international categories. The
special “transition” status is increasingly losing the content
common for these countries. As for competition on commodity
markets, even in the 1990s the new transition economies did not
enjoy any privileges as a “prize” for giving up their planned

There is nothing wrong in a “catching-up” economy or in
exploiting a country’s natural or acquired advantages to speed up
its development. Moreover, each country defines its model of
development all by itself on the basis of available resources and
the interests of major stock holders and the political and
financial elite. If a country moves toward integration on the basis
of foreign capital (the Hungarian variant), this is also an
eventual choice. If a model of development based on integrated
business groups happens to win in Russia, this will be its own
choice. To be sure, this option does not guarantee a rapid and
large-scale modernization either because any investment in that
case should primarily be in corporate interests. It should be noted
that new international accounting standards and WTO competition
rules, such as possible establishment of ecological and labor
standards, may lead to the actual division of labor in the world.
Indeed, environment pollution and labor super-exploitation are the
“Marxist” past of the industrial countries. They are not ashamed of
that past, yet they do not recommend it to others, primarily for
ethical reasons. By this token, however, the world’s stiffer
competition rules lead to a new situation where, as distinct from
the era of “wild” capitalism, economic growth and activity will be
regulated by a complex (and expensive) system of rules.
Understandably, this will greatly stiffen the demands on business
activities as compared to the current regulations.

Modernization by new rules is quite possible in the transition
countries, but this will not be easy to do. Hoping for foreign aid
or capital investments as the main factor of growth is futile.
Modernization has always been a result of strenuous home efforts,
the use of inner resources and favorable external factors.

World economic development in the 21st century is hampered by
general political instability, by local and civil conflicts that
dash past development results. Many key countries in different
regions are in the grip of crises. Accordingly, this hinders the
evening-out of economies. Some countries’ ability to develop faster
than others (demonstrated quite recently by Taiwan and South Korea,
for example) is much more limited today. The current development
paradigm does not resolve major problems of world development, but
it has no alternative today. Various groups of countries with
different levels and models of development are facing their own
problems. They are addressing them by employing their own methods
and they are largely going their own way. It seems the world
convergence resulting from globalization processes was
overestimated during the economic boom in the 1990s and the
information revolution. Balanced and sustainable development is
slipping away so far. No catastrophe threatens the world, but there
is no real hope that serious problems will be resolved shortly.
This will only happen when humankind realizes global
interdependence and mutual responsibility. The world’s common rules
of the game have been established for the nearest future and
modernization opportunities will be translated into reality by the
country that will find definite ways of using its own national

1 See: World Economic Outlook, IMF,
April 2002, Washington.

2 L.M. Grigoryev, A.V. Chaplygina.
“Saudi Arabia – Oil and Development” in Mezhdunarodnaya
energeticheskaya politika, No. 7, September 2000 (in Russian).

3 See estimates in “Global Oil Market
Analysis,” A.G. Edwards, August 19, 2002, p. 15.

4 See: V. Alekperov. “Oil Potential” in
Neft Rossii, No. 9, 2002, p. 12 (in Russian).

5 William Easterly. The Elusive Quest
for Growth: Economists’ Adventures and Misadventures in the
Tropics. MIT Press, 2001.

6 Highlights of Commitments and
Implementation Initiatives. UN Johannesburg Summit, September 12,

7 The Johannesburg Declaration on
Sustainable Development, September 4, 2002.

8 L.M. Grigoryev. “Transformation
Without Foreign Capital: Ten Years Later” in Voprosy ekonomiki, No.
6, 2001 (in Russian).

9 An estimated resource outflow –
income and interest could have been reinvested.

10 J. Stiglitz. “Overcoming
Instability” in Vedomosti, September 25, 2002 (quoted from the

11 “The World Economy in the
Twentieth Century: Striking Developments and Policy Lessons,”
Chapter 5 in World Economic Outlook, IMF, April 2000,

12 I. Berend. “From Regime Change to
Sustained Growth in Central and Eastern Europe” in Economic Survey
of Europe, 2000, No. 2/3, p. 49.