The Wealth Gap: Developing Nations Are Catching Up
All over the news, the words "global recession" have been used to describe our current economic woes. And it's true - most countries have been negatively affected by the current downturn and in big ways. But some recently published research by the German insurance group Allianz shows that, despite the recession and perhaps even because of it, the gap between wealthy nations and poorer ones has closed a little. (For a background reading, see Global Trade And The Currency Market.)

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A Bridge to Somewhere
A bridge is starting to be built over the wealth chasm between poor and rich nations, and it's being built with both the tools of industrial growth and with the misfortunes of recessions. In bad economic times, rich countries like the United States, Japan and countries in Western Europe lose large amounts of their assets. It's sort of a bigger-they-are-the-harder-they-fall type of process.

Since the dot-com bust in the early 2000s, global assets have been down, primarily among industrial nations. But around that same time, developing nations started making significant gains in their wealth. Asia, minus Japan, and Latin America have had increases of wealth by 12% every year since 2000 and Eastern Europe has seen increases of 16% each year. Compare that to the United States and Western Europe's gains of about 3% each year during that same time frame.

Investing Gone Wrong
Part of the narrowing of the gap is due to industrial nations having larger sums of money in investments. When the market takes a nose dive, a nation's wealth takes a big hit pretty quickly. Because assets are lost after this happens, people in richer nations tend to invest less money and use it instead to pay off mortgages and debts. This doesn't necessarily mean that no one in the developed nations is investing; Americans and Europeans still own the majority of stocks in the market. But while people in the richer nations are scrambling to figure out ways to reduce their debt, emerging financial markets in other countries are making economic headway.

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Why this is a Good Thing
Obviously, economic downturns aren't a good thing for a lot of people. They significantly hurt personal wealth, increase layoffs and spur defaults on mortgages - all of which can take years to rebound from. But for some countries, it's a time for them to catch up and even make some progress. Since 1990, the amount of people living on less than one dollar a day has decreased by over 25%, with the majority of that development coming in China.

As developing countries build and earn more assets, it opens up the possibility for them to invest more money in their own countries and, in turn, their own people. It provides opportunities for them to increase programs that can help reduce the economic inequalities among their citizens. Not only can more assets in developing nations help financial stability, but stronger economic nations help the global economy to be more robust. Developing nations have actually been one of the major forces helping in the overall recovery from the current crisis.

Still a Long Road Ahead
The wealth in the richest nations used to be 135 times more than other nations, but that figure has dropped to 45 times more. Although this is sizable decrease, North America, Japan and Western Europe still hold a large majority of the global assets. Over the next several decades, however, the shifting of wealth to these emerging economies is expected to increase, with developing nations producing more goods and services - accounting for an estimated 60% of the world's gross domestic product by 2030.

As we've seen over the past several years, global economics can change very quickly. We'll have to see if this narrowing gap trend continues. A few years down the road, those developing nations will hopefully have continued to close the gap and we'll all be a little better off. (For more, see Re-evaluating Emerging Markets.)

For the latest financial news, see Water Cooler Finance: Poverty Rates Increase – And So Do Millionaires.





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