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Rapidly developing countries now driving global economy

Rapidly developing countries now driving global economy

Never before have China, India and other developing economies grown so much faster than those of the United States, Japan and the rich countries of Europe. Developing countries that once looked to the U.S. to lead the world economy are now driving the recession recovery.

WASHINGTON -- The world's biggest economies are recovering from the Great Recession at troublesome speeds -- either too fast or too slow.

China, India and other major developing countries quickly returned to breakneck rates of growth after escaping the worst of the economic downturn in 2008 and 2009.

Their rapid recoveries showed for the first time that emerging economies have grown big and strong enough to thrive independently while the United States and other rich countries struggle.

And today, to an unprecedented degree, the developing world is driving the global recovery, instead of relying on the United States for economic leadership as it used to.

This picture emerges from The Associated Press' new Global Economy Tracker, a quarterly analysis of 22 countries that account for more than 80 percent of the world's economic output.

The shakeup in the world's economic order has taken 30 years. The developing world's share of global economic output has risen from 18 percent in 1980 to 26 percent last year, the World Bank said. So growth in emerging markets now has a far bigger effect on the world's economic performance.

Leading the transformation is China, an economic backwater three decades ago that last year replaced Japan as the world's second-biggest economy. Japan, after more than a decade of stagnation, is struggling again in the aftermath of the earthquake and nuclear disaster that struck this month.

Rapid growth in emerging economies has lifted hundreds of millions of people out of poverty and created vast consumer markets for U.S. goods and services. At the same time, "this two-track world poses some unusual risks," warned Nobel Prize-winning economist Joseph Stiglitz of Columbia University.

He and others fear that too much money flowing to developing economies is driving up commodity prices and inflating dangerous bubbles in emerging market stocks and housing prices.

Rapid growth in the developing world also is pulling jobs and investment from the United States and other rich countries. And it's fanning international disputes over trade and currencies.

The AP Global Economy Tracker found that:

--The fastest-growing countries -- China, India, Indonesia -- all are in the developing world. The slowest are all European, Spain, Italy and Britain. The United States ranks 12th among the 20 largest economies plus Argentina and South Africa.

--Speedy growth is triggering inflation in emerging countries. The countries where consumer prices rose the most last year were Argentina, India and Russia.

--High unemployment is plaguing rich countries. At the end of 2010, unemployment was more than 20 percent in Spain, 9.6 percent in the European Union as a whole and 9.4 percent in the United States. (The U.S. rate fell to 9 percent in January and 8.9 percent in February).

--In contrast, the unemployment rate was 5.3 percent in Brazil.

--In the past, the developing world depended on advanced economies, particularly the United States, to generate global growth, which trickled down to them when the rich countries bought their exports. And when rich countries faltered, poorer ones suffered too.

"The conventional wisdom was when we went into recession, they went into recession," said Robert Lawrence, professor of trade policy at Harvard University's Kennedy School of Government.

The Great Recession overturned the old relationship. Emerging economies dodged the housing crisis that froze credit markets in the United States and Europe and threw the rich world into the worst downturn since the 1930s. Developing countries just kept growing, though more slowly.

They never had to bail out their banks or endure the high unemployment and stagnant growth that historically follow financial crises. India's heavily regulated banks never made disastrous bets on the U.S. subprime mortgage market.

Neither did China's, which are almost all owned by the government. As fear paralyzed financial markets in the rich world, Beijing simply ordered state-run banks to keep lending to support the Chinese economy.

And they did, unleashing more than $1.4 trillion in new loans in 2009 alone, a year when bank lending fell in the United States.

In 2009, developing countries continued to expand, eking out 2.6 percent growth, while rich economies shrank 3.4 percent. Last year developing countries grew 7.1 percent, rich ones 3 percent. And this year the International Monetary Fund expects developing countries to outgrow the rich world 6.5 percent to 2.5 percent.

Japan's wealthy economy faces new uncertainty after the quake and a tsunami devastated the country's northeastern coastline.

The World Bank said developing economies accounted for 45 percent of global growth last year, the first full year since recession ended in June 2009.

They contributed just 14 percent of worldwide growth in the first full year after the deep 1981-82 recession, 11 percent after the 1990-91 recession and 38 percent after the 2001 recession, World Bank numbers show.

Rich countries continue to lag because of their devastating financial crisis. Their banks are still writing off bad debts. Their governments are saddled with gaping deficits, the result of shrunken tax revenue, the cost of bailing out banking systems, rising health care costs and the need to stimulate their economies.

U.S. consumers still are paying the bills they charged up during the mid-2000s debt binge.

Nearly 14 million Americans are unemployed, 1.8 million of them for two years or more. They are people like John D. Galvin, who lost a computer specialist job at a health care company in December 2008. Galvin, 48, has burned through savings and unemployment benefits. He said he's facing a foreclosure on his house in McHenry, Ill.

"I've been working since I was 15 years old," he said. "I've never seen it this bad."

Britain, Ireland and Spain have cut spending, raised taxes or both to narrow budget gaps. The United States, slowed by a budget deficit that could reach a record $1.65 trillion this year, is debating its own spending cuts.

The World Bank warns that austerity measures will trim 0.7 percentage points from growth in rich countries this year and 0.4 percentage points in 2012.

Unburdened by a financial crisis, China, India and other developing countries resumed fast growth as they continued their transition from agricultural to industrial economies. In fact, they now are generating their own growth instead of relying on exports to the rich world.

The World Bank said, for example, that internal demand -- including business investments, government programs and consumer spending -- accounted for 80 percent of China's growth last year.

"The emergence of a huge middle class in both China and India is generating internal demand," said Lawrence.

For all its benefits, fast growth is causing problems for China and other developing countries.

Surging demand for commodities -- oil, grain, steel -- is pushing prices ever higher. Inflation is running near 5 percent in China, over 9 percent in India and near 11 percent in Argentina, AP found. Inflation in the U.S. was just 1.9 percent last year.

The developing world's financial markets are drawing cash from rich countries. The U.S. Federal Reserve and other central banks have pushed interest rates to record-low levels to stimulate their sluggish economies.

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