The rich get richer and the poor get poorer. But is 2011 the year this adage no longer holds? In advanced economies, austerity rules, with the wealthiest nations promising to mend their spendthrift ways. Despite Washington’s movement on tax cuts, states and cities, which can’t run deficits, are carrying out a stealth agenda of higher taxes, reduced spending, and investment—necessary measures given projected fiscal gaps. Meanwhile, U.S. consumers, who once kept global factories humming, are pinching pennies.
In Europe, rich countries are learning what their poorer counterparts did in the ’70s and ’80s. The price of appeasing bond-market gods and aid providers is raising taxes while reducing benefits and cutting public jobs. These moves will make the once wealthy residents of crisis-hit countries feel poorer. And if past is prologue, there’s more where all this austerity came from. As Paul Krugman points out, without a dramatic currency devaluation, austerity leads to stagnation and contraction, not expansion. However, in Europe’s former colonies, life is good. As Portugal grapples with political chaos, Brazil is strengthening public finances. While the U.K. is donning a fiscal hairshirt, India surges ahead. The IMF projects that forever-hurting sub-Saharan Africa will see rising incomes and sustained investment. And China, always in danger of overheating, is growing at a nearly double-digit rate.
Sure, it’ll take many years of this austerity-prosperity dualism for the developing world to catch up. And there are risks in the emerging-market boom: inflation, reckless lending, trade tensions. But how often does an age-old aphorism get turned on its head?
Gross is economics editor at Yahoo Finance.