The New Wealth of Nations
Can Emerging Markets Save the World Economy?
Mohamed A. El-Erian and Michael Spence
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MILAN – Over the past two years, industrial countries have experienced bouts of severe financial instability. Currently, they are wrestling with widening sovereign-debt problems and high unemployment. Yet emerging economies, once considered much more vulnerable, have been remarkably resilient. With growth returning to pre-2008 breakout levels, the performance of China, India, and Brazil is an important engine of expansion for today’s global economy.
High growth and financial stability in emerging economies are helping to facilitate the massive adjustment facing industrial countries. But that growth has significant longer-term implications. If the current pattern is sustained, the global economy will be permanently transformed. Specifically, not much more than a decade is needed for the share of global GDP generated by developing economies to pass the 50% mark when measured in market prices.
So it is important to know whether this breakout growth phase is sustainable. The answer comes in two parts. One depends on emerging economies’ ability to manage their own success; the other relates to the extent to which the global economy can accommodate this success. The answer to the first question is reassuring; the answer to the second is not.
While still able to exploit the scope for catch-up growth, emerging economies must undertake continuous, rapid, and at times difficult structural change, along with a parallel process of reform and institution building. In recent years, the systemically important countries have established an impressive track record of adapting pragmatically and flexibly. This is likely to continue.
With government policy remaining on course, we should expect a gradual strengthening of endogenous domestic growth drivers in emerging economies, anchored by an expanding middle class. Combined with higher trade among them, the future of emerging economies is one of reduced dependence on industrial-country demand, though not a complete decoupling.
Distribution as well as growth matter. Emerging economies still need to manage better their growing domestic tensions, which reflect rising income inequality and uneven access to basic services. A failure on this front would derail their strengthening domestic and regional growth dynamics. This is better understood today, with distributional aspects of growth strategy being firmly placed on emerging countries’ policy agendas.
While emerging economies can deal with the economic slowdown in industrial countries, the financial-sector transmission mechanism is more challenging. Today’s low interest-rate environment is causing a flood of financial flows to emerging economies, raising the risk of inflation and asset bubbles. The hiccups in Western banks have served to disrupt the availability of trade credits, and, if amplified, could destabilize local banks.
These risks are real. Fortunately, several emerging economies continue to have cushions and shock absorbers. Having entered the 2008-2009 crisis with sound initial conditions (including large international reserves, budget and balance-of-payments surpluses, and highly capitalized banks), they are nowhere near exhausting their fiscal and financial flexibility – and hence their capacity to respond to future shocks.
Overall, emerging economies are well placed to continue to navigate successfully a world rendered unstable by crises in industrial countries. Yet, again, the decoupling is not complete. A favorable outcome also requires industrial countries’ ability and willingness to accommodate the growing size and prominence of emerging economies. The risks here are significant, pointing to a wide range of potential problems.
The flow of knowledge, finance, and technology that underpins sustained high growth rates in emerging economies is closely linked to an open, rule-based, and globalized economy. Yet this global construct comes under pressure in an environment in which advanced countries have stubbornly high unemployment and bouts of financial volatility. The location of growth in the global economy comes to be seen as a zero-sum game, leading to suboptimal reactions.
As a result, the continued openness of industrial-country markets cannot be taken for granted. Political and policy narratives are becoming more domestic and narrow, while the international agenda and the pursuit of collective common global interests are having greater difficulty being heard.
These challenges will grow in the years ahead. And then there is the issue of global institutions and governance.
Managing a growing and increasingly complex set of transnational connections is an even bigger challenge in a multi-speed world that is being turned upside down. Such a world requires better global governance, as well as overdue institutional reforms that give emerging economies proper voice and representation in international institutions.
In the absence of such changes, the global economy may bounce from one crisis to another without a firm hand on the rudder to establish an overall sense of direction. The result is what economists call “Nash equilibria,” or a series of suboptimal and only quasi-cooperative outcomes.
Where does all this leave us?
Emerging economies will be called on to play an even larger role in a multi-speed global economy characterized by protracted rehabilitation of over-extended balance sheets in industrial countries. Left to their own devices, they are up to the task. But they do not operate in a vacuum. Emerging economies’ ability to provide the growth lubrication that facilitates adjustment in industrial countries is also a function of the latter countries’ willingness to accommodate tectonic shifts in the operation and governance of the global economy. Let us hope that these global issues receive the attention they require.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO and author of When Markets Collide. Michael Spence is Nobel Laureate in Economics (2001), Chairman of the Commission on Growth and Development, Senior Fellow at the Hoover Institution and, from September 1, Professor of Economics at NYU’s Stern School of Business.. An expanded treatment of the lessons and challenges of the financial crisis can be found in “Post-Crisis Growth in Developing Countries: A Special Report of the Commission on Growth and Development on the Implications of the 2008 Financial Crisis.”
Copyright: Project Syndicate, 2010.
www.project-syndicate.org
For a podcast of this commentary in English, please use this link:
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Johnexo 10:41 14 Jan 11
China and India continue to barrel along although their red hot pace of growth is showing some signs of cooling off. The overall indices have dipped for both countries, mostly because of a moderation in real growth and sharp declines in financial indices.
JessieRider 08:32 16 Jun 11
Such a world requires better global governance, as well as overdue institutional reforms that give emerging economies proper voice and representation in international institutions. Research Paper Help | Term Paper Help | Essay Help | book report help | Dissertation Help
AlejandroG 09:37 07 Dec 10
Even though the author is optimistic about the capitalism recovery, there are other issues which might be taken in account especially for the third world. Firstly, in the last decade, there are a consensus among scholars that we are facing one of the most sharply problems of our modern history, the environmental problem. Unlike to the post war period where the world natural resources (oil,) “remained abundant and cheap”, “now not only depletion reached an advance stage, but the world has also virtually run out of space for any further environmental pollution” (Li, 2010). In fact, the capitalist economy is largely dependent of the no-renewable energy mainly oil, gas and coal, which account for almost “80% of the world´s energy supply”; unfortunately, these resources are peaked or in the best case will peak in the following years, so according some studies the “oil production will fall by about 25 percent by 2020 and by about two-thirds by 2050”, and “the world natural gas production will peak by 2045”. Secondly, the decline of the hegemonies in the world capitalist economy, and the insurgence of social movements around the world (“Movimiento sin Tierra” in Brasil, “Zapatisitas” in Mexico, the indigenous movement in Bolivia, and so on) mean a serious challenge to the capitalist system.
Therefore, I believe that any attempt to discuss the “development” of third world countries have to be done in a different scenario, outside of the capitalist constraints. As John Bellamy Foster claims “[t]here is only one possible solution to this all-encompassing planetary crisis, and that is the euthanasia of capitalism, replacing it with a new economy geared to sustainable human development, ecological plenitude, and the cultivation of genuine human community. The sooner we begin to construct this qualitative new system through our mass struggle, the better the long term prospects for humanity and the earth will be”.