Saturday, November 22, 2014
5

Emerging-Market Resilience

NEW YORK – With most of the world focused on economic instability and anemic growth in the advanced countries, developing countries, with the possible exception of China, have received relatively little attention. But, as a group, emerging-market economies have been negatively affected by the recent downturn in developed countries. Can they rebound on their own?

The major emerging economies were the world’s main growth engines following the eruption of the financial crisis in 2008, and, to some extent, they still are. But their resilience has always been a function of their ability to generate enough incremental aggregate demand to support their growth, without having to make up for a large loss of demand in developed countries.

A combination of negligible (or even negative) growth in Europe and a significant growth slowdown in the United States has now created that loss, undermining emerging economies’ exports. Europe is a major export destination for many developing countries, and is China’s largest foreign market. China, in turn, is a major market for final products, intermediate goods (including those used to produce finished exports), and commodities. The ripple effect from Europe’s stalling economy has thus spread rapidly to the rest of Asia and beyond.

Moreover, not only is the tradable sector of Japan’s economy highly vulnerable to a slowdown in China, but the recent conflict over the Senkaku/Diaoyu Islands raises the prospect of economic decoupling. Apart from that, Japanese economic performance is set to remain weak, because the non-tradable side is not a strong growth engine.

The key questions for the world economy today, then, are how significant the growth slowdown will be, and how long it will last. With wise policy responses, the impact is likely to be relatively mild and short-lived.

One key issue clouding the future is trade finance. European banks, traditionally a major source of trade finance, have pulled back dramatically, owing to capital-adequacy problems caused by sovereign-debt capital losses and, in some cases, losses from real-estate lending. This vacuum could reduce trade flows even if demand were present. In Asia, especially, filling the vacuum with alternative financing mechanisms has become a high priority.

In particular, although China’s tradable sector is highly exposed to developed economies, the government is likely to accept some short-run slowdown, rather than adopting potentially distorting stimulus measures. Given the risk of re-inflating asset bubbles, no one should expect a dramatic easing of credit of the type that followed the 2008 meltdown.

An accelerated public-investment program that avoids low-return projects is not out of the question. But the best and most likely responses are those that accelerate domestic consumption growth by increasing household income, effectively deploy income from state-owned assets, and strengthen China’s social-security systems in order to reduce precautionary saving. Indeed, these are all key components of China’s recently adopted 12th Five-Year Plan.

Admittedly, China’s major systemic reforms await the country’s leadership transition, now expected in November. By most accounts, the pace of reform directed at expanding the market side of the economy needs to pick up quickly to achieve the ambitious economic and social goals of the next five years.

Some countries have bucked the global trend. Indonesia, for example, has experienced accelerating growth, with rising business and consumer confidence boosting investment to almost 33% of GDP.

Likewise, Brazil’s growth has been dented, but now looks set to recover. Moreover, overall economic performance in Brazil masks an important fact: growth rates have been substantially higher among the country’s poorer citizens, and unemployment is declining. The aggregate growth rate does not capture this inclusiveness, and thus understates the pace of economic and social progress.

The main challenge for Brazil is to increase its investment rate from 18% of GDP currently to closer to 25%, thereby sustaining rapid growth and economic diversification. Commodity dependence, even with the creation of considerable domestic value added, remains high.

Economic-growth rates in other systemically large countries, including Turkey and Mexico, have risen as well, despite European and US headwinds. Many African countries, too, are showing a broad pattern of sound macroeconomic fundamentals, durable growth acceleration, economic diversification, and investor confidence.

The outlook for India’s economy remains more uncertain. While growth slowed recently from very high rates – owing to a combination of exposure to developed-country weakness, internal loss of reform momentum, and declining investor confidence – that trend appears to be reversing after recent decisive corrective moves by the government. The main question is whether India’s parliament will pass crucial legislation or remain paralyzed by hyper-partisan, scandal-fueled infighting.

Combining this general picture with more general developing-country trends – rising incomes, rapid growth in middle classes, expanding trade and investment flows, bilateral and regional free-trade agreements, and a growing share of global GDP (roughly 50%) – these economies’ growth momentum should return relatively rapidly, over the next 1-2 years.

Most of the downside risk to this scenario lies in the systemically important economies of Europe, the US, and China. To derail emerging economies’ growth momentum at this stage probably would require either an additional major demand shock from the advanced economies, or some kind of failure in China’s leadership transition that impedes systemic reform and affects the country’s growth. Notwithstanding low growth forecasts for the entire developed world, these systemic risks, taken individually and in combination, appear to be declining (though certainly not to the point that they can be dismissed).

On balance, then, the multispeed growth patterns of the past decade are likely to continue. Even as the developed economies experience an extended period of below-trend growth, the emerging economies will remain an important growth engine.

  • Contact us to secure rights

     

  • Hide Comments Hide Comments Read Comments (5)

    Please login or register to post a comment

    1. CommentedIrene Dovas

      I think Japan's population slowdown also plays a role in its vulnerability. A smaller workforce and an aging population means less productivity--fewer exports and international competitiveness-- and fewer funds (also due to lower tax collection) to finance expansion.

    2. CommentedAndré Rebentisch

      We have to keep in mind that many emerging economies are also struck by a rise of food prices. This may well translate into "growth" of agrobusiness nations and create hardship for their urban populations. When you look at the data the Arab Spring was largely provoked by a food crisis etc.

    3. CommentedSuhan Gurer

      The current difference between the developed and developing countries is the adaptation level to crisis environment. Developed countries have mainly lived through 1 crisis every 2 decades. Developing countries (Maybe excluding China, but there we cannot trust the data honestly), have lived 2 crisis every decade.

      The problem is not living through a crisis, it is the duration. Here in Turkey, 2012 have been the year where we have truly felt the effects of the crisis apart from the devaluation suffered in 2008. The crisis is not taking it's toll in the markets and 2013 is expected to be more or less the same.

      Therefore the resilience of the developing markets are there for sure since they are more prone to surviving crisis. However since the developed markets are not picking up (And seemingly doesn't look like so soon) fast enough, the effect on the developing markets might be more severe in the upcoming future.

    4. CommentedNathan Coppedge

      What this article suggests is that there's some kind of mental processing that affects finance. Perhaps that means computers can be involved too. Do computers really do what they might do with money? I don't mean making things up, but perhaps reinforcing dynamic potential?

      See for example, my quotes about dimensional economics:
      http://www.hypercubics.blogspot.com/2012/10/precepts-of-dimensional-economics.html

    5. CommentedJ. C.

      Spence- "The key questions for the world economy today, then, are how significant the growth slowdown will be, and how long it will last. With wise policy responses, the impact is likely to be relatively mild and short-lived..."

      Lagarde- "Europe's woes a 'critical risk' to global economy..."

      ...no comments...

    Featured