Lost in Transition

WASHINGTON, DC – Financial markets and the news media have one thing in common: they tend to oscillate rapidly between hype and gloom. Nowhere is this more apparent than in analyses of emerging economies’ prospects. In the last few months, enthusiasm about these countries’ post-2008 economic resilience and growth potential has given way to bleak forecasts, with economists like Ricardo Hausmann declaring that “the emerging-market party” is coming to an end.

Many now believe that the recent broad-based growth slowdown in emerging economies is not cyclical, but a reflection of underlying structural flaws. That interpretation contradicts those (including me) who, not long ago, were anticipating a switchover in the engines of the global economy, with autonomous sources of growth in emerging and developing economies compensating for the drag of struggling advanced economies.

To be sure, the baseline scenario for the post-crisis “new normal” has always entailed slower global economic growth than during the pre-2008 boom. For major advanced economies, the financial crisis five years ago marked the end of a prolonged period of debt-financed domestic consumption, based on wealth effects derived from unsustainable asset-price overvaluation. The crisis thus led to the demise of China’s export-led growth model, which had helped to buoy commodity prices and, in turn, bolster GDP growth in commodity-exporting developing countries.

Against this background, a return to pre-crisis growth patterns could not reasonably be expected, even after advanced economies completed the deleveraging process and repaired their balance sheets. But developing countries’ economic performance was still expected to decouple from that of developed countries and drive global output by finding new, relatively autonomous sources of growth.