The Case for Continued Faith in Emerging Markets

by Ali Wyne

The hype surrounding emerging markets that prevailed for much of the last decade has given way to unease, even despondence, in some quarters. A recent item on BBC News, for example, asks, “Is the emerging market growth story over?” On balance, however, there is little evidence to suggest a disruption in the eastward and—with the Americas and sub-Saharan Africa increasingly coming into play—southward diffusion of economic power. As Martin Wolf explained at the beginning of 2011, “the ‘great recession’ was a blip [for emerging countries].  For high-income countries, it was calamitous.”

What, then, accounts for the newfound pessimism? One explanation is that the four countries that are often depicted as the emerging markets’ representatives—Brazil, Russia, India, and China (the BRICs)—have taken hits in recent years.

Brazil’s surge over the past decade depended in part on a commodities boom that is running out of steam. While the country can rely on significant foreign-exchange reserves and robust foreign direct investment to weather tough times, it confronts anemic growth, persistent inflation, and growing deficits.

The energy revolution in North America is likely to undermine the leverage that Russia can exert over its Eastern European neighbors and in global energy markets. Moreover, in response to lower-than-projected tax revenues and unusually weak growth, the government is being forced to increase borrowing.

While India’s demographic outlook is more favorable than China’s, it is presently struggling to stabilize the rupee, stem an exodus of investment, and boost growth to above five percent.

China’s annual growth rate has cooled from roughly ten to 7.5 percent. Given that environmental degradation is increasing, its society is rapidly aging, and its export-led growth model is experiencing diminishing returns, that figure is likely to drop further.

Challenging though these outlooks may be, they should be placed in perspective. Simon Cox notes that “Goldman Sachs expected the combined GDP of the four economies to amount to about $8.7 trillion in 2013…In fact, despite the disappointments of the past two years, it will amount to over $15 trillion.” The IMF’s latest economic outlook, moreover,explains that

“The slowdowns are hardly unprecedented…For some of the BRICS [the IMF includes South Africa in this category, as do some other observers], they are not even unusual….For Brazil, India, and South Africa…growth is projected to remain roughly in line with (or higher than) their average of the past fifteen years…only China and Russia are expected to have persistently lower rates of economic growth.”

Indeed, empirical evidence points to the continued weight of emerging markets—including but certainly not limited to the BRICs—in the global economy. According to Quartz, the IMF estimates that 2013 was the first year when “the combined gross domestic product of emerging and developing markets, adjusted for purchasing price parity, [eclipsed] the combined measure of advanced economies.” Meanwhile, The Economist recently reported that “the emerging world” has supplied “four-fifths of global growth” since the end of the 2007-2008 global recession. Finally, the aforementioned IMF outlook notes that emerging markets “continue to account for the bulk of global growth.” It forecasts that the real GDP of emerging-market and development economies will grow by 5.5 percent in 2018, compared to 2.5 percent for advanced economies.

There are at least three other reasons to view bleak forecasts for emerging markets with caution. First, extrapolation is a risky undertaking: even sophisticated forecasting that factors in a wide range of possible contingencies cannot predict the future with complete accuracy. It makes little sense, then, to speculate that short-term movements are symptomatic of long-term trends. It was misguided to conclude from their strong growth before the latest downturn that emerging markets would continue to ascend uninterrupted, just as today it is misguided to believe that their difficulties—arguably most pronounced in the BRICs, but certainly present elsewhere—portend long-term stagnation.

Second, focusing on contrived blocs—strategic, economic, ideological, and so forth—can obscure more than clarify. In the case of the BRICs, many analysts imputed cohesion to the group even though the four countries’ economic prospects and strategic priorities were (and remain) markedly different. Had greater attention been paid to a larger, more representative basket of emerging markets, it is likely that neither past breathlessness nor current gloominess would have been as intense.

Third, the emerging-markets story hardly ends with the BRICs. While they may be experiencing slower growth, other emerging markets are gathering momentum. Sub-Saharan Africa, for example, is the world’s second-fastest growing region. The head of Emerging Markets and Global Macro at Morgan Stanley Investment Management, Ruchir Sharma, cites the Philippines, Poland, and Sri Lanka as examples of “breakout nations.” Jim O’Neill, the economist who coined the term “BRICs,” is shifting his focus to Indonesia, Mexico, Nigeria, and Turkey. Still others are exploring the potential of Colombia, South Africa, and Vietnam.

There is every reason to expect that emerging markets as a whole will experience cycles of both growth and stagnation in the decades to come.  But there is every reason to expect that the recalibration of the global economy—the “great convergence,” to use Wolf’s term—will continue as well.

Follow Ali Wyne on Twitter here.

About the Author

Ali Wyne is an associate of the Harvard Kennedy School’s Belfer Center for Science and International Affairs and a contributing analyst at Wikistrat.

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