The Great Emerging-Market Bubble

The Great Emerging-Market Bubble

emerging-market bubble



The Great Emerging-Market Bubble

by Bill Emmot, Project Syndicate

LONDON – Something has gone badly wrong in the emerging economies that were supposed to be shaping, even dominating, the future of the world. The search for culprits is under way: commodity prices, fracking, US interest rates, El Nino, China, these and others lead the field. But the answer is simpler and more traditional. It is politics.

Look at Brazil. There an economy once tipped for ever-lasting boom has barely grown for more than two years, and is currently shrinking. Falling prices for its commodity exports haven’t helped, but Brazil’s economy was supposed to be about far more than just harvests and extractive industries.

Or look at Indonesia. That economy is still expanding, but at a rate – 4.7% annually in the latest quarter – that is disappointing in terms both of previous expectations and of population growth. The same can be said of Turkey, where growth has sagged to 2.3% in the latest quarter – which at least beats population growth but is meager compared with the country’s go-go years of 2010 and 2011, when it expanded by 9%. Or South Africa, where economic progress has constantly been too slow, whether in boom years for gold and other resources or busts, to make any real dent in poverty levels.

Then there is China itself, whose slowdown is everybody else’s favorite explanation for their own sluggishness. There, private economists are back enjoying their favorite pastime during periods of economic stress, namely trying to construct their own indices for GDP growth as at such times they do not believe the official statistics. Officially, Chinese growth is rock-steady at 7% per year, which happens to be the government’s declared target, but private economists’ estimates mostly range between 4% and 6%.

One mantra of recent years has been that, whatever the twists and turns of global economic growth, of commodities or of financial markets, “the emerging-economy story remains intact.” By this, corporate boards and investment strategists mean that they still believe that emerging economies are destined to grow a lot faster than the developed world, importing technology and management techniques while exporting goods and services, thereby exploiting a winning combination of low wages and rising productivity.

There is, however, a problem with this mantra, beyond the simple fact that it must by definition be too general to cover such a wide range of economies in Asia, Latin America, Africa, and Eastern Europe. It is that if convergence and outperformance were merely a matter of logic and destiny, as the idea of an “emerging-economy story” implies, then that logic ought also to have applied during the decades before developing-country growth started to catch the eye. But it didn’t.

The reason why it didn’t is the same reason why so many emerging economies are having trouble now. It is that the main determinants of an emerging-economy’s ability actually to emerge, sustainably, are politics, policy and all that is meant by the institutions of governance. More precisely, although countries can ride waves of growth and exploit commodity cycles despite having dysfunctional political institutions, the real test comes when times turn less favorable and a country needs to change course.

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