During the boom of the last decade, many economic pundits embraced the long view, arguing that because China and India dominated the world economy in the 17th century, they could do so again in the 21st century. Ignoring the messy centuries in between, these forecasters seemed to be saying that 17th-century performance guarantees future results. That is, of course, not how economic cycles work.
Normally, what is hot one decade cools in the next, and this is what we are seeing in the emerging world today. After a torrid decade, the emerging world is cooling off, relative to the developed world, and the largest emerging markets—Brazil, Russia, India and China, hyped as the BRICs—are cooling off relative to unsung new stars, like the Philippines, Nigeria and lately Mexico.
This cooling phase will be particularly dramatic, because of the unprecedented scope and pace of the boom in the last decade. Starting with the highly accommodative American monetary policy stance in 2003, in response to the tech bust, a tide of easy money fuelled a new investor enthusiasm for emerging nations that in turn had cleaned up their act following the serial crises that had afflicted many of them in the 1990s. Over the next four years, the average annual GDP growth rate in emerging nations doubled to 7.5%. By 2007, with three small exceptions, every economy in the emerging world was growing, and more than 100 were growing faster than 5%. This kind of synchronised global boom had never happened before, so far as the records show, and it is not likely to happen again.
The onset of the global financial crisis in 2008 signalled the end. For a while, the emerging world appeared to defy the global economic slowdown as it relied on massive stimulus measures to lift domestic demand and counter the slump in export growth. By mid-2009, the emerging economies were growing 10 percentage points faster than the G7 economies, but since that peak, the gap has fallen to just 2 percentage points this year, as the stimulus effects wear out, the structural growth problems in many of the emerging markets become apparent, and a revitalised America and Japan reduces the supply of easy money in emerging markets.
That does not mean that the emerging-market story is completely over, just that it is returning to its normal state of churn. The average growth rate in emerging economies has fallen by 4% this year to just 2.5% outside China. The hottest economies of the last decade, the BRICs, are now among the coolest. China is in transition from the double-digit growth rate of a poor, young economy to the more sedate pace of a middle-class economy. It has already seen its growth rate fall below 8% over the past year. And due in good measure to the alarmingly rapid rise in its debt burden, to over 200% of GDP, China could see growth slow to 5-6% in the coming years.
These cycles have endured at least since the second world war. Today, only 35 of the 185 economies tracked by the IMF are developed; the rest have been “emerging” forever. It is rare for emerging nations to sustain growth faster than 5% for even one decade, much less two or three, and only six countries have grown that fast for as long as four decades in a row. Most nations that do grow rapidly for a decade soon become complacent. They quit reforming, and fall back to where they started. That is why the average income in a country like Brazil is no higher, as a share of the average American income, than it was in 1960. Indeed, even after the boom of the last decade, the gap between the average incomes in the developed and emerging worlds was as wide in 2011 as it was in the 1950s. Right now, Brazil, Russia and South Africa are growing no faster than America. So much for last decade’s popular theory of “convergence” of the rich and the poor.
Sustained economic success is rare. So pundits need to analyse economies as individual stories, not grouped in a faceless “emerging” class or a catchy marketing acronym. As China slows, the foggy talk of a coming Asian century should give way to a more pointed focus on which nations can flourish in the next five to ten years. The rise of the rest will yield to the rise of the select, what I call the “breakout nations”, capable of growing faster than rivals in the same income class.
What is increasingly apparent is that last decade’s era of easy growth is over and not all emerging markets will be breakout nations. Their paths will vary significantly and it will take new reformist-minded leadership to create winners, as we have seen with the Philippines and Mexico of late, while countries with stale leadership such as Russia and Brazil turn into the laggards. No nation can hope to grow as a free rider on the tailwinds of fortuitous global circumstances, as so many did in the last decade. They will have to propel their own weight, and remember that not all trees grow to the sky.
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