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page12John PlenderEMERGING MARKET FUTUROLOGY


the authorJohn PlenderContributing Editor and Columnist at the Financial Timesand Board Member of The Stern Stewart Institutepage13The Financial Times is a global business newspaper with a paid for circulation,print and digital, of just under 600,000. It has an elite readership of 4.8 m in 140 countriesand is printed in 22 cities around the world.Emerging MarketFuturologyThe economic performance of emerging markets since thefinancial crisis has been undeniably impressive. Unlike thedeveloped countries, emerging market leaders achieved aV-shaped recovery despite having been hit by the backwashof the credit crunch and by a vicious downturn inworld trade. The upturn was brought about thanks totimely fiscal and monetary policy pump priming. Yet nowthe prospects for emerging markets have soured, as has theenthusiasm of investors. Emerging market equities arewell below their valuations at the peak in 2007.Consider the recent fate of the so-called BRIC economies.In China a stimulus program that involved increased domesticinvestment and an undervalued exchange rateended up generating high inflation. This in turn causedthe real exchange rate to appreciate just as the recovery inNorth America and Europe started to falter. India, whileless exposed to global trade, has made big mistakes infiscal and monetary policy that have left it struggling tocontrol high inflation and one of the biggest budgetdeficits in the developing world. Brazil has been a victimof falling commodity prices and the slowdown with China,which is a substantial trading partner. As a petro-economythat has failed to diversify, Russia has naturally suffered inan adverse climate for energy producers.These problems are admittedly partly cyclical. Despiteloose talk before the financial crisis about emergingmarkets decoupling from the West, China and much ofthe rest of Asia remain heavily dependent on exports. Theglobal slowdown prompted by turbulence in the eurozoneis thus a serious setback. Yet there is a growing concernthat the economic models pursued by many of the largerdeveloping countries are broken and that potential growthrates are coming down.Exhibit A on this score is China, which is the emergingmarket that matters most for the rest of the world. Clearlya growth rate that has run at double digits for many yearscould not go on forever. Since the second quarter whenreal growth slowed to a 7.6 percent annualized rate, it haslooked almost certain that nemesis has arrived. Even thisfigure probably flatters the economy since electricity consumptionhas fallen close to zero at the time of writing.That implies that the country’s basic industries must havebeen grinding to a halt.Not only is China battling with the aging of the populationat a very rapid rate for its stage of development. Wages arenow being allowed to rise in the interests of socialstability, which is eroding China’s competitiveness against


John PlenderEMERGING MARKET FUTUROLOGYpage15The difficulty of emerging markets now is that manufacturingis becoming more like high productivity services, inthat technological advances have made manufacturingmore skill and capital intensive, even at the low quality endof the spectrum. So it is becoming much harder for developingcountries to absorb underskilled rural workers intomanufacturing. At the same time global markets havebecome increasingly competitive thanks to earlier growthmiracles. So new entrants are finding it more difficult toindustrialize. And the political rules of the game look setto change. Western politicians who have been happy towatch companies outsource output to emerging marketsare losing their appetite for the liberal trading regime, aselectoral rhetoric in the US makes clear. It is possible thatwe are moving into a more protectionist world.This does not mean that the emerging markets will ceaseto be exciting places for developed world companies toinvest. Their growth rates in the catch-up phase will alwaysbe faster than in the US and Europe, albeit more volatile.But it is possible that the prospects for industrializationin Africa, the Middle East and parts of South Americaare nothing like as good as those that confronted the AsianTiger economies over the past four decades.Mr Rodrik argues that manufacturing industries willremain poor countries’ “escalator industries”, but theescalator will neither move as rapidly, nor go as high asbefore. Growth will need to rely to a much greater extenton sustained improvements in human capital, institutionsand governance. And that means, he believes, that growthwill remain slow and difficult at best.I suspect Mr Rodrik overstates his case a bit. But it doesseem plausible that the spectacular rates of growthengendered by China and the Asian Tigers in recentdecades will not be replicated in the years ahead. ✺

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