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NS4053 Winter Term 2014 Prospects for Emerging Economies. Sharma I. Ruchir Sharma, “Broken BRICs: Why the Rest Stopped Rising”, Foreign Affairs, November/December 2012

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sharma i
Sharma I
  • Ruchir Sharma, “Broken BRICs: Why the Rest Stopped Rising”, Foreign Affairs, November/December 2012
  • Argues that there has been considerable over optimism concerning the growth prospects of emerging economies especially the BRICs (Brazil, Russia, India and China)
  • Much has been straight line extrapolation of growth over the last decade compared with the advanced countries
  • Always a poor way to predict the future
  • Similar thing done with Japan in the 1980s – proved way off the mark
  • Right now Chinese growth slowing down same for the other BRICs
  • Right now current fad in forecasting is to project so far into the future no one will be around to hold you accountable
sharma ii
Sharma II
  • Fact is it is very hard to maintain very high growth for more than a decade.
    • Last decade many have been particularly favorable for the BRICS – environment not likely to continue
    • Global flood of easy money
    • Rapid growth in U.S. and Europe creating demand for BRIC exports
    • Commodity super-cycle helping Russia and Brazil
  • Now credit tightening and commodity boom over.
sharma iii
Sharma III
  • Sharma argues that the notion of convergence between the emerging and developed worlds is a myth.
    • Rodrik study found that per capita income between the advanced and developing markets steadily widened from 1950 to 2000
    • Few pockets of growth and catching up – Gulf States, East Asia Tigers, Southern Europe after WWII
    • Only after 2000 that emerging markets as a whole started to catch up.
    • Still as of 2011 the difference in per capita incomes between the rich and developing nations back to where it was in the 1950s.
sharma iv
Sharma IV
  • Reality is that:
    • Over the course of any given decade since 1950, on average only one third of emerging markets have been able to grow at 5% or more
    • Less than one fourth have kept that pace for two decades
    • Only one tenth for three decades
    • Only Malaysia, Singapore, South Korea, Thailand and Hong Kong have maintained this growth rate for four decades
    • Even before the recent slowdown odds were against Brazil experiencing a full decade of growth above five percent or Russia its second in a row.
sharma v
Sharma V
  • Sharma identifies several key phases in the evolution of emerging economies.
  • The first phase – mid 1980s many east Asian countries opened up their stock markets to foreigners for the first time
    • Foreign investors rushed in unleashing a 600 percent boom in emerging market stock prices between 1987 and 1994
    • During this period amount of money invested in emerging markets rose from less than one percent to nearly eight percent of global stock market total
    • Ended with the economic crisis that struck from Mexico to Turkey between 1994 and 2002
    • Stock markets developing countries lost almost half their value
    • Developing country share of world output fell from 23 to 205
    • Exception China which saw its share of world production double to 4.5%
sharma vi
Sharma VI
  • Second phase – began with global boom in 2003
  • Emerging markets really started taking off as a group
  • Share of Global GDP began rapid climb from 20% to 34%
  • Some of this was attributed to rising value of their currencies
  • Share of global stock market total rose from less than 4% to more than 10%
  • Huge losses many suffered during financial crash of 2009 mostly recovered in 2009, but have grown slowly since then
sharma vii
Sharma VII
  • Third phase – just beginning
  • will be defined by moderate growth in developing world, return to boom busy cycle.
  • Without easy money of last decade and over-optimism that fueled investment in last decade, stock markets are likely to deliver more measured and uneven returns
  • Gains hat averaged 37% a year between 2003 and 2007 are likely to slow to at best 10% over coming decade
  • Earnings growth and exchange-rate values in large emerging markets have limited scope for additional improvement after period of high growth
sharma viii
Sharma VIII
  • Sharma’s forecast:
  • Decade to come U.S. Europe and Japan likely to grow slowly.
  • Will not be so noticeable because of slower growth in the global economy
  • China will experience a 3 to 4% slowdown
  • China’s population is aging to quickly for its economy to continue growing as rapidly has it has
  • Also running out of surplus labor – wages rising rapidly
  • With slowing growth in China – demand will fall off for products from export driven economies like Brazil Malaysia, Mexico Russia and Taiwan
  • Export driving emerging markets will have to find new ways to achieve strong growth
sharma ix
Sharma IX
  • As for rapid growth:
    • Among countries with per-capita incomes in $20,000 to $25,000 range sees only Czech Republic and South Korea matching or exceeding 3% annual growth over the next decade
    • In the $10,000 to $15,000 only Turkey has a good shot at marching or exceeding 4-5% annual growth, although Poland has a chance
    • In the $5,000 to $10,000 range Thailand has the best chance of high performance.
    • New stars under $5,000 likely to be Indonesia, Nigeria, Philippines, Sri Lanka and some in East Africa
emerging power fortunes i
Emerging Power Fortunes I
  • “China is the Key to Emerging Power Fortunes” Oxford Analytica, September 20, 2013
  • Looks at outlook for global growth over the very long term. Main points:
    • If the surge in developing world growth that has dominated the last two decades has ended, global growth forecasts will likely return to the old 2-3% per annum.
    • This would alter the outlook for old versus rising powers and commodity markets
    • Important to consider the potential for and implications of more persistence divergence in growth across the developing world.
    • The climb out of poverty for the lowest-income countries probably put on hold for some years
    • Any restart would depend on the rest of the world regaining growth
emerging power fortunes ii
Emerging Power Fortunes II
  • Impacts
  • China’s economic development has slowed and economic growth looks likely to be subdued over the last 20 years
  • Other emerging economies will struggle to overcome weakening in advanced economies and China, internal tensions and financial constraints
  • The poorest countries, especially commodity producers are unlikely to show meaningful progress against this backdrop
  • Long term global GDP growth outlook remains heavily dependent on the pace of development and scope for rising domestic consumer spending across emerging markets, especially Asia.
emerging power fortunes iii
Emerging Power Fortunes III
  • Diverging fortunes across BRICS look similar to the divergence currently seen across Europe
  • Underlying problems in fundamentals may prove equally intractable
  • Advanced economies also face uncertainty
  • However even under varying scenarios the range of outcomes is relatively narrow.
  • Improvements in quality of life becoming more important to typical households
  • Should result in greater investment in human capital, advanced sciences and environmental improvements
  • This will keep wealthy countries ahead of the developing world, even if the gap is narrowing.
emerging power fortunes iv
Emerging Power Fortunes IV
  • Diverging BRICS
  • China – although growth has slowed markedly it may be over the development hump (resource intensive phase of infrastructure building)
  • Might consolidate growth at 6-8% rather than 10% averages of last 20 years
  • World economy would be confident of 3-4% growth rates per annum if China could continue at its current paced
  • India – has yet to overcome development hump, particularly the infrastructure and organizational requiems necessary to sustain growth.
  • Side-stepped this during a few years of booming services exports but now needs to tackle problem or risk failure
  • Growth prospects Russia and Brazil look lackluster at a stage were further advances are more challenging to sustain.
emerging power fortunes v
Emerging Power Fortunes V
  • Base case forecast:
    • Moderately favorable world GDP forecast based on recent trends and
    • Slight slowing in the developing world over the long run
  • Implication:
    • Regional shares of world GDP will be much closer to regional population shares by 2050 as developing world productivity catches up
  • 2050 Scenarios with slower BRICs growth
  • Case 1
    • More sluggish and more fragile parts of the developing world could revert to much slower growth paths
    • However advanced economies and China are assumed to keep performing in line with trends
    • This implies that by 2050 their shares of world GDP have risen sharply over the base scenario
emerging power fortunes vii
Emerging Power Fortunes VII
  • Case 2
  • China slows far faster than expected -- with annual growth dropping to 2.0 – 2.5% per annum by 2040-50, close to the growth projected for advanced economies.
  • With extreme Chinese slowdown, coupled with weak growth throughout the developing world, advanced countries maintain an even stronger position in world economy
emerging power fortunes ix
Emerging Power Fortunes IX
  • Case 3
  • There could be negative repercussions and further failures in the developed world taking growth to 0.5-1.0%.
  • Coupled with the weaker growth in Case 2 this pulls back advanced countries’ share in GDP towards Case 1.
  • However in contrast, China regains the initially forecast share of GDP
  • All countries suffer weaker absolute performance
  • Summing up:
  • China maintains an advance towards a 25-35% share of world GDP in all scenarios
  • The developing world becomes over half of world GDP by 2020-25 (measured at market prices)
emerging power fortunes xi
Emerging Power Fortunes XI
  • The level of 2050 GDP falls compared to the trend forecast base case in all scenarios
  • The drop is greatest in Case1, moderate in Case 2 and quite small in Case 3
  • Resource Demand Implications
  • A slower world economy would moderate commodity demand
  • 2-3% global growth would stabilize aggregate energy consumption
  • The failure of some poor countries to overcome the development hump would undermine demand for metals and minerals as well as energy.
emerging power fortunes xii
Emerging Power Fortunes XII
  • Effects of permanently weaker growth are likely to include:
  • Far slower “hard” development of China’s rural areas and hinterland – more emphasis on “soft” services and resolving existing problems
  • A long phase in India where financial issues are tackled and obstacles to growth come under political scrutiny
  • Moderate growth in Latin America and resource prucers as Russia, with Africa’s development largely stalled
  • Tensions in countries dependent on resource revenues to sustain populations and consumer imports
  • Parts of Eastern Europe Central Asia and Middle East
  • More investment in alternative long-run growth options in wealthy Gulf states
  • There would be modest benefits for resource importers as the EU and Japan from weaker world prices
emerging power fortunes xiii
Emerging Power Fortunes XIII
  • Conclusions
  • While growth in china has slowed it is still expanding rapidly
  • The probability is shifting in favor of moderate short-term improvements in growth and trade
  • This would have positive impacts pn many other developed and developing countries
  • The immediate future of India is less assured
  • The current crisis could worsen, and the roots of the malaise, especially poor infrastructure could take a long time to resolve
  • However over the long term, Chinese growth is on a downward trajectory.