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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 • 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 • 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 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 • 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 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 • 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 • 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’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 • 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 • “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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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.
