international analysis and commentary

Emerging markets: beyond the hype, it’s the differences that matter


In many ways, the hysteria over “emerging markets” amounts to the latest global fad not to happen. Two recent fashionable theories about them have blessedly bit the dust, as reality – in the guise of highly disappointing growth numbers – has returned to political-risk analysis.

The first primary strand of conventional wisdom to be broken concerns the giddy, utopian view that in the immediate term emerging markets would effortlessly take the place of a moribund West, proving themselves the new motor of global growth. This unreflective optimism has been silenced by new and far more depressing realities. Between 2000-2009, the average annual rate of emerging market growth (those countries in the MSCI emerging market index from around the world) was 7.6%, fully 4.5% higher than that of the becalmed rich world. It is true that if this decade-long rate had been able to be maintained, emerging markets’ average income per person would have converged with that of America amazingly in just over a mere 30 years, scarcely a generation. But that is always the trouble with extrapolating such figures; they assume that nothing much happens or changes over significant periods of time. In other words, the figures – and the optimism they generate – are otherworldly.

The more recent numbers tell a very different story. In 2013 this grouping’s average GDP per head grew (if a still relatively buoyant China is excluded from the calculations) at just 1.1% faster than the rich world. At that meager pace, convergence with America happens over a century from now, beyond the realm of imagining.

The reasons for this dramatic reversal are simple: The forces that compelled the glorious emerging market decade of the 2000s have run their course. Global trade – upon which so much of their success was based – has slowed. Between 1994-2007, trade increased at almost twice the rate the global economy grew. But as it has now been a generation since there has been a significant, all-encompassing global trade deal (think of the World Trade Organization’s recent futility) this benign global economic environment has decidedly changed.

Also, emerging market growth was spearheaded by a single, dramatic change in the global economic scene; the rise of China. Here a rising tide did lift all boats, as the Chinese economic miracle flattered a more general material improvement across the spectrum of emerging economies. In essence, in many cases the emerging market rise amounted to the other developing countries serving a part of China’s new supply chain wherein they supplied raw materials to feed China’s manufacturing renaissance.

The ever-increasing Chinese demand for raw materials – and the consequent rapid rise of global commodity prices – lay behind the overall boom. While Beijing’s growth remains a relatively strong 7-plus-%, gone forever are the days there of 10% growth, and with them the easy takings for the rest of the emerging world.

But the last major feature of the boom – and its juddering halt – call into question a second overall strand of conventional thinking about the group as a whole. The days of ultra-cheap credit, with global (and especially American) interest rates at subterranean levels and capital – in search of higher non-Western yields – flowing naturally to emerging markets, are at a definitive close. The American Federal Reserve has ended the party, removing the punch bowl of Quantitative Easing (QE), wherein the Fed printed $85 billion a month to prop up the ailing American economy, much of which gravitated toward the new markets. But with America growing again at a robust 3.9% in the third quarter of this year, QE is no longer necessary.

This is where things get analytically interesting. In recent years the thought that the emerging market world was a monolithic whole – encapsulated in the BRICS (Brazil, Russia, India, China, South Africa) and MINT (Mexico, Indonesia, Nigeria, Turkey) concepts – has seized the imagination of the global commentariat. However, in practical terms the idea never made much sense, beyond correctly illustrating that the new multipolar era would not be nearly as Western-dominated as before. But to really explain the confusing new world we find ourselves in, it is disaggregation that matters. The key question is which emerging economies will rise, which limp along, and which will fall.

The key event that makes this clear is the end of the Fed’s taper. Now that the Americans have in essence begun to tighten credit, increasingly it will be possible to separate the emerging market sheep from the wolves. The shrewd ones have used the interim period QE bought them to continue to re-structure their economies; Mexico, China, and to an extent India fall into this category. Some countries, such as Indonesia, which under its populist new President Jokowi crucially just managed to cut the energy subsidy in order to use the funds to jumpstart the country’s educational system, remain question marks, but ones worth betting on.

However, there is a third sub-grouping worth watching: countries that seem to be moving in reverse, both in terms of their immediate anemic growth rates, and their persistent inability to enact structural reform. Damagingly, these countries have used the economic respite provided by the Fed to actually put off reform, getting by on the narcotic of cheap foreign capital, as though that state of affairs would last forever. In the case of Turkey, Brazil and South Africa, much work remains to be done if they are to retain their fleeting status as emerging market darlings.

In many ways, all this is to the analytical good, as a sort of intellectual course correction is well on its way. The emerging economies came from nowhere 15 years ago, bewilderingly traveling the analytical distance from being an under-valued portion of the global economy to being an over-valued portion in the blink of an eye. It is time a new consensus, based on the facts, establishes itself. There is no doubt the relative rise of emerging markets have changed the structural face of the new multipolar world, as new and enduring global players invade the heretofore cozy Western-dominated club of great powers.

However, there is also little doubt that this rise will not be effortless, nor does it make any sense to see such a diverse group as a monolithic factor on the world scene. As is ever the case in world politics, some emerging markets will indeed emerge as truly global players, just as others will continue to disappoint, never fulfilling their lofty promise. In other words, we will all have to go back to actually analyzing these places in painstaking detail. For if the new era teaches us anything, it is that the work of foreign policy analysis cannot be wished away by a simplistic belief in uniform global historical forces.