The resilience of the emerging economies has become particularly evident during the current global crisis. Their dynamic demographics, macroeconomic stability (often the result of lessons learnt from previous crises), and high levels of investment have sustained a rapid pace of growth even in the face of global economic uncertainty. This is often further supported by large public sector reserves which have at times been marshaled to sustain growth. Supporting the de-coupling notion, even markets such as Turkey, Brazil, and South Africa that saw a correction in 2009 quickly rebounded to trend growth. In 2010, China alone accounted for 1.5 percentage points of the 5 percent global growth — more than that 1.4 percent aggregate share of the advanced economies take together. Also in the medium term, emerging markets look likely to drive the global economy with more than 6 percent annual growth projected past the middle of this decade as compared to 1-2 percent for the advanced economies.
The key question going forward, of course, has to do with the ability of the emerging economies to sustain this superior performance. Speaking at the 3rd annual Kingdom Investors Summit in Riyadh recently, Chief Economist Jarmo T. Kotilaine of the National Commercial Bank outlined three alternative scenarios for the emerging economies: 1. “more of the same,” 2. “maturing success,” and 3. “the end of the miracle.”
In the words of Kotilaine, “‘More of the same”’ probably remains close to the baseline scenario. There are a number of important structural and policy factors that would suggest considerable resilience in the performance of the emerging economies even if short-term volatility in response to potential external shocks, such as the uncertainties in Europe, cannot be ruled out.” The leading emerging economies are still going through a period of robust economic growth underpinned by demographic dynamics, infrastructure upgrades, and high investments in human and physical capital. This momentum is in many cases further supported by a strong political will to meet strategic growth objectives. For instance the Chinese governments views annual growth of 8 percent as the necessary minimum in view of the country’s impending demographic challenges as a result of the one-child policy. In many countries, further work on updating regulations, improving transparency, and addressing political pressure points can serve as a way to further significantly unleash growth. For instance India’s rapid expansion has materialized in spite of substantial weaknesses in these areas, along with sectarian and regional division and progress in addressing them would only serve to further stimulate the country’s economic expansion.
But especially over time, a growing number of emerging economies will face the prospect of the growth boom maturing and slowing down as many of the easiest investment opportunities are exhausted, the costs of doing business rises as a result of urbanization, wage claims, and resource constraints, and, above all, as the populations begin to age. In the words of Kotilaine, “The post-war experience of Japan serves as a potential precedent. Fast growth was attained between the 1950s and 1980s thanks to robust population growth and high investment levels. The momentum began to wane as the population began to age and the costs of business in the big cities rose sharply by the 1980s, partly due to asset bubbles supported by loose monetary policy.” The demographic dividend faced by the leading emerging economies will similarly prove finite in nature. Declining family sizes, higher life expectancy, and declining fertility levels mean that the dependency ratio (the proportion of those not working to the workforce) will begin to grow. Political risk and a lack of success in effectively mobilizing the available human capital resources can significantly accelerate this process.
Lastly, the most pessimistic scenario would involve a reversal to the situation obtaining before the current take-off of emerging markets. This remains a possibility in the event that some of the drivers of past progress are lost. These have included trade and financial liberalization and improved governance at the international, national, and corporate levels. A rise of protectionism and a loss of momentum in the area of governance could potentially turn the emerging markets miracle of the past decade into a “flash in the pan.” Potential vulnerabilities exist in some countries because of the recent nature of the transformation and its reliance on particular individuals and political forces. Additional challenges are posed by the otherwise desirable turn to more inclusive growth. The European experience in the 1960s and 1970s highlights the increasingly negative growth implications of redistributive policies. “But,” added Kotilaine, “the emerging markets boom faces potential limitations also because of its highly resources-intensive nature. The demand for many commodities has exploded as a result of the brisk expansion of the populous emerging economies where such demand is, moreover, often fueled by extensive government subsidies. This rapid demand growth is raising growing challenges in terms of finite resource endowments and cost pressures.” The success may become increasingly conditional on our ability to more effectively utilize the resources available to us.
Even though the challenges facing emerging markets are numerous, the likeliest scenario remains one of rapid growth moderating only fairly gradually over time. As the global economy faces considerable structural challenges, the emerging markets are likely to remain one of the relative bright spots in the years to come. As real as some of the risks to growth are, they tend to be less serious than the structural weaknesses of the advanced economies.