Most of the financial commentary on emerging markets has turned negative. This reflects a combination of uncertainties, whether to do with growth in those markets, continued slow growth in advanced economies, possible overvaluations resulting from previous expectations (now being revised), anticipated capital flows out of emerging markets associated with tapering, and an eventual normalization of the interest rate environments in the United States and Europe.
From the perspective of asset allocation, this view probably paints an unnecessarily pessimistic picture with respect to growth alone. Indeed, in a period of unconventional policies, divergences between asset price performance and underlying economic fundamentals have become quite common.
One way to assess growth prospects is to ask whether economies have the resources, policy expertise and political will to make decisions that restore or alter growth patterns to adapt to the current environment. In general, emerging economies tend to pass these tests and hence to be flexible and resilient.
For good reasons, there is much attention on China; its performance, one way or another, will affect the rest of the global economy. The aggressive and comprehensive reform programme announced in November 2013 and detailed in December is likely, if implemented, to transform the Chinese growth model and sustain future growth in the 7%-plus range. There is some risk that there will be a dip, as unregulated leverage and excess low return investment is reined in and the growth drivers associated with consumption and a liberalized service sector kick into gear. That may make markets nervous but does not imply a major defect in the plan. In fact, it is the opposite: a commitment to use whatever policy levers are available to sustain growth above, say, 8% would surely risk stalling the structural transformation of the economy.
India and Brazil are both approaching important elections, which will affect the direction and vigour of growth-oriented policies. In both cases, growth potential is high. With India, the challenge is to reverse the pattern of political gridlock and unleash a set of reforms and investments that will restore confidence and trigger new growth potential in a wide variety of areas, including manufacturing. India should benefit from China’s middle-income transition – its per capita income is about a third of China’s and it can still play in labour-intensive, lower-valued space, absorbing labour from rural areas.
Brazil has focused resources on inclusivity, especially through education, with the goal of eliminating the dual economy structure. This is an important continuing agenda. It requires a higher level of public-sector investment in infrastructure, and this will, over time, help to raise the investment rate above 18% of GDP, the latter not being sufficient to sustain high growth.
A number of emerging markets (India, Brazil, Indonesia and Turkey, to name a few) are experiencing transitory slowdowns, a process that accelerated last spring with the tapering announcement and a normalizing interest-rate environment. Current account deficits will come down and the question is whether investment will fall or savings rise, and in what combination.
Many Sub-Saharan African countries continue to sustain growth and reforms, diversifying from a dependence on natural resources. Their global market shares are not yet large enough to be affected by global slowdowns led by advanced countries. A medium-term solution would be technologies that supersede labour-intensive production and bring back manufacturing and assembly closer to their markets.
As a group, developing countries are not heavily indebted. They have resources and increasing policy expertise. They do not have the same growth as advanced countries, which still account for half of the global economy, and that surely reduces their potential growth to some extent. But the huge and growing Chinese market is a partial counterweight and the still-partial recovery in the US is helping.
As has been true of a wide range of countries, advanced and developing, for some time: the principal uncertainties are associated with political legitimacy, will and social consensus.
My overall impression is that growth in developing countries will be somewhat uneven in 2014 but, on balance, is likely to accelerate in 2015 and beyond. For Europe, this presumes negligible growth but no catastrophic reversal, and for the US, a continuation of the structural rebalancing of the economy.
Author: Michael Spence is the William R Berkley Professor in Economics and Business at the NYU Stern School of Business.
Image: An employee changes a price board at a gas station in China, 15 January 2009. REUTERS