Sunday, September 01, 2013
Tortoises catch up on emerging-market hares
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Much attention is rightly being directed towards Syria and the risk Middle East turmoil poses to the global and British recoveries.

Certainly, the Middle East has taken over from the eurozone as the biggest economic threat. An oil price not far short of $120 a barrel, with predictions it could hit $150, is not what the world needs, particularly when something is happening which should be bringing the oil price down: a sharp slowdown in emerging economies.

It is this slowdown, which has evolved into full-blown currency crises in some countries, notably India, that I want to focus on today, and for good reason.

For years I have been telling anybody who would listen the future lay in the emerging world. A book of mine six years ago, The Dragon and the Elephant, looked at the two emerging-economy giants, China and India and predicted great things for them. Never before had we had two such populous countries, each with well over a billion people, growing so strongly and in tandem.

The emerging-economy story was strengthened by the global financial crisis which most of them sailed through. In 2009, the annus horribilis for advanced economies, which suffered a collective 4% fall in gross domestic product (Britain’s was more than 5%), emerging economies grew. Some, such as China with with 9% growth and India with 7%, almost boomed.

After the crisis, the advanced world seemed destined for two enduring hangovers: the financial hangover that meant their banking systems would need a prolonged period of convalescence and the fiscal hangover requiring tax hikes and spending cuts.

Emerging economies, mostly free of such constraints, were where exporters - and selectively investors - needed to be. The big criticism of Britain’s exporters was that they sold too much to sclerotic Europe and too little to the Brics (Brazil, Russia, India and China). Remember all those stories about Britain exporting more to Ireland than to the Brics? It has not been true for a while but it appeared to be a powerful indictment of British failure.

But now, with the Brics apparently crumbling, were exporters sold a pup? Was all that exhortation to go east, or elsewhere in the emerging world, a cruel trick?

Last year only China, which grew 7.8%, achieved the kind of growth associated with the Brics. Brazil, 0.9%, India, 3.2% and Russia, 3.4%, barely deserved to be members of the club. Emerging economy growth dipped below 5%, before the crisis of plunging stock markets and tumbling currencies this year. One emerging darling, Indonesia, is in a currency crisis. Another, Thailand, is in recession.

Advanced economies, on the other hand, have perked up, including Britain but also the eurozone, America and Japan. On one estimate advanced countries contributed more to global growth in the second quarter than the emerging world, the first time this has happened for years.

The pessimistic case on emerging economies is easily made. It is that they been beneficiaries of two developments made in the advanced world. The first was pre-crisis debt-fulled growth, which provided the demand to pull the emerging world along.

The second was the response of the big central banks to the crisis, particularly the Federal Reserve. The crisis in emerging economies has at least in part been driven by the big financial market event this year, indications from the Fed that it will soon begin “tapering” its asset purchases under quantitative easing.

Some emerging economies had become too dependent on a regular fix of the QE drug. Stephen Roach of Morgan Stanley cites International Monetary Fund research showing cumulative capital inflows to the emerging world of $4 trillion (£2.6 trillion) since 2009.

Add in to the pessimistic mix worries about rising Chinese debt and it is not hard to be concerned. If China falls it would drag other emerging economies with it. There are signs, evident in the trial of the ex political rising star Bo Xilai, the cast-iron grip of the authorities in Beijing has weakened.

So is it time to throw in the towel? No. Most emerging economies have years of strong growth ahead of them, including China. We are seeing an adjustment there from three decades of super-strong strong, averaging 9.5% a year from 1978 to 2008, to a more modest and sustainable rate of around 7%, with the balanced tilted towards domestically-generated growth. Such adjustments are not easy but predictions of Chinese downfall, ever-present since the late 1970s, have been wrong before and are likely to be wrong again.

India may be different. While the dragon can continue roaring, the elephant may be condembed to a lumbering existence, a far cry from the 10% growth its government was targeting not so long ago.

India is in some respects back to the crossroads it faced in 1991, when a chronic current account deficit (it is 5% of GDP now) and a run on the rupee was the wake-up call that led to the country’s successful economic reforms. The wake-up call is being sounded but it is not clear the country’s politicians have the appetite or ability to push through reforms. The prospects for India and her 1.2bn people, soon to grow into the world’s biggest population, are a lot cloudier than they were.

As for the rest of the emerging world. there remain plenty of bright spots, in Asia, central and eastern Europe, sub-Saharan Africa and Latin America. Even at 5% average emerging-world growth, some countries will achieve more than this, and this year that includes the likes of Vietnam, Indonesia ((despite the rupiah crisis), Ghana and Nigeria.

What we have learned, once again, is for these countries it can be a rocky ride. But for emerging economies, as a whole, the ride is far from over. Britain’s exporters should carry on boarding those planes.