作者：Ruchir Sharma November/December 2012 foreign affairs
Over the past
several years, the most talked-about trend in the global economy has been the
so-called rise of the rest, which saw the economies of many developing
countries swiftly converging with those of their more developed peers. The
primary engines behind this phenomenon were the four major emerging-market
countries, known as the BRICs: Brazil, Russia, India, and China. The world was
witnessing a once-in-a-lifetime shift, the argument went, in which the major
players in the developing world were catching up to or even surpassing their
counterparts in the developed world.
These forecasts typically took the
developing world’s high growth rates from the middle of the last decade and
extended them straight into the future, juxtaposing them against predicted
sluggish growth in the United States and other advanced industrial countries.
Such exercises supposedly proved that, for example, China was on the verge of
overtaking the United States as the world’s largest economy-a point that
Americans clearly took to heart, as over 50 percent of them, according to a
Gallup poll conducted this year, said they think that China is already the
world’s “leading” economy, even though the U.S. economy is still more than
twice as large (and with a per capita income seven times as high).
As with previous straight-line projections
of economic trends, however-such as forecasts in the 1980s that Japan would
soon be number one economically-later returns are throwing cold water on the
extravagant predictions. With the world economy heading for its worst year
since 2009, Chinese growth is slowing sharply, from double digits down to seven
percent or even less. And the rest of the BRICs are tumbling, too: since 2008,
Brazil’s annual growth has dropped from 4.5 percent to two percent; Russia’s,
from seven percent to 3.5 percent; and India’s, from nine percent to six
percent.
None of this should be surprising, because
it is hard to sustain rapid growth for more than a decade. The unusual
circumstances of the last decade made it look easy: coming off the
crisis-ridden 1990s and fueled by a global flood of easy money, the emerging
markets took off in a mass upward swing that made virtually every economy a
winner. By 2007, when only three countries in the world suffered negative
growth, recessions had all but disappeared from the international scene. But
now, there is a lot less foreign money flowing into emerging markets. The
global economy is returning to its normal state of churn, with many laggards
and just a few winners rising in unexpected places. The implications of this
shift are striking, because economic momentum is power, and thus the flow of
money to rising stars will reshape the global balance of power.
FOREVER EMERGING
The notion of wide-ranging convergence
between the developing and the developed worlds is a myth. Of the roughly 180
countries in the world tracked by the International Monetary Fund, only 35 are
developed. The markets of the rest are emerging-and most of them have been
emerging for many decades and will continue to do so for many more. The Harvard
economist Dani Rodrik captures this reality well. He has shown that before
2000, the performance of the emerging markets as a whole did not converge with
that of the developed world at all. In fact, the per capita income gap between
the advanced and the developing economies steadily widened from 1950 until 2000.
There were a few pockets of countries that did catch up with the West, but they
were limited to oil states in the Gulf, the nations of southern Europe after
World War II, and the economic “tigers” of East Asia. It was only after 2000
that the emerging markets as a whole started to catch up; nevertheless, as of
2011, the difference in per capita incomes between the rich and the developing
nations was back to where it was in the 1950s.
This is not a negative read on emerging
markets so much as it is simple historical reality. Over the course of any
given decade since 1950, on average, only a third of the emerging markets have
been able to grow at an annual rate of five percent or more. Less than
one-fourth have kept up that pace for two decades, and one-tenth, for three
decades. Only Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong
have maintained this growth rate for four decades. So even before the current
signs of a slowdown in the BRICs, the odds were against Brazil experiencing a full
decade of growth above five percent, or Russia, its second in a row.
Meanwhile, scores of emerging markets have
failed to gain any momentum for sustained growth, and still others have seen
their progress stall after reaching middle-income status. Malaysia and Thailand
appeared to be on course to emerge as rich countries until crony capitalism,
excessive debts, and overpriced currencies caused the Asian financial meltdown
of 1997-98. Their growth has disappointed ever since. In the late 1960s, Burma
(now officially called Myanmar), the Philippines, and Sri Lanka were billed as
the next Asian tigers, only to falter badly well before they could even reach
the middle-class average income of about $5,000 in current dollar terms.
Failure to sustain growth has been the general rule, and that rule is likely to
reassert itself in the coming decade.
In the opening decade of the twenty-first
century, emerging markets became such a celebrated pillar of the global economy
that it is easy to forget how new the concept of emerging markets is in the
financial world. The first coming of the emerging markets dates to the
mid-1980s, when Wall Street started tracking them as a distinct asset class.
Initially labeled as “exotic,” many emerging-market countries were then opening
up their stock markets to foreigners for the first time: Taiwan opened its up
in 1991; India, in 1992; South Korea, in 1993; and Russia, in 1995. Foreign
investors rushed in, unleashing a 600 percent boom in emerging-market stock
prices (measured in dollar terms) between 1987 and 1994. Over this period, the
amount of money invested in emerging markets rose from less than one percent to
nearly eight percent of the global stock-market total.
This phase ended with the economic crises
that struck from Mexico to Turkey between 1994 and 2002. The stock markets of
developing countries lost almost half their value and shrank to four percent of
the global total. From 1987 to 2002, developing countries’ share of global GDP
actually fell, from 23 percent to 20 percent. The exception was China, which
saw its share double, to 4.5 percent. The story of the hot emerging markets, in
other words, was really about one country.
The second coming began with the global
boom in 2003, when emerging markets really started to take off as a group.
Their share of global GDP began a rapid climb, from 20 percent to the 34
percent that they represent today (attributable in part to the rising value of
their currencies), and their share of the global stock-market total rose from
less than four percent to more than ten percent. The huge losses suffered
during the global financial crash of 2008 were mostly recovered in 2009, but
since then, it has been slow going.
The third coming, an era that will be
defined by moderate growth in the developing world, the return of the boom-bust
cycle, and the breakup of herd behavior on the part of emerging-market
countries, is just beginning. Without the easy money and the blue-sky optimism
that fueled investment in the last decade, the stock markets of developing
countries are likely to deliver more measured and uneven returns. Gains that
averaged 37 percent a year between 2003 and 2007 are likely to slow to, at
best, ten percent over the coming decade, as earnings growth and exchange-rate
values in large emerging markets have limited scope for additional improvement
after last decade’s strong performance.
PAST ITS SELL-BY DATE
No idea has done more to muddle thinking
about the global economy than that of the BRICs. Other than being the largest economies
in their respective regions, the big four emerging markets never had much in
common. They generate growth in different and often competing ways-Brazil and
Russia, for example, are major energy producers that benefit from high energy
prices, whereas India, as a major energy consumer, suffers from them. Except in
highly unusual circumstances, such as those of the last decade, they are
unlikely to grow in unison. China apart, they have limited trade ties with one
another, and they have few political or foreign policy interests in common.
A problem with thinking in acronyms is that
once one catches on, it tends to lock analysts into a worldview that may soon
be outdated. In recent years, Russia’s economy and stock market have been among
the weakest of the emerging markets, dominated by an oil-rich class of
billionaires whose assets equal 20 percent of GDP, by far the largest share
held by the superrich in any major economy. Although deeply out of balance,
Russia remains a member of the BRICs, if only because the term sounds better
with an R. Whether or not pundits continue using the acronym, sensible
analysts and investors need to stay flexible; historically, flashy countries
that grow at five percent or more for a decade – such as Venezuela in the 1950s,
Pakistan in the 1960s, or Iraq in the 1970s – are usually tripped up by one
threat or another (war, financial crisis, complacency, bad leadership) before
they can post a second decade of strong growth.
The current fad in economic forecasting is
to project so far into the future that no one will be around to hold you
accountable. This approach looks back to, say, the seventeenth century, when
China and India accounted for perhaps half of global GDP, and then forward to a
coming “Asian century,” in which such preeminence is reasserted. In fact, the
longest period over which one can find clear patterns in the global economic
cycle is around a decade. The typical business cycle lasts about five years,
from the bottom of one downturn to the bottom of the next, and most practical
investors limit their perspectives to one or two business cycles. Beyond that,
forecasts are often rendered obsolete by the unanticipated appearance of new
competitors, new political environments, or new technologies. Most CEOs and
major investors still limit their strategic visions to three, five, or at most
seven years, and they judge results on the same time frame.
THE NEW AND OLD ECONOMIC ORDER
In the decade to come, the United States,
Europe, and Japan are likely to grow slowly. Their sluggishness, however, will
look less worrisome compared with the even bigger story in the global economy,
which will be the three to four percent slowdown in China, which is already
under way, with a possibly deeper slowdown in store as the economy continues to
mature. China’s population is simply too big and aging too quickly for its
economy to continue growing as rapidly as it has. With over 50 percent of its people
now living in cities, China is nearing what economists call “the Lewis turning
point”: the point at which a country’s surplus labor from rural areas has been
largely exhausted. This is the result of both heavy migration to cities over
the past two decades and the shrinking work force that the one-child policy has
produced. In due time, the sense of many Americans today that Asian juggernauts
are swiftly overtaking the U.S. economy will be remembered as one of the
country’s periodic bouts of paranoia, akin to the hype that accompanied Japan’s
ascent in the 1980s.
As growth slows in China and in the
advanced industrial world, these countries will buy less from their
export-driven counterparts, such as Brazil, Malaysia, Mexico, Russia, and
Taiwan. During the boom of the last decade, the average trade balance in
emerging markets nearly tripled as a share of GDP, to six percent. But since
2008, trade has fallen back to its old share of under two percent.
Export-driven emerging markets will need to find new ways to achieve strong
growth, and investors recognize that many will probably fail to do so: in the
first half of 2012, the spread between the value of the best-performing and the
value of the worst-performing major emerging stock markets shot up from ten percent
to 35 percent. Over the next few years, therefore, the new normal in emerging
markets will be much like the old normal of the 1950s and 1960s, when growth
averaged around five percent and the race left many behind. This does not imply
a reemergence of the 1970s-era Third World, consisting of uniformly
underdeveloped nations. Even in those days, some emerging markets, such as
South Korea and Taiwan, were starting to boom, but their success was
overshadowed by the misery in larger countries, such as India. But it does mean
that the economic performance of the emerging-market countries will be highly
differentiated.
The uneven rise of the emerging markets
will impact global politics in a number of ways. For starters, it will revive
the self-confidence of the West and dim the economic and diplomatic glow of
recent stars, such as Brazil and Russia (not to mention the petro-dictatorships
in Africa, Latin America, and the Middle East). One casualty will be the notion
that China’s success demonstrates the superiority of authoritarian, state-run
capitalism. Of the 124 emerging-market countries that have managed to sustain a
five percent growth rate for a full decade since 1980, 52 percent were
democracies and 48 percent were authoritarian. At least over the short to
medium term, what matters is not the type of political system a country has but
rather the presence of leaders who understand and can implement the reforms
required for growth.
Another casualty will be the notion of the
so-called demographic dividend. Because China’s boom was driven in part by a
large generation of young people entering the work force, consultants now scour
census data looking for similar population bulges as an indicator of the next
big economic miracle. But such demographic determinism assumes that the
resulting workers will have the necessary skills to compete in the global
market and that governments will set the right policies to create jobs. In the
world of the last decade, when a rising tide lifted all economies, the concept
of a demographic dividend briefly made sense. But that world is gone.
The economic role models of recent times
will give way to new models or perhaps no models, as growth trajectories
splinter off in many directions. In the past, Asian states tended to look to
Japan as a paradigm, nations from the Baltics to the Balkans looked to the
European Union, and nearly all countries to some extent looked to the United
States. But the crisis of 2008 has undermined the credibility of all these role
models. Tokyo’s recent mistakes have made South Korea, which is still rising as
a manufacturing powerhouse, a much more appealing Asian model than Japan.
Countries that once were clamoring to enter the eurozone, such as the Czech
Republic, Poland, and Turkey, now wonder if they want to join a club with so
many members struggling to stay afloat. And as for the United States, the
1990s-era Washington consensus – which called for poor countries to restrain
their spending and liberalize their economies – is a hard sell when even
Washington can’t agree to cut its own huge deficit.
Because it is easier to grow rapidly from a
low starting point, it makes no sense to compare countries in different income
classes. The rare breakout nations will be those that outstrip rivals in their
own income class and exceed broad expectations for that class. Such
expectations, moreover, will need to come back to earth. The last decade was
unusual in terms of the wide scope and rapid pace of global growth, and anyone
who counts on that happy situation returning soon is likely to be disappointed.
Among countries with per capita incomes in
the $20,000 to $25,000 range, only two have a good chance of matching or
exceeding three percent annual growth over the next decade: the Czech Republic
and South Korea. Among the large group with average incomes in the $10,000 to
$15,000 range, only one country – Turkey – has a good shot at matching or
exceeding four to five percent growth, although Poland also has a chance. In
the $5,000 to $10,000 income class, Thailand seems to be the only country with
a real shot at outperforming significantly. To the extent that there will be a
new crop of emerging-market stars in the coming years, therefore, it is likely
to feature countries whose per capita incomes are under $5,000, such as
Indonesia, Nigeria, the Philippines, Sri Lanka, and various contenders in East
Africa.
Although the world can expect more breakout
nations to emerge from the bottom income tier, at the top and the middle, the
new global economic order will probably look more like the old one than most
observers predict. The rest may continue to rise, but they will rise more
slowly and unevenly than many experts are anticipating. And precious few will
ever reach the income levels of the developed world.
