Pages

December 01, 2012

A case against the Rise of the Rest

Foreign Affairs Magazine - The Broken BRICS by Ruchir Sharma. Ruchir is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management and the author of Breakout Nations: In Pursuit of the Next Economic Miracles.

I think that Ruchir is overly pessimistic about China. I do agree that many other nations have to demonstrate the ability to grow for decades. Indonesia appears back on track to grow at 6% fairly consistently for a number of years. India has slowed down to 5-6% growth and needs a lot of reforms to get on track. India has serious challenges to educate and lift up its poorest people (making up over half of its population.)

The Economist forecasts China will have 9.3 trillion GDP in 2013. (next year). This is more than Japan (3rd biggest economy) and Germany (4th biggest economy) combined. This is without including Hong Kong and Macau which are part of China. It also does not include the hidden economy. Michael Pettis is a China pessimist and talks about subtracting environmental damage from China's GDP. This is not done for any other GDP and basically is a different measurement than GDP.

Including Hong Kong and Macau China should be at 9.8 trillion GDP at the end of next year and with the hidden economy China would be at 13 trillion GDP. There is also general agreement that China's currency is undervalued. So China catching up on an overall GDP basis a done deal. However the catchup on a per capita basis is a more open issue. I think several cities like Shanghai and Beijing will catchup on a per capita basis by 2020. Overall per capita catchup will take into the 2030s and a lot can happen to delay and slow that. What could speed it up is if China allowed its currency to strengthen a lot.

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.

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.



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.

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.


If you liked this article, please give it a quick review on ycombinator or StumbleUpon. Thanks
blog comments powered by Disqus