Looking For Economic Growth In All The Wrong PlacesDr. Harry G. Broadman
By Harry Broadman
(Forbes) – Most mainstream US and European media stories on the future prospects of the global economy dwell on the fortunes of either the advanced economies or of a very small set of large emerging market countries, often expressed in catchy (but not terribly meaningful) acronyms, epitomized by “BRICS”—Brazil, Russia, India, China, and South Africa. Businesses, investors, government officials and non-governmental organizations (NGOs) buying into this myopic view are missing the real story on what is driving global economic growth.
The Euro area continues to falter, punctuated by Greece’s chronic challenges; Japan’s economy remains anaemic, seemingly immune to remedial policies; and although the US has been nicely rebounding from a deep and prolonged recession, the days are long gone when the US alone could jump-start the global economy.
Even if it were, despite the shot in the arm provided by the current collapse in world oil prices, the US is beginning to face headwinds due to the substantial strengthening of the dollar, the expectation of higher interest rates, and—perhaps the most insidious real constraint on the future of the US economy—the increasing deterioration of the nation’s infrastructure.
Not surprisingly, last month’s World Economic Outlook, the globe’s bellwether publication on all of our economic fortunes, issued by the InternationalMonetary Fund (IMF ), forecasts an average growth rate in the advanced economies to be 2.4% for 2015 and the same rate for 2016. A real flatliner. Clearly not much to look forward to.
However, at the same time the IMF foresees economic growth for the world as a whole to be 3.5% in 2015 and rise to 3.7% in 2016. What’s behind the higher growth rates for the entire globe, let alone increases in those rates over time?
To paraphrase James Carville during the 1992 Clinton campaign, “It’s the emerging markets, stupid.”
Critically, it’s not simply the Brazils, Russias, Indias, Chinas, and South Africas of the world. Rather, it is also a substantial–and growing–number of countries in East Asia (think of Indonesia, Malaysia, and the Philippines, among others); in Latin America (Colombia, Peru, Mexico, and Chile, for example); and in sub-Saharan Africa (for example, Ghana, Botswana, Uganda, Nigeria, Mozambique and Rwanda).
As a whole, emerging markets’ average growth rate for 2015 is forecast by the IMF to be 4.3%, and 4.7% for 2016. That’s about twice the rate of the advanced countries.
Of course, China’s and India’s sizeable growth trajectories play a key role in these forecasts—even after accounting for these countries’ current softening, which, at this juncture, mainly reflects the typical business cycle workings of any economy. In the case of China, more systemic risks may well be in the offing, but they would be reflected in numbers of a wholly different magnitude and nature. (This is a topic I will address in a subsequent post.)
But perhaps equally important are the average growth rates for sub-Saharan Africa—projected to be 5.2% in 2016; and for South East Asia—projected to be 5.3% then. The multiples illustrated by these numbers compared to those of the US are actually nothing new. Indeed, over the last two decades, average economic growth rates in these and in the other emerging markets as a whole have been more than twice, sometimes three times, that of the average for advanced economies.
As a result, if you think of the global economy as a pie that gets larger over time (which will always be the case unless the entire world economy actually shrinks), because of their growth over the last several years, emerging markets are accounting for larger and larger pieces of the pie even as the pie itself keeps increasing in size.
Taken together, these point to a long-run structural transformation—not a transitory cyclical change—in the global economy. Rather than the United States, it is the emerging markets that have become the engines of world economic growth. And this pattern is unlikely to change any time soon.
These observations likely will be very surprising to most American—if not to most European and Japanese—businesses and investors. And for those whom they are not, it will be contended that the risks of doing business in these locales are far too high. As I’ll discuss in a follow-up post, the risk-adjusted returns in many of these cases are actually—or could be made to be—far higher than generally perceived. The real risk is not understanding what is happening in these markets and ignoring the opportunities for growth they represent.
The issues explored in this column are the first part of a series of posts on business opportunities and risks in emerging markets.