Ever since the 2008 financial crisis left many advanced economies in disarray, global growth has been sustained only through the continued spectacular performance of the emerging countries, especially China.
But a wave of gloom has now spread concerning their prospects and the knock-on implications for advanced economies. In presenting the current IMF forecasts, the Fund's chief economist highlighted the role of slowing emerging economies in 'worsening global economic pains'. The Financial Times says that 'the emerging economy growth story is dead'. The Economist's lead story is 'The Great Deceleration', accompanied by a cover showing the BRICs mired on the running track.
All this despondent talk needs some perspective.
It's true that the stunning emerging-economy performance had fortuitous and atypical elements: not only did China's economy accelerate after its WTO accession, but Brazil and India shook themselves out of their accustomed languor to grow at a pace not far short of China's. Brazil, perennially the 'Country of the Future', actually realised some of this potential; India managed to break some of the bonds of the 'regulation raj'.
It's also true that the rapid pace of growth has reflected the 'convergence' narrative, as described by Mark Thirlwell. One of the key messages of this narrative is that the early stages of catch-up provide the opportunity for a pace of growth which cannot be maintained as countries get closer to the technological frontier. The low-hanging fruit of easy technological improvement gives way to smaller efficiency gains as relative income rises (though in the case of China, the slowing was not mainly a convergence story but reflected the 'unbalanced, unsustainable and uncoordinated' nature of the break-neck expansion, maintained since 2009 only by huge artificial stimulus).
The current glum headlines, however, have been largely driven by more ephemeral factors.
Financial markets are obsessed with the tapering of America's quantitative easing program which is, at most, a transient phenomenon. Even if a tapering does cause some capital outflows from emerging economies, the impact seems likely to be quite short-lived. The emerging economies' growth was not driven by QE, and its ending won't make much difference. Brazil and India retain their potential for fast growth, if only their politics became more conducive to growth. China will experience structural demographic issues, but not this decade and in the meantime the investment/consumption rebalancing seems entirely achievable.
In any case, the main failing of the pessimists' analysis lies elsewhere. As noted by Mark Thirwell in his recent China post, expansion of the emerging economies has made them so much larger that even if the pace of growth is somewhat slower, it adds more to world demand than the earlier faster growth did.
Let's spell this out. In terms of growth rates, the emerging economies had their best period in the four years leading up to the 2008 crisis: they grew at an annual rate of around 8 per cent, accounting for just over half of global growth. When growth collapsed in most advanced countries in 2008, the emerging economies slowed but still recorded rapid growth: they averaged 5.5 per cent during 2008-2011. In a limp world, this kept global expansion going: the emerging economies accounted for three quarters of world growth. Since then, they have slowed a touch more, to around 5 per cent. China is growing at 7 per cent rather than 10 per cent-plus and Brazil and India have reverted to their traditional lacklustre performance.
But in the meantime, the cumulative expansion of these emerging economies means that they have more heft. The emerging countries are two-thirds bigger than they were in 2006: thus 5 per cent growth now adds more to the world economy than 8 per cent did back in 2006.
So why all the gloom about their prospects? The current IMF forecast puts their growth rate this year and next at around 5 per cent, the same as during the past few years. Perhaps the IMF feels that it is a bit optimistic about China, but provided China's growth stays somewhere near 7 per cent (which is still the predominant market forecast), there is nothing here to justify the gloom.
As well, the advanced economies could turn out a bit better than current forecasts. While there seems no early prospect of Europe getting its act together, America has done a lot to repair its immediate budget position (at the cost of crimping growth over recent years), opening the possibility of easing the austerity next year if the political bickering could be overcome. Winding back unemployment in the two countries with room to ease austerity (the US and the UK) would, in itself, deliver a substantial growth spurt. Sentiment in Japan is much improved, even if Abenomics has been more talk than substance so far.
Thanks to the sustained performance of the emerging economies, the IMF's forecast for global growth during this year and next is around the same pace as was achieved in the first half of the 2000s, which in turn was a bit faster than growth in the previous decade. Why, then, all the breast-beating about emerging economies? The policy message here is to spend less time fretting about the emerging economies and focus instead on sorting out the pathetic economic performance in most of the advanced world.
Originally published by The Lowy Institute publication The Interpreter. Republished with permission.