HONG KONG – It is no secret that emerging economies are facing serious challenges, which have undermined their once-explosive growth and weakened their development prospects. Whether they return to the path of convergence with the advanced economies will largely depend on how they approach an increasingly complex economic environment.
Of course, these economies’ development path was never simple or smooth. But for most of the post-World War II period, until as recently as ten years ago, it was relatively clear-cut. Countries needed to open their economies at a sensible pace; leverage global technology and demand; specialize in tradable sectors; pursue a lot of investment (some 30% of GDP); and promote foreign direct investment, with appropriate provisions for knowledge transfer.
Throughout this process, the emerging economies recognized the importance of allowing market mechanisms to work, guaranteeing property rights, and safeguarding macroeconomic and financial stability. Perhaps most important, they knew that they had to focus on generating employment, particularly in urban areas and modernizing sectors, and on inclusiveness more broadly.
As they pursued this agenda, emerging economies experienced stuttering starts and numerous crises, often associated with excessive debt, currency traps, and high inflation. And, upon reaching middle-income levels, countries confronted the policy and structural pitfalls that accompany the transition to high-income status. Nonetheless, in an increasingly open global environment, characterized by strong growth (and demand) in the advanced economies, the emerging economies managed to make huge and rapid progress.
That all changed after the 2008 global financial crisis. To be sure, the core of the development agenda remains the same. But it is vastly more complicated.
One set of complications arises from external global imbalances, distortions, and heightened volatility in capital flows, exchange rates, and relative prices. Given that such challenges are essentially new, there is no proven roadmap for overcoming them. After all, the developed economies have not previously engaged in the kind of unconventional monetary policy seen in recent years – a period characterized by ultra-low interest rates and ultra-fast cross-border capital flows.
For the emerging economies, with their relatively illiquid financial markets, such trends encourage over-dependence on low-cost external capital, which can be withdrawn in a heartbeat. Rock-bottom borrowing costs also spur excessive reliance on leverage, weakening the will to undertake reforms needed to boost potential growth – and further exacerbating the economy’s vulnerability to a shift in interest rates or investor sentiment.
Making matters worse for the resource-rich emerging economies, commodity prices have plummeted since 2014. After a prolonged period of accelerating demand growth, notably from China, governments came to regard high commodity prices as semi-permanent – an assumption that caused them to overestimate their future revenues. Now that prices have dropped, these countries are facing huge imbalances and fiscal strain. And governments are not alone; the private sector, too, relied on rosy assumptions to justify imprudently high levels of leverage.
Slower growth in the advanced economies has also weakened trade flows, adding to the headwinds. As Mohamed El-Erian has observed, in the global economy, your neighborhood – the economies to which you have economic or financial links – matters. That is all the more true for the emerging economies, which have become highly dependent on their neighbors.
In short, emerging economies have been challenged by externally generated macroeconomic shifts, unconventional monetary policies, widespread volatility, and slow growth in developed markets. Without much of a playbook to guide them, it is unsurprising that their ability to cope with these challenges has varied considerably.
Generally, those that have fared better, such as India, have combined sound growth fundamentals and reforms with pragmatic and activist measures to counter the external sources of volatility. India has also, of course, benefited from lower oil prices.
Commodity exporters like Brazil have struggled more, but not just because of falling natural-resource prices. In fact, the decline in prices, together with the reversal of capital flows, exposed weaknesses in the underlying growth patterns that had previously been masked by favorable conditions.
Now there is yet another challenge, which is becoming larger by the year. Whichever path emerging economies choose for addressing these challenges must also account for the fundamental shift driven by digital capital-intensive technologies. While digital technologies have created new kinds of jobs in high-tech sectors and the sharing economy, among others, they have been reducing and dis-intermediating “routine” white- and blue-collar jobs.
Here, rapid advances in robotics are particularly relevant, as increasingly sophisticated machines threaten to supplant low-cost labor in a variety of sectors. The high fixed and low variable costs of these technologies mean that once robots become more cost-effective than human labor, the trend will not reverse, especially given that automated assembly can be located close to markets, rather than where labor is cheapest.
Jobs in electronics assembly, which plays a huge role in global trade and has helped to drive growth in many emerging economies – notably, China – are particularly vulnerable. While trades involving sewing – textiles, apparel, shoes – are not yet being automated much, it is probably only a matter of time before they are.
As the classic sources of early comparative advantage dwindle, countries – particularly earlier-stage developing countries – will need to implement policies that feature services (including tradable services) more prominently; they will also need to adjust their investment in human capital. Whether this amounts to removing the bottom rungs on the ladder of development remains to be seen. The relatively unconventional growth pattern in India, with its early emphasis on services, may hold important lessons.
In any case, the developing countries – and especially the emerging economies – clearly have a lot on their plates. As these economies add items – protecting themselves from volatility, countering unfavorable external conditions, and adapting to powerful technological trends – to their core structural growth agendas, they will invariably make mistakes, and even stumble. This will produce high variance in performance across countries and probably reduce the average pace of convergence. But it will not, in my estimation, derail convergence completely.
Comments
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Comment Commented Monica Giraldo
Beautiful written, as the initial phrase says the post does not say anything new that an economics reader hasn't read before. I would expect more from this professor. What about proposing some solutions? Read more
Comment Commented Ken Verrett
Many of the mistakes and challenges of the developing countries could also be noted in the advanced countries. All fell prey to unbridled optimism and greed, few invested in education and infrastructure. The AI and robotics trends arrive in advanced countries weakened by unemployment and decades of wage stagnation. The added pressures will threaten consumption, demand, and social stability. All these will impact global demand. A contagion could result. Read more
Comment Commented jagjeet sinha
Three billion in Asia need to uplift themselves - into Urban Home owning Asset rich millionaires.
Three billion cannot migrate to Vancouver Brisbane Seattle and San Francisco.
Three billion cannot migrate to Hong Kong Singapore Shanghai and Beijing.
Thirty MegaCities in China, Thirty MegaCities in India, Thirty MegaCities in ASEAN - will keep World Demand perpetual.
All the IMFs World Banks ADBs - will not be able to cater to their Himalayan Demand Mountains.
The reignition that the Author is looking for must be based on Value Creation - not necessarily export based.
And even if it is to be export based - the biggest export will be Developed Lands, like Vancouver and Brisbane Real Estate being snapped by the migrating Chinese, like Singapore and Hongkong Real Estate being snapped by migrating Chinese and Indians, like London and New York Real Estate that were snapped in an earlier era.
Am a trifle surprised that Professor Spence did not focus on this key ingredient in the chemistry needed for reignited emergence.
Unless my vision is blemished. Read more
Comment Commented Jose araujo
In the economic science we know from decades the pitfall of export substitution growth models. You kill by the sword and you die from the sword, so if a country has been basing the development policy by feeding the export industries and neglecting the development bases of the country (better institutions, better infrastructure, qualified work force, good health and social security, etc) why are they complaining now?
What’s even more interesting is that instead of admitting the strategy was an error, there are now a number of economists willing to double down the bet, and prescribing the traditional recipe of low wages and job flexibility…. Like that would even matter in countries with very low wages and where you can be fired on the spot….
I also would like to know where the idea that developing countries had a sudden inflow of direct investment, came from… No it wasn’t a flow of direct investment it was the off shoring of private profits with the counterpart of corporate loans…
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Comment Commented Gerry H
When growth no longer happens, nobody can grow anymore, what's so surprising about that? '08 smacked it all down and there's no magic button to start it up again. The growth was a self-sustaining phenomenon but now that its gone, it has dropped down to a zero baseline. The solutions sitting on the horizon are not the old solutions but an entirely new mix of technologies that did not exist before, like robotics or IT combined with Big Data. The machinery of exploitation of emerging countries may not start up again at all, and the trickle down wealth disappear. It's a new age needing new solutions, those who can find the effective ones will be the ones to get ahead. Read more
Comment Commented Michael Public
All these countries are so different. China has emerged - being the largest economy worldwide on a PPP basis. Others never really emerged in any way - they were just riding the wave of investment into Brics which was based on a promise of 'above average GDP growth' which was probably only a phantom. Russia, Brazil and South Africa have gone down the tubes. India is doing ok. Nigeria was an oil boom. India's has remained stable but they certainly have not emerged in the way China has. Read more
Comment Commented Steve Hurst
'...emerging economies ... knew that they had to focus on generating employment, particularly in urban areas and modernizing sectors...'
This is mimicing the industrialised countries as a strategy. Whilst this is understandable it dioes have its problems. Whilst the technology gap between developed and emerging economies is converging in some areas on the whole emerging economy technology bar a few hotspots is based on the West offshoring mature product and mature production capacity. This route may well hit head-on the next tech development outcome - AI / robotics. Foxconn in China has recently cut 60K workers by utilising robots. Generally opinion appears to suggest emerging economies may well be more affected than the West by AI. Furthermore the likely response longterm in the West to AI impact of introducing a basic income is likely to be more difficult to implement in emerging economies.
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Comment Commented Jose araujo
Industrialization was helped by dumping bad products into colonies, something that nowadays can't be done.
Very hard to develop a country based on exports when you are competing in todays economy. Most probablt you will end-up in country with low wages and obsolete technologies and industries, unless you follow the Korean way... Read more
Comment Commented Val Samonis
Emerging or Developing economies always benefit from developed countries pushing the tech frontiers of the globe; that is why emerging markets will continue to slowly catch-up with the developed countries that should continue this global division of labor in tech development; they have money, people, universities. Read more
Comment Commented Jose araujo
Most of the countries used the profits from the commodities boom to fuel the oligarchie, and forgot about the infra structures of the country.
They didn't invest on Schools, Hospitals, Roads, police, etc instead the bought houses in London, Paris and New York... Read more
Comment Commented Jose araujo
So not a word for the need that development economies have to invest on infra-structures. Build better roads, build hospitals schools, universities, etc
And then we are puzzled to verify that all things remain the same in this countries....
Trade in not an end in itself, it should be done with a purpose, and so its capital accumulation.. The goal has to be the development of the country, specially its institutions and infra-structures.
What is also very curious is that tis countries 2 years ago were looked upon like the way to go for the developed world... go figure... Read more
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