Finding the Magic Bullet
Emerging economies have been faced with a problem of late; they are not the engines of growth they used to be. Five years ago they seemed to defy economic gravity, while the rest of the world was crashing they were soaring, in the dark days of 2009 India grew at over 8% year on year, and China grew at over 9%. Other emerging countries like Mexico, Russia and Brazil had recessions in 2009 but exploded back to life in 2010 with the sort of recovery that happens after conventional recessions (imagine that). Brazil, India, China and Mexico all broke past the 7% mark in growth immediately after their slowdowns, making up for lost time. Now however, their shine has faded; China seems to be relying on blind luck to make its stated growth target of 7.5% and India’s growth rate has more than halved in 3 years to under 5%. Other emerging economies have seen slowdowns of this sort in the aftermath of 2010, what could be the matter?
Optimists state that this is simply an inflation squeeze by central banks and a series of unhappy coincidences. The stimulus measures taken during the dark times have caused inflation to surge in its aftermath, leaving central bankers with no choice other than to apply the brake. This certainly seems true for India; inflation skyrocketed to over 10% in less than a year after the crash and the Reserve Bank of India (RBI) has had to accommodate that by doubling the bank rate between 2010 and 2012. Brazil is another example, an inflation rate of over 7% occurred during its post crisis surge, and it was natural to expect the central bank to clamp down on inflationary expectations. On top of that, optimists argue, the crises that have rocked the west have caused panicked investors to flee into emerging markets, overvaluing their currencies. In Brazil, the rate on 10 year guilts actually fell despite a surge in inflation and Mexico’s 10 year guilts have fallen over the same period that inflation has increased. The theory goes that during the eurozone crisis and the 11th hour deals done in Washington, hot money flows had a damaging effect on economic potential, thus explaining the resulting slowdown. All governments have to do is have a cup of tea and wait for the inflation and market hysteria to blow over.
Whilst the optimists make salient points, to accept their argument would let policymakers off the hook in these countries. Brazil and India have been complacent in the way they have handled their economy in recent years, have not capitalised on their booms to drastically overhaul their dated infrastructure and have left further reforms by the wayside. China shows the most potential, significantly, it has removed its rail ministry, infamous around China for systemic failings year-round but particularly around the Chinese New Year, when it is under most pressure. Yet the Chinese authorities have kept silent on what is to replace the government department, barely concealing the same internal party squabbles that makes analysts second guess just how capable the Chinese are at economic management. Mexico has been distracted by its drug cartel and crime problem to do anything economically meaningful over the past 8 years. On top of that, the way Russia is headed it seems it was a mistake to dignify the country by putting it in the BRICs acronym at all.
Economic slowdown due to poor management is nothing new but this is more serious than usual for the countries concerned. Every moment India waits thousands of school-leavers and peasant boys from the countryside arrive in the cities to be confronted with a life of poverty and penury in the country’s slums. Brazil will be faced with 2 major international sporting tournaments where they have an opportunity to showcase what the nation is capable of; planners will be desperate to avoid the utter humiliation of Delhi’s failed Commonwealth games a few years ago and more capable governance is required to ensure that does not happen. China is faced with a race against time to beat their looming demographic mill saw and Mexico risks its crime problem getting worse if youngsters are left without an option other than crime.
This slowdown has started to have implications for firms in the west as well. The latest announcement from Aberdeen Asset Management’s chairman: Martin Gilbert would have had political pundits struggling not to use their “U-turn” catchphrase. The fact that AAM (a FTSE 100 company) is unwinding its key holdings in emerging markets, the central plank of its investment arm, is an indication of the concern that is felt by investors about this deceleration. There could be worries about where all the spare capital is going to go and what it may ignite but the simple answer is that nobody knows enough to speculate.
So if the BRICs are languishing, which countries have proved to be defying this contagion of poor economic management? South Korea, as always, has proved to be the most adept country in the developed world in economic stewardship, with non stop growth since the financial crisis, an inflation rate of only 1% and an unemployment rate of 3.2% you have to wonder if it’s something in the water. Chile has also proved a policy role model recently announcing over $15bn of infrastructure investments as well as a separate pot of money for private investors to chip into as well. Indonesia and Turkey haven’t got a good reputation for economic management but both have maintained investment in infrastructure and stepped it up, with FDI in Turkey an exponential of its former self. These countries have no major affectations in their demographics like China, no Indiana Jones wannabes like Russia’s Putin and no complacent policymaking like India or Brazil. They have never been bewitched by their own magnificence and never struck with a Manifest Destiny like belief in their own superiority. As a result these countries could be the new models for how to go from subsistence to splendour in under 50 years.