Summary:
– The process of convergence between emerging countries and advanced countries is expected to be long and fraught with obstacles. According to Erik Orsenna, there are several reasons for revolts and blockages in emerging countries: infrastructure, the environment, the social model, governance, and culture.
– According to Yves Zlotowski, the slowdown in emerging countries is due to strong supply constraints, which are leading to a sharp deterioration in current accounts. However, emerging countries are now much more financially sound for two reasons: (1) monetary policies are responsive and (2) external debt is no longer held by the state and banks (systemic players) but by companies.
Even though the consensus is for global growth to be sustained by advanced countries in 2014, according to Jean-Claude Trichet, « we are very dependent on the dynamism of emerging countries. » Indeed, emerging Asia and Latin America are rich sources of growth.
The various reasons for revolts and blockages in emerging countries
In his introduction to the round table discussion on emerging countries, Erik Orsenna, economist, writer, and member of the Académie française, listed five reasons for revolts and blockages in these countries, without ranking them:
- Infrastructure: « transport links spaces together. » The lack of infrastructure in emerging countries makes trade between these countries difficult. This is why trade is more North-South than South-South or even West-East. The isolation of certain emerging countries, particularly in Africa, makes the lack of infrastructure even more damaging.
- The environment: water scarcity is a key constraint. However, this scarcity is not always persistent; it is sometimes due to a lack of investment (desalination processes, construction of irrigation canals, etc.). Air quality is becoming a major issue, particularly in China’s large cities, where the air is difficult to breathe for several months of the year.
- The social model: emerging countries must refocus their growth model on domestic consumption, which requires the emergence of a genuine middle class with a strong propensity to consume.
- Governance: the example of Africa is very evocative of the governance problems faced by emerging countries. Corruption, the highly questionable quality of the rule of law, and high crime rates make it difficult for a true private sector to prosper.
- Culture: the status of women in emerging countries is improving, but there are still several downsides. Women have limited access to education and the number of children per woman is sometimes very high, too high in relation to the number of jobs available in these countries.
Emerging countries: a slowdown linked to supply constraints
According to Yves Zlotowski, chief economist at COFACE, the slowdown in emerging countries is mainly due to significant supply constraints. While consumption remains relatively dynamic, investment has slowed significantly (from +12% before the crisis to +3% today). This supply constraint is leading to a sharp deterioration in current accounts, which is particularly visible in a group of countries now known as the « fragile five » (Brazil, India, Indonesia, South Africa, and Turkey). However, according to Yves Zlotowski, the situation is very different from that which prevailed in the 1990s during the wave of economic crises in emerging countries.
Today, emerging countries are much more financially sound, for two reasons: (1) monetary policies are responsive (central banks are raising rates) and (2) external debt is no longer held by the government and banks (systemic players) but by companies. As a result, even if systemic risk seems to have been averted (hard landing in China, high government and bank debt), idiosyncratic risk must once again be approached in the traditional manner. In this regard, eight countries should be closely monitored this year: Brazil, Turkey, Tunisia, Morocco, Egypt, Romania, Hungary, and South Africa. The currencies of these emerging countries were already battered in 2013, and the turbulence is likely to continue in 2014.
In addition, some large emerging countries are experiencing structural problems: rising labor costs, particularly in China, a shortage of skilled labor, and governance issues that are causing concern for investors in advanced countries. Furthermore, 2014 is an election year in many emerging countries, and political tensions in some of these countries appear to be a major issue for this year. Elections in Brazil, India, Turkey, South Africa, and Argentina will be closely watched.
After the BRICS, which other countries show promise?
The round table discussion on this question highlighted several key points. Overall, all participants emphasized the efforts that need to be made in terms of infrastructure in all emerging countries.
According to Munir Jalil, chief economist at Citibank for the Andean region, Colombia and Peru have strong growth potential (catching up) compared to Latin American economic standards. In addition, these two countries can boast healthy growth, based mainly on domestic consumption.
According to David Carbon, chief economist at DBS Bank, Asia has rapidly growing domestic demand: « Asia adds a new France to its landscape every two and a half years. » Furthermore, emerging countries have considerable room for maneuver to increase their deficits, unlike developed countries, which have every interest in increasing their surpluses, which is not yet the case for either group.
According to François Heisbourg, special advisor to the president of the Foundation for Strategic Research, « some countries are experiencing their own May 1968. » This is the case in Thailand, Turkey, Ukraine, and Indonesia.
Finally, 2014 is a big election year in many emerging countries. For some (Brazil, Colombia), things should go smoothly, but for others (Indonesia, India), clashes are to be expected before, during, and after the elections.
Julien Moussavi and Samuel Delepierre
References
S. Delepierre (2013), » Growth and global wealth: the great rebalancing , » BSI Economics.
M. Ferry (2014), « African businesses: the time is now, » BSI Economics.
S. Ganem (2013),« Another BRIC in the Wall, » BSI Economics.
C. Keddi (2013), » What colors are the signals sent by Algeria? », BSI Economics.
L. Lizarzaburu (2014), » Peru: a new model of fair trade, » BSI Economics.
J. Moussavi (2013), » When the Fed sneezes, emerging countries catch a cold! » BSI Economics
