Emerging economies struggling to find new growth models
The end of debt-fuelled consumption in the West has seen growth in world exports slow
Cargo ships at Qingdao port in China: the export-oriented growth model pursued by many emerging economies needs to be rebalanced. photograph: reuters
Emerging markets stumbled from one crisis to another during the 1980s and 1990s, but their fortunes appeared to change for the better during the early years of the new millennium. A dollar invested in emerging market equities at the start of 2003 grew to $4.78 by the end of 2010, a return of 21.5 per cent a year, as compared with $2.02 or 9 per cent a year for a dollar invested in world equities.
Investment commentators hailed the arrival of a “golden age” for emerging market equities, but the outperformance did not last long.
Stocks in these markets have been nothing short of a major disappointment over the past three years; returns have trailed developed market equities by 11 percentage points a year since the end of 2010, and almost 24 percentage points over the last year alone. Has the emerging market story come to a premature end once again or is this just a cyclical blip?
The upturn in emerging markets’ fortunes got under way in 2003 and was driven by some unusually favourable developments that combined to produce growth rates that were well ahead of historical experience.
The tailwinds included: debt-fuelled consumption in advanced economies and the accompanying increase in the demand for emerging market exports; China’s integration into the global economy and the associated commodity super-cycle; the extensive availability of cheap external financing; and last but not least the widespread adoption of macroeconomic stabilisation policies.
Emerging market economies grew at an annualised rate of 7.5 per cent during the five-year period that immediately preceded the global financial crisis – more than double the growth performance registered during the 1980s and 1990s.
That robust performance saw the growth differential between emerging market economies and advanced economies jump from less than 1 per cent during the 1980s and 1990s to an unprecedented 5 percentage points in the pre-crisis period.
The astonishing emerging market growth leading up to the global financial crisis was heavily dependent on buoyant consumer demand in advanced economies, primarily the US. In very simple terms, China invested heavily in the infrastructure required to support its export sector, and benefitted handsomely from the West’s debt-fuelled consumption.
Meanwhile other emerging market economies focused on the commodities and semi-finished goods required to feed China’s vibrant, export machine.
The trade surpluses arising from emerging markets’ export-oriented growth models were recycled into low-yielding US assets. The accumulation of dollar reserves resisted the upward pressure on emerging market exchange rates and kept exports competitive. Additionally, long-term interest rates were pushed lower in the US, and the reduction in borrowing costs – in tandem with the resulting increase in house prices – allowed for the debt-fuelled consumption of cheap emerging market imports.
The export-led growth models were accompanied by the adoption of macroeconomic stabilisation policies across much of the emerging market world.
Inflation was largely tamed with the median emerging market inflation rate declining from almost 12 per cent by the mid-1990s to just 4 per cent in 2002.