5 September 2019

Is Rapid Growth in Emerging Markets Over for Good?

For much of the first two decades of the current century, it has been emerging markets that have provided an increasing share of the growth for the global economy, with emerging markets growing on the average three times faster than their developed counterparts since 2000. In the years between 2003 and 2013, emerging markets expanded by an astounding 6.5% per year, while developed economies could only generate growth of 1.7% per year during that period. However, since 2014, only emerging markets in Asia and a small number of non-Asian emerging markets have been able to maintain relatively strong rates of growth, with overall emerging market economic growth falling to 4.6% per year over the past five years.  

Those emerging markets that have fallen on hard times in recent years have either suffered from low levels of export competitiveness, or have been battered by the overall decline in commodity prices since 2014.  It was initially believed that this downturn in emerging market growth would be a temporary situation and that higher rates of growth would return.  However, there are increasing signs that this emerging market slowdown could in fact be a long-term development, one that could have massive repercussions for the global economy and for international security. 

The latest economic data coming out of emerging markets has confirmed that this slowdown is continuing, even in faster-growing emerging markets in Asia.  For example, China’s official rate of economic growth fell to 6.2% (year-on-year) in the second quarter of this year, and its actual rate of growth is probably much lower.  The slowdown in India has been even more acute, with growth there slowing to a much-worse-than-expected 5.0% in the second quarter.  

Elsewhere, recent economic results have been even more disconcerting.  In Latin America, the region that has recorded to lowest overall rates of economic growth in recent years, the region’s largest economy, Brazil, is struggling to generate any growth, while that region’s second- and third-largest economies (Mexico and Argentina) both shrank in the previous quarter.  In fact, less competitive and commodity-dependent emerging markets are continuing to struggle and these struggles appear far from over. With more poor economic results expected from emerging markets in the months ahead, this entire segment of the global economy appears to be in a severe crisis.

In the span of just a few years, emerging markets went from being the great hope for the global economy to a significant concern.  There are many reasons for this dramatic change in fortunes, including:

  • The Global Trade War: Most emerging markets remain dependent upon exports to generate much of their economic growth, so the threat of reduced access to key export markets has led to falling levels of exports and foreign investment.
  • Trade and Investment Slowdown: Even before the recent trade disputes, trade and investment growth rates had fallen substantially since the global financial crisis, reducing opportunities for growth for most emerging markets.
  • Localization: In recent years, many key manufacturing and service sectors have turned towards localization in order to provide more timely and specialized goods and services to their most important markets, often in developed economies.
  • Risk Aversion: Business and investor confidence levels were battered by the global financial crisis, and while they recovered somewhat in the early part of this decade, they have been trending sharply downwards over the past couple of years.
  • Demographics: Birth rates have been trending downwards in almost all of the world’s leading emerging markets in recent decades and this has led to stagnant or declining working-age populations in most of these countries.
  • Commodity Prices: Too many emerging markets failed to properly diversify their economies, leaving those emerging markets that are dependent upon commodity exports dangerously exposed to downturns in commodity prices.

With overall emerging market economic growth having fallen below 5% for each of the past five years, the question now is whether or not this is a permanent slowdown or something that can be reversed.  For developed economies, growth has trended steadily downwards over the past 50 to 60 years, so could emerging markets be in for a similar long-term decline?

It was long assumed that emerging markets would continue to close the wealth gap with many of their developed counterparts, but for some emerging markets this no longer appears likely.  Much of the closing of this wealth gap between developed and emerging markets was the result of the opening of the global economy that allowed manufacturing operations (and to a lesser degree services) to be transferred to emerging markets.  Now, this open global economy may be in the process of closing somewhat, threatening emerging markets’ access to the exports markets and investment sources found primarily in developed economies.  Should this trend continue, many emerging markets will find its very hard to generate wealth and growth, leading to what could be a very long-term period of sluggish growth and growing popular discontent.

As recent developments have shown, this is a very crucial time for the world’s emerging markets.  In order to reverse their recent losses, emerging markets must protect and enhance their access to key export markets and sources of investment.  Likewise, emerging markets must also do whatever they can to boost domestic wealth levels in order to lessen their dependence upon export markets and foreign investment.  Together with a necessary diversification of their economies, this would allow emerging markets to be less exposed to external shocks and better placed to achieve more stable rates of long-term growth and development.  Finally, many emerging markets must do more to shore up their financial situation, as higher levels of global volatility and falling levels of business and investor confidence are leaving those emerging markets with weak financial positions in severe danger.  

Only those emerging markets that managed to achieve each of this goals will be assured of continued growth and development in a shifting global economic landscape.  If not enough emerging markets can achieve these goals, it is safe to say that the glory days of emerging market growth have truly come to an end.