In­dia is Part of Fab­u­lous Five, Not Frag­ile Five

Here is a 10-step pro­gramme for un­der­stand­ing emerg­ing mar­kets

The Economic Times - - World View - Jim O’Neill

In a re­cent round of con­fer­ences about the so-called emerg­ing-mar­ket economies, I of­ten found my­self at odds with other an­a­lysts and had to keep mak­ing the same points re­peat­edly. To save time in the fu­ture, here they are: The emerg­ing economies are more dif­fer­ent from one an­other than they are alike. China is big­ger than Ger­many, France and Italy com­bined, even in cur­rent dol­lar terms. On the ba­sis of new pur­chas­ing-power-par­ity es­ti­mates, China might al­ready be as big as the US, South Korea is as rich as Por­tu­gal and not far be­hind Spain: it has plenty in com­mon with those “ad­vanced economies” and noth­ing in com­mon with the “emerg­ing mar­kets” of Africa. The mood of the mar­kets is some­times good for a laugh, but not much else. At one of the con­fer­ences, I was as­signed this ques­tion: “Is this emerg­ing-mar­ket cri­sis go­ing to be as bad as 1998?” This was in March. For the year to date, with the im­por­tant ex­cep­tions of the Chi­nese and Rus­sian mar­kets, vir­tu­ally all emerg­ing-mar­ket eq­uity in­dexes are show­ing stronger gains than the US, many of them at dou­bledigit rates. Let’s stop sup­pos­ing that the ad­vanced economies can have a good re­cov­ery while the rest fall back —let alone fall as far as they did in 1998. In dif­fer­ing de­grees, the US, Europe and Ja­pan all need to ex­port their way to a full re­cov­ery from their post-2008 dol­drums. If their ex­port mar­kets in Asia and Latin Amer­ica col­lapse, that won’t hap­pen. The idea that the de­vel­oped world is back while the emerg­ing-mar­ket economies are in trou­ble doesn’t add up. Let’s stop talk­ing down China’s eco­nomic strength. Many com­plain that its of­fi­cial sta­tis­tics are in­flated: partly, I think, this re­flects the be­lief (or hope) that a non­demo­cratic coun­try is bound to fail. Skilled China watch­ers are ap­pro­pri­ately scep­ti­cal and look at other in­di­ca­tors as well. They find that China’s growth is no il­lu­sion. Bear in mind, too, that China’s govern­ment re­sisted the new PPP re­vi­sions be­cause they showed the econ­omy to be larger than the au­thor­i­ties want to ac­knowl­edge (for pur­poses of de­vel­op­ment as­sis­tance and global obli­ga­tions). Re­lat­edly, the global econ­omy is do­ing bet­ter than many sup­pose. Thanks to China and other large emerg­ing economies, growth in global gross do­mes­tic prod­uct will ap­proach 4% a year over the course of this decade, ac­cord­ing to the In­ter­na­tional Mon­e­tary Fund — higher than in ei­ther of the pre­vi­ous decades. The new PPP data sug­gest that the world econ­omy is grow­ing even faster than the con­ven­tional mea­sures sug­gest: even at a sup­pos­edly slow rate of 7%, China will con­trib­ute more than twice as much as the US to this year’s rise in global out­put. Much of China’s slow­down is de­lib­er­ate, part of an ef­fort by the govern­ment to shape a more sus­tain­able and bal­anced econ­omy. China’s slow­down will help some and hurt oth­ers. Coun­tries such as Aus­tralia and Brazil are prob­a­ble losers be­cause they de­pend on ex­ports of com­modi­ties. In­dia and Mex­ico are prob­a­ble win­ners be­cause ris­ing Chi­nese wages will help their com­pet­i­tive­ness. Don’t con­fuse do­ing the right thing with be­ing lucky. Many emerg­ing economies have done well dur­ing the past 10 years be­cause of China’s boom and the US’s be­nign mon­e­tary pol­icy, not be­cause of good pol­icy at home. Recog­nis­ing the im­por­tance of out­side forces un­der­lines the need for re­silience — be­cause ex­ter­nal fac­tors can eas­ily be­come less be­nign. Be care­ful with la­bels like “frag­ile five.” The term was coined for Brazil, In­dia, In­done­sia, South Africa and Turkey. Eq­ui­ties in In­dia and In­done­sia are up about 15% for the year to date, re­flect­ing bet­ter per­for­mance and hope for bet­ter pol­icy. Turkey, de­spite ev­ery­thing, is up 12%. Even with Brazil and South Africa show­ing more mod­est gains, “fab­u­lous” might have made more sense than “frag­ile.” Cer­tainly there were far worse places to in­vest — such as Ja­pan, per­sis­tently praised by an­a­lysts and down 15%. Of the 15 most pop­u­lous emerg­ing economies, only China, Mex­ico and Rus­sia are show­ing neg­a­tive per­for­mances for the year to date. Al­ways look to these fac­tors: mar­ket val­u­a­tion, cycli­cal prospects, struc­tural bar­ri­ers and op­por­tu­ni­ties, and the out­look for pol­icy above all. Granted, low-in­come economies such as In­dia and China have op­por­tu­ni­ties for catch-up growth that the US doesn’t, but aside from that, it doesn’t much mat­ter whether an econ­omy is “emerg­ing” or “ad­vanced.” Don’t let those terms be a sub­sti­tute for think­ing about what counts.

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