Economic models predict a bright future for the emerging world. But a lot of variables remain unaccounted for
The Bric’s growth create the equivalent of an Italy every year, said Jim O'Neill - the man who first coined the 'BRIC' acronym - at an IPPR seminar I attended last Monday. China itself, he reckoned, adds a Greece to global output every 4 months.
His argument was rather straightforward: whatever goes on in the West, the emerging world keeps growing. So much so that the global economy would increasingly depend on these 'Growth' markets (he didn't like the catch-all 'Emerging' label), and less and less on whatever happens to Greece, the eurozone, or even the G7. A good thing, since this would propell the world economy forward for decades on - despite slackening growth in the West.
For a moment, it felt good to hear such words. Anyone concerned by the eurozone debt crisis, its under-capitalised banks, and the pain of austerity must have felt relieved that the outcome of all this is already written somewhere - and that, by the sound of it, it's a rather happy one. But the initial feel-good effect gradually dissipated, and doubts soon settled in. Was Mr O'Neill right to be so confident?
The data was certainly compelling. According to Goldman Sachs Asset Management, the Brics will contribute more than 50% of global growth this decade and the next, and represent close to 40% of World GDP by the middle of the century. Emerging Markets as a whole will contribute up to 80% of global growth over the next 40 years, and reach 73% of global GDP by 2050. This will allow the world economy to clock a 3.8% average growth rate this decade - more than the 3.2% it commanded during the last two.
This rebalancing will have a deep impact on the structures and patterns of the World economy. Emboldened by their growing economic clout, emerging powers will soon knock on the door of global institutions - and ask more for their money. The monetary system will have to adapt to the rise of new economic giants, with the Chinese Renmibi and the Russian Rouble likely to become international currencies pretty soon. Consumers and investors from the growth economies, looking for bargains will come en masse to do their shopping in the West. And so on.
And yet, Jim O'Neill said, Western anxiety is misguided and counterproductive. This rebalancing, of course, will be massively disruptive. But it will also pull the World Economy forward, something the West is now unable to do. And it already offers unprecedented opportunities: look at Germany, who now exports more to the Brics than France. Rather than drowning in nostalgia, developed nations should toughen up their competitive advantage and open up their economies. And so concluded our speaker: there is space for everyone under the shifting sun – the West just needs to move on.
Stefan Wagstyl, who had the tricky role of respondent, had no issue with these prescriptions. As an Emerging Market editor for the FT, he was hardly going to disprove the pro-market, outward-looking remedies M O’Neill advocated. Neither did he criticize the broad picture painted by Goldman's economic models. What he had issues with, rather, was what any model leaves out of the picture - the unpredictable.
There’s a lot we don’t know about the emerging world. On the cyclical side of things, more economic and financial and financial crisis could be in store. The West has just seen one that's going to affect world growth figures for years to come. And the emerging world has had many more before that, with the Asian crisis in 1997-1998, the Russian default in 1998-1999, Brazil, Argentina, Turkey in the early 2000s. Yet models can’t foresee such discontinuities: financial crisis are ‘tail-risk’ events, to which no one can assign a probability.
When ironing out the effect of economic cycles, uncertainties of an unquantifiable kind remain: those attached to the EM’s economic structures. Take the role of the state, for example. As a special report in the Economist brilliantly explains, state-owned or state-backed companies dominate most of the emerging nations’ strategic industries, and spearhead their global expansion. But state capitalism carries inherent, imponderable risks. They are less productive and less innovative than private ones. They are often used to pursue political motives rather than commercial ones and siphon out a country’s talents and capital. And they end up breeding cronyism, inequality, corruption, and eventually discontent - Egypt's experience with state capitalism, under Mubarak, eventually led to the regime's collapse. Who can safely bet that state-capitalism will generate sustainable growth for the next four decades?
Neither would you bet too much on the stability of the emerging world’s political structures. Empirical studies have long established that when nations get closer to $10,000, their political system gradually welcomes democratic change. But living standards rise much more slowly than GDP, and many countries are still far from crossing the prized threshold. Even those close to reaching these heights, like Russia and China, don’t always fit in the model. So there again change could be fast, violent - and unpredictable.
The bottomline is that Goldman's models, just like any models, are inherently limited. Their beautiful, smooth curves fail to render future discontinuities. Does this imply that Stefan Wagsyl was right and Jim O'Neill was wrong last Monday? Not really: both agreed that, within 50 years, 'growth economies' would be majority shareholders of the world economy. Rather, the debate revealed that they were looking at two different parts of the curve. Jim O'Neill, looking at the World Economy's eventual destination, foresaw that eventually all its shareholders should be better off. Stefan Wagsyl, focused on the long journey to get there, warned it could be a rocky one.
Such an open conclusion, I imagine, didn't give anyone looking to invest in the Brics much to get their teeth into. But everyone else, including myself, enjoyed the seminar - and went back to work with good food for thought.