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The author is Chairman of Rockefeller International
“Resilience” is one of the buzzwords of the year. It’s often used to describe the US economy, which continues to ward off a recession and spur global growth despite the sharpest hikes in interest rates in decades. But there’s an even more startling story about the strength unfolding in the developing world.
Of the top 25 emerging markets, three-quarters of those reporting data this year beat growth forecasts, with some including India and Brazil significantly. Forecasts for global growth in 2023 are rising and most of this rebound is coming from emerging markets.
Few analysts foresaw this revival. They assumed that emerging markets would be particularly vulnerable to rising interest rates and that this view still prevails, based on the weaknesses of China, which is burdened by its high debt, and some smaller countries such as Ghana or Bolivia. However, this picture excludes the major developing countries outside of China, from India to Mexico, which account for half of emerging economies by economic output and more than half by population.
While rising interest rates fueled emerging market crises in the 1980s and 1990s, many of the major emerging economies entered the 2020 pandemic with repaired banking systems and increased financial discipline. They borrowed less for stimulus programs and saw an average increase in deficits of 15 percent of gross domestic product from 2020 to 2022, half that of the US. The old notion that “show up” is another word for ruthless no longer applies.
Now it is American history that rests on questionable foundations. The US stock market is bouncing back, thanks in part to the boom in artificial intelligence which, like all mania, is likely to prove part hype. Meanwhile, economic growth is being kept alive by the multi-billion dollar stimulus funds still sitting in US savings accounts and by the fact that financing conditions remain much looser than the Federal Reserve would like. Despite the magnitude of the rate hikes so far, the Fed expects more rate hikes to follow before inflation is brought under control.
In comparison, central banks in emerging markets are closer to hitting their inflation targets – and cutting rates again, having hiked rates before the Fed. Normally, inflation is much higher in emerging markets, but excluding outliers, the median rate is now 5 to 6 percent – no higher than in developed economies. That hasn’t happened in four decades. Some central banks in developing countries have started cutting interest rates, and many others are likely to follow soon.
Emerging markets are expected to grow by more than 4 percent on average in the coming year, four times faster than developed countries. Although developing countries tend to grow faster than developed countries, this gap has narrowed over the past decade and is now widening again. And money follows growth: foreign investment in the major emerging markets is increasing. Their currencies have appreciated against the dollar since late last year.
While the US budget deficit is likely to remain unusually high into the 2020s, it is already on the way down in most major emerging markets. As a result, the recovery in emerging markets could be more sustainable.
Nonetheless, commentators keep warning of impending crises in emerging markets, as if nothing has changed. In the 1980s and early 1990s, never fewer than 25 emerging markets defaulted, often including large emerging economies such as Brazil and Turkey. Today there are only five, all small ones like Belarus and Zambia.
Although the major emerging markets are generally in good financial shape, each has its own strengths. So far this year, much of Asia has seen an upswing on strong domestic demand. In Latin America, exports, especially commodity exports, are the main driver, with prices remaining stable. Net exports contribute 2 percentage points to growth in Latin America and as much as 8 percentage points in Chile – thanks in part to sales of metals used in electric vehicles.
They are also “decoupling” from China. Emerging markets used to grow in lockstep with China, their main trading partner, but this link has weakened in recent years. As Beijing turned inward, developed countries sought to reduce their reliance on trade with China, opening up opportunities for other emerging economies.
The developing world never fits exactly into a storyline. There are 155 emerging markets, and if tightening financial conditions eventually trigger a recession in the US, as many still expect, it will spread outward and provoke anger in some of them. But to use that catchphrase, your story so far is a story of true “resilience.”
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