The big story of the last 20 years has been a tale of two worlds coming together. While the developed world experienced a decade of growth in the 1990s followed by stagnation and decline in the 2000s, the developing world saw nothing but growth. The two phenomena are related in the tremendous expansion of credit and general money supply over this time, and are now starting to come together. The developing world is feeling the pinch the same as the developed world.
This story first appeared in Barataria back in September 2012, but it’s now quite fashionable to talk of the end of the great boom in “Emerging Markets” (EM). They have, simply, started to either mature or fall back. And investors are trying to find the next wave of fantastic growth stories to invest in.
“The EM story is based on rapid growth, led by exports, which delivers large current account surpluses, which leads to the accumulation of foreign exchange reserves and the expansion of domestic credit,” according to David Lubin, head of emerging market economics at Citigroup. “Every single element of that story is no longer true.”
Some of the nations are quietly slipping back (Russia), others are finding ways to charge ahead and achieve superpower status (China), and some are seeking to normalized and mature into fully fledged developed economies (Brazil). The story is far from over, but the process of finding high-growth economies for global investment banks is going to be a lot stranger and riskier.
What we have seen in this period, however, is largely unprecedented in world history. Globalization has very much evened out the quality of life for people around the world, especially when you look at Purchasing Power Parity (PPP). This is a way of adjusting the size of an economy based on a basket of goods that can be bought locally – in short, because things are cheaper in a developing nation they can enjoy a good life with less money. Using this adjustment, half of the world’s net product comes from developing nations for the first time since such statistics were kept.
Arvind Subramanian and Martin Kessler of the Peterson Institute call it “convergence with a vengeance”. Rich, developed economies didn’t worry about growing balance of trade deficits with developing nations as new technologies such as the internet and containerized cargo hooked up the world. It was fueled by plenty of investment money that could fuel a rapid rise through global banks.
That can’t happen anymore. In many ways, the economic cycles that have strangled the developed world are finally catching up with the rest of the planet. It’s not possible for a nation to make a lot of money selling goods to the developed world because there just isn’t as much to give. It’s now up to the nations that experienced the big rises to normalize into consumer societies that generate their own consumption to keep it moving. A lot of credit and trade is no longer a ticket to a new generation of wealth.
Is this the end? Investment bank Goldman Sachs, who first proclaimed the rise of the “BRIC” nations (Brazil, Russia, India, and China) in the last 1990s is now focusing on the “Next 11” (N11). This is a strange grab-bag of nations that include the largely developed South Korea, hopeful Mexico, horribly unstable Turkey and Egypt, all along with isolated Iran. It’s going to be a lot more difficult to pull of the same trick twice, but big banks like Goldman are known for throwing the dice hard these days.
“Long-term, emerging markets remain one of the most attractive asset classes,” says Christopher Cordaro, chief investment officer at RegentAtlantic Capital. “We know they’re going to be volatile, and we expect EMs to be the most volatile asset class in our clients’ portfolios.” But they are still the story for big growth in the long term according to investors. That’s even as the US appears to be pulling out of the worst of our own depression and possibly turning a corner.
When will this end? As Barataria has noted before, inequity is harmful for long term growth. As the world becomes one big economy, we can expect that struggling nations will be a drag for everyone. The problem will persist until the world has evened out substantially.
That is still what is happening, even as the developing world slows down and starts to look like a much riskier bet. That will make safer investments in the US look good – assuming we can get our act together, that is. The stakes for everyone are a bit higher all the time, and that includes us here at home. A faltering global economy is not good news for anyone.