GDP growth. (Source: IMF WEO Chapter 1.)
The latest IMF World Economic Outlook (WEO) records a watershed moment for the global economy. In terms of purchasing power GDP, the emerging and developing economies are now clearly larger than the advanced economies. Moreover, they have accounted for three-quarters of global growth since 2009 and make up two-thirds of forecast global growth.
Since mid-2011, the emerging economies in aggregate have maintained a stable pace of expansion, with minor deviations, of around 5%. The Fund forecasts this to be a touch faster during the next two years (see graph above).
Yet the Fund continues to articulate concerns about the sustainability of emerging-economy growth. IMF Managing Director Christine Lagarde told the G20 meeting in September: 'Just as some advanced economies have begun to gather momentum, many emerging markets are slowing'. The latest WEO notes that 'downside risks to growth in emerging market economies have increased even though earlier risks have partly materialized and have already resulted in downward revisions to the baseline forecasts.'
This disconnect between the Fund's down-beat words and its actual forecast figures may be coloured by its interpretation of emerging economy evolution during the past two decades.
In the current WEO, the Fund devotes a whole chapter to examining the impact of the advanced economies on growth in the emerging economies. To do this, the Fund averages the growth of the main emerging economies over the period since 1997 and analyses the deviations around this average. The fundamental difference between the unsustainable pre-2008 period and the sustainable post-2010 period gets lost in this averaging process. [fold]
The more nuanced narrative goes like this: in the decade or so leading up to the 2008 crisis, there was an atypical 'alignment of the planets'. China continued its head-long development pace, putting huge resources into government-sponsored investment while at the same time clocking up a massive export surplus. India, hobbled for decades by limitations encapsulated in the term 'Hindu growth rate', turned in a performance close to that of China. Brazil, which for decades had been disparagingly (or despairingly) called the 'country of the future', chronically unable to realise its potential, got its act together.
All of this, however, was unsustainable.
The world was not going to allow China to continue its disruptive external imbalance, running an export surplus equal to 10% of its GDP. Global saving was excessive and China was seen as the main culprit. India and Brazil flopped back into their traditional disappointing sub-par growth mode. To calculate a baseline growth rate by averaging these two fundamentally different periods is to miss the underlying shape of the growth profile.
The 2008 crisis represents the inflection point in emerging-economy growth. Once the advanced economies went into slump, the planets were knocked out of alignment. This was temporarily masked by the 2009 world wide stimulus. China, for example, recorded 12% growth in 2010, thanks to its enormous boost to credit. This stimulus couldn't be maintained and by mid-2011 growth in China, and in the emerging economies more generally, had fallen to a level substantially lower, but more sustainable, than the break-neck pace of the pre-2008 decade.
An alternative explanation for the Fund’s heightened risk-concern for the emerging economies is that it fears a big impact from the unwinding of US quantitative easing (QE). Given the US Fed's rhetoric, this is understandable. The Fed is going out of its way to emphasise that it will take a narrow, domestically oriented view of the unwinding, without any concern for other economies. Both Janet Yellen, the current Chair, and Ben Bernanke, her predecessor and the 'godfather' of QE, seem defiant on this. When Raghuram Rajan, the Indian central bank governor, complained again that QE was adversely affecting emerging economies, Bernanke is reported to have 'taken him to task' for his views.
Whatever the merits of this argument (and Rajan seems to have the best of the analytical points), QE tapering last year didn't, in practice, do much harm. The shocks to exchange rates and equity prices in the 'fragile five' emerging economies were easily absorbed. If you are going to worry about the collateral damage from unwinding QE, you might worry more about the effect on Europe, with its under-capitalised banks, huge official debt burden and doubtful private-sector debts.
Perhaps the best approach is to focus on the Fund’s actual forecast figures for the emerging economies, rather than its articulated concerns about risks. Not only does the Fund's forecast of continuing good growth numbers seem well founded, but the accumulated growth performance in recent decades has given these economies the heft to remain, permanently, the main drivers of global growth. Today's China, growing at around 7%, contributes as much to global growth as the much smaller pre-2008 China did when it was growing at 10%-plus.
Tony Abbott's Asian tour-team can hardly fail to have noted Australia's geographic luck. Now all we have to do is make the most of it.