While emerging markets continue to grow and their share of the world gross domestic product in purchasing power parity increases every year (from approximately 40 per cent in 1997 to 55 per cent in 2013), there are some significant shifts taking place.
First, the pace of growth in all of the larger more established emerging markets of the BRICS (Brazil, Russia, India, China and South Africa) has dramatically slowed down. In all likelihood, the 10 per cent growth rates from the likes of China are now history. We will not see double-digit economic growth rates in the BRICS again anytime soon.
Second, while the emerging market share of the world gross domestic product continues to grow, albeit at a slower pace, there seems to be a “changing of the guard.” The traditionally strong performing BRICS and the likes of Turkey are losing ground to the so called “frontier markets” of Nigeria, Thailand, Cambodia, Vietnam, Qatar, Romania, Pakistan, Argentina and Kenya, to name a few.
Third, all emerging markets are seemingly much more vulnerable to shocks going into 2014. After decades of strong growth, emerging markets have accumulated large hard currency reserves which should foster economic stability. While this is generally true, ironically it is the very success of these emerging markets' integration into the global economy that leaves them now more vulnerable to outside shocks despite having large hard currency reserves.
For example, almost all emerging markets are reeling from the recent U.S. Federal Reserve fiscal stimulus slowdown. Essentially, the era of cheap money being pumped into emerging markets is coming to an end. Moreover, the U.S. recovery is adding additional impetus for capital to be pulled out of emerging markets and pumped back into the American economy. Making matters even more volatile are the 44 national elections taking place in the emerging markets during 2014.
So what does all this mean?
It’s clear that the emerging markets are coming to a lull in their dramatic increase in development. Over the last decade, emerging market populations have joined the middle-class ranks in droves, but governments in those countries are now coming under pressure from two connected issues. First, the new middle class is demanding better resources, access and support structures for a better standard of living. Second, institutional credibility and systemic progress cannot keep pace with double-digit economic growth rates. For example, it takes a very long time to establish functioning and effective labor and capital markets that adhere to middle-class standards. This disconnect between fast wealth generation, a demanding middle class and lack of systemic development inherently causes instability in the larger BRICS countries.
An additionally factor contributing to the instability is the growing income inequality in these countries. Serious income inequality, if left uncorrected for too long, almost invariably breeds social and political unrest. In all the BRICS countries and other established emerging markets such as Turkey, almost without exception, we are seeing signs of social unrest stemming from a lack of a healthy distribution of wealth or access to wealth.
For example, Brazil saw prolonged street demonstrations due to a simple 50 cent bus fare hike last summer. Even China’s new government has targeted aggressive reforms aimed at the problem of growing income disparity. It should be noted that Turkey’s problems are much more complex. While Turkey is afflicted with the same slowdown as other emerging markets (its dramatic slowdown of growth from 12 per cent to below 3 percent within the last three years), it is also struggling with the larger issue of the coexistence of democracy, Islam and secularism.
Another key point is that "most emerging economies are sustained by western export markets rather than local demand. This is a strategy that has passed its sell-by date." While some emerging markets are evolving and becoming hubs for innovation in manufacturing and service sectors, like India, others have not moved past being low-cost factories for the West. This leaves them more vulnerable to external shocks.
Slowly but surely many emerging markets are also raising interest rates. Some are doing it to combat the inflation that has crept into their markets while others are doing it to stabilize their currencies and capital outflows. Turkey and South Africa raised their interest rates in late January, while other large more established emerging markets have been doing it for some time. While necessary, this will most assuredly guarantee a slowdown in economic growth in the medium-term.
We have not seen the
bottom to this slowdown in economic growth in the larger more established
emerging markets. If one has to predict the medium-term future of the BRICS: China
has a chance to be a success if all the necessary reforms are pursued
aggressively and successfully, India and Russia are listless, while Brazil and
South Africa are going to see a serious prolonged slowdown.