Emerging Economies Showing Resilience

Stephen DeAngelis

July 25, 2008

While the developed world is suffering from an economic downturn caused in part by rising oil prices, emerging market countries are showing a surprising amount of economic resilience [“Slowing Economy Gives Way to Global Role Reversals,” by Anthony Faiola and Jill Drew, Washington Post, 17 July 2008].

“The global slowdown stemming in part from the deepening U.S. financial crisis is hitting the world’s richest nations the hardest even as emerging nations, some with once-fragile economies, are proving relatively resilient. … [Consider] oil-fat Russia — a red-hot emerging market. As in many commodity-driven economies in the developing world, soaring energy revenue has largely insulated Russia, the world’s second-largest oil exporter, from the turbulence in global markets. Its gross domestic product is expected to grow 8 percent this year, and consumer spending continues to boom, with a 13 percent increase so far this year, according to Troika Dialog, a Moscow investment house. … It marks a global economic role reversal of sorts. When financial crises hit the Asian markets in the 1990s and Argentina in 2001, the aftershocks spread to other emerging economies, plunging several into recession while wealthy countries went relatively unscathed. Rather than taking its toll largely on residents of developing countries, this economic downturn may cause the greatest damage to those living in the wealthiest countries on earth.”

This “economic reversal” can be traced to the extraordinary redistribution of wealth from the developed to developing world that has occurred over the past couple of decades and continues apace.

“As global wealth has shifted during the past decade, emerging markets have become not only increasingly stable but they have also been claiming a larger portion of the world’s riches than ever before. If Californians are rushing to withdraw money from banks there, the situation in Kenya is just the opposite: People are flocking to banks to open accounts. The Nairobi exchange, which lists mostly Kenyan companies and a handful of multinational firms, posted 10 percent gains in the three months ended in June as local and foreign investors flocked to the initial public offering of the cellphone giant Safaricom.”

Although some emerging market countries appear untouched by the current economic crisis, other countries and certain economic sectors are feeling the pinch.

“The emerging world is [not] buffered completely, [and won’t be] if both the United States and Europe slip into recession or if the financial crisis in the United States claims more and bigger financial institutions. And without question, sectors of emerging economies are already being stung. There is growing fear especially in the fastest-growing Indian technology markets, which include outsourcing, back-office operations and call centers. Those sectors are 70 percent dependent on the United States. Several Indian technology companies have slowed their hiring because of the U.S. economy’s slowdown. In May, industrial output was up 3.3 percent, half the 6 percent increase in May 2007.”

The emerging market economies that will be hurt most by a downturn in the developed world will be those based on exporting products to the developed world. Principal among those countries, of course, is China.

“Exports in China — the darling of the 21st-century economy — are also being hammered by slackening demand caused by the global slowdown and rising labor and material costs. Chen Gong, who runs a factory that makes plastic cleaning devices in Ningbo, a manufacturing city near Shanghai in the Yangtze River delta, has seen profits slip partly from the yuan’s controlled but steady rise against the dollar. It has slashed profit margins for many mid-size manufacturers from 15 to 3 percent. Many factories in nearby Guangdong province have closed their doors, and thousands of workers have lost their jobs. … Chinese exports to the United States have been flat this year and will likely experience a rare, overall decline by year-end, said Arthur Kroeber, managing director at Dragonomics, a research firm in Beijing. Yet experts said that might be exactly what China needs. A global slowdown — if tempered — could help China stage a soft landing for its breakneck economic growth.”

Even though the global crisis originated in the U.S., its global consequences demonstrate why no developed country’s economic policies can be successfully isolated from the global economy. Bad policies normally create bad results. Undoubtedly the current crisis has generated resentment among some developed countries that have been preached to and prodded about their economic policies over the years by the U.S. and others. Although they may be tempted to say “I told you so,” the crisis requires forward rather than backward thinking. It may well be that emerging economies will turn out to be the key to keeping the global economy progressing during these lean times. Since they hold much of the U.S.’s debt, they certainly have a stake in helping put things in America back on track.