Wednesday, 28 August 2013

Graph of the week: A slowdown in emerging markets

From the WSJ:
Source: Wall Street Journal
For the first time since the start of the crisis, emerging economies are contributing less to global GDP than the developed ones (see graph below). Just as the developed economies are starting to bounce back, BRICs and Mexico are declining. Exports have plummeted in China, declined in India and Mexico and are slightly recovering in Brazil, while manufacturing is slowing down in all of these economies (graph above). On the other hand developed nations are finally seeing an improvement in manufacturing and exports, which will soon enough be visible in the growth numbers. The stock markets in both sets of nations show this forthcoming trend better than anything. Why is this? Shouldn't the BRICs also feel the recovery of the West and carry on growing just as they did in the pre-crisis decade? 

Certain things have changed since before the crisis. The most important one was a reverse of the outsourcing trend - the so called "insourcing", where (mainly US) companies decided to switch some of their production back home from distant Asian markets. Some claim the reason to be growing wages in China and the rest of Asia, others claim rising transportation costs and the distance being too big to service immediate desires of the customers. I think it could be both. After all, the reason Western companies decided to put up with high transportation costs were the lower wages, making the overall cost burden much lower. With both of these going up, it is only natural for a company to adjust to the changes in demand. 

Source: The Economist
Many claims have also been made that the emerging markets have failed to catch up to the developed economies, thus failing to achieve even partial convergence. It could get even worse, particularly if the main driver of BRIC growth, China, enters a recession following its inevitable bubble burst. It's a shame the developing economies have missed their chance during the past five years to close the wide income gap with the Western world, as it is likely that in the decades to come this gap will remain to be wide. However, not to sound too pessimistic, there is still a lot of scope for catching up, particularly in India and Mexico (and even China if they all of a sudden realize their policy mistakes), in terms of rising productivity, worker incomes and the consequential rise of living standards. Economic policy will play an important role (hence my optimism for the reformist Mexico), as the newly created wealth and incentives for creating wealth now need to be nurtured and allowed to produce even more. Overall, as always, it's a mixed picture. 


  1. I believe the slowdown is only temporary. Even though you're right to notice that the outsourcing trend has been reversed and that China is on the verge of a bubble burst, I think that certain processes have emerged as a result of their decade long growth, and that these processes of institution builiding are irriversible. This is my reason for long term optimism regarding the emerging markets..

    1. you're optimism is misplaced. you haven't really been to any of these countries have you? there is still A LOT to work on, like improving the basic state functions like tax collection, not to mention things like health care or schooling. None of the growth went to improve the factors which will guarantee long term success like education or R&D. It all ended up either in big business or in politicians' pockets