You’ve heard of
the “rise of the rest”: the emergence of China, India, Brazil, Russia, Turkey,
Mexico and other rapidly developing economies. Emerging markets have become a
lifeline for the global economy. As the story goes, these countries will
continue to emerge, providing much-needed global growth and
leadership.
But they are
struggling through severe growing pains, and for many of them the pain outweighs
the gain. With 540 million votes cast, India’s recent election was the largest
in world history; it followed less than two years after the largest blackout of
all time, which left 700 million in India without power.
Other governments
have had to contend with their own unwelcome surprises. A fare hike for bus
services in São Paulo moved more than a million on to Brazil’s streets last
year, and this year’s World Cup ignited another round of confrontation. A plan
to cut down a grove of sycamore trees triggered a political fight that produced
even larger demonstrations across Turkey last year, and Prime Minister Erdogan
seems eager for more conflict. Not so long ago, Brazil and Turkey were
considered best-in-class developing countries. Russia’s interventions in Ukraine
have driven its economy into a tailspin, but Mexico, despite slowing growth,
continues its march towards developed-world status. Finally, China’s uncertain
future provides the world’s most important question mark.
Given that
developing countries face vastly different challenges with vastly different
capacities to respond, we must stop thinking of them as members of a single
club. Forget the “rise of the rest”. Some are emerging. Some are stalling.
Others are simply falling. For the developed world, this is a serious concern.
The world now depends on emerging markets for much of its economic energy and
some of its leadership.
Why did these
countries rise together, and why are they now heading in such different
directions? A close look at Brazil, Russia, India, Mexico, Turkey – and
especially China – tells the story.
A rising tide lifts all emerging
markets
When a World
Bank economist coined the phrase “emerging markets” in 1981, he explained what
the group had in common: “I came up with a term that sounded positive and
invigorating . . . ‘emerging markets’ suggested progress, uplift and dynamism.”
An emerging market is meant to grow rapidly while adopting the values,
institutions and levels of political predictability found in the west; think
Japan in the 1960s. The term has become fuzzier over time. Now it includes some
60 countries that have generated go-go growth in recent years despite their
political immaturity.
Emerging markets
hit their full stride by 2000. From 1960 to the late 1990s, only 30 per cent of
these developing countries increased their per capita output faster than the
United States. But from the late 1990s through 2012, 73 per cent of emerging
markets outpaced the US – to the tune of 3.3 per cent per year on average.
Emerging markets had become the place to go for those willing to accept higher
risk for the possibility of higher growth.
This was an
unprecedented era of abundance for many emerging-market countries, as commodity
and credit booms dovetailed to supercharge growth. Rising commodity prices
lifted many resource-rich markets without the need for underlying structural
improvements. After the tech bubble burst in the United States in 2001, the US
began slashing interest rates, sending vast amounts of capital flowing into
these high-growth economies.
Emerging markets’
modest starting point was another common advantage. Emerging-market growth
pulled hundreds of millions of people out of poverty: the share of the
population in emerging-market countries that lived on less than $2 per day
dropped from 65 per cent in 1990 to 41 per cent by 2010. Emerging-market middle
classes ballooned in size. Governments postponed painful reforms needed for
continued economic development, their necessity buried beneath gangbuster
growth.
The backlash from a heady decade
After the
financial crisis, as commodity prices fell, easy credit dried up and
developed-world demand subsided, emerging markets felt the burn. This era of
easy growth lifted huge numbers of citizens into the middle class and
strengthened ruling parties and leaders’ hold on political power – but today,
those larger middle classes are a double-edged sword.
Economists view
growing middle classes as a huge plus. But the rising expectations they create
for governments can spell trouble. The same people who contributed to – and
benefited from – a decade of rapid growth are beginning to value quality over
quantity and make more sophisticated demands. They want less corruption, more
accountability and transparency, as well as better social services and quality
of life, air, food and water. At the same time, new technologies and new tools
of communication give citizens better access to information and help them
articulate and amplify their demands for change. And leaders bolstered by a
decade of explosive economic growth now have less capacity and fewer resources
to respond.
An inability to
meet these demands has led to enormous street protests in some best-in-class
emerging markets. Last year in Turkey, demonstrations against commercial
development in central Istanbul – and harsh retaliation from police and Prime
Minister Erdogan – motivated over two million people to take to the streets in
major cities. This year, anger at Erdogan reignited after leaked recordings of
conversations between government officials surfaced on Twitter and YouTube,
appearing to expose corruption. Erdogan responded with a heavy-handed attempt to
ban these communication channels, platforms that he described as “the worst
menace to society”.
The challenges
keep piling on. The US Federal Reserve is tapering its quantitative easing,
winding down the era of easy liquidity; higher bond yields in the developed
world mean less capital flowing to emerging markets in search of better returns.
Their growth has waned, leaving political incumbents in an increasingly tight
spot. All told, 44 emerging-market countries, representing 36 per cent of the
world’s population, have held or will hold elections in 2014. Many of these
incumbents will spend more money to boost their popularity and election
prospects, compromising their ability to balance the books after the votes are
cast.
But even if many
emerging markets face similar problems, their capacities, strategies and
prospects differ enormously. The divergence between just six of the most
important developing economies makes clear just how misleading the term
“emerging markets” has become.
Major emerging markets are fundamentally
different
It’s impossible
to group China, Brazil, Russia, India, Mexico and Turkey together as emerging
markets. Their energy needs and political and economic systems run the gamut,
contributing to a huge divergence in their interests and priorities.
First, they are
divided by energy. Russia is hugely reliant on energy production, natural
resources comprising 70 per cent of its exports and over half of its government
revenue. A spike in prices is a windfall for Moscow. Turkey, on the other hand,
is deeply dependent on energy imports (see page 27), which provide about
90 per cent of the oil and gas it uses; the country’s energy demand is expected
to double by 2030. Brazil’s abundant supplies of oil and ethanol make it
energy-self-reliant, but its infrastructure problems continue to weigh heavily
on growth. Mexico is an oil exporter, but one with declining production levels
that have forced historic reforms to open the petroleum sector to foreign
companies and investment. India, now the fourth-largest net importer of oil in
the world, depends on foreign sources for 80 per cent of its oil. China has
surpassed the US as the world’s leading oil importer. In short, on any question
that might drive oil and gas prices higher or lower, the governments of these
countries have very different sets of interests.
The political and
economic systems across these six countries diverge even more than their energy
needs. Mexico, India and Brazil are free-market democracies that grapple with
corruption and governmental inefficiencies; India is by far the most
decentralised. Russia poses as a democracy, but its elections, state
institutions and swaths of its market landscape are subject to one-man
authoritarian rule. In Turkey, Prime Minister Erdogan has authoritarian
aspirations in what is otherwise a democracy with empowered institutions and a
diversified economy. In China and Russia, the state is the primary actor in the
economy – state-owned companies account for more than half the total value of
the stock market in each. Yet they are heading in different directions. Under Xi
Jinping, China is actively trying to liberalise its economy through ambitious
reforms, while Vladimir Putin has not made significant strides to reduce the
state’s control of key economic sectors such as oil, gas and mining.
The countries’
neighbourhoods and the major powers they rely on are completely distinct, too.
In the western hemisphere, Brazil and Mexico are almost entirely insulated from
geopolitical conflict; Mexico’s deepest security concerns come from drug-related
violence within its own borders. But the two differ immensely in terms of their
reliance on the United States. Mexico sends 80 per cent of its exports to the
US, from which it receives roughly half of its imports. According to some
estimates, a 1 per cent rise or fall in the US economy moves Mexico’s economy
1.2 per cent in the same direction. Brazil’s trade and investment relationships
are much better diversified: in 2009, China surpassed the United States as its
largest trading partner.
Turkey can benefit
from economic opportunities in Europe as well as the Middle East, but its
neighbourhood comes with a steep geopolitical price tag. It borders volatile
Iraq, sanctioned Iran and Syria, from which it has absorbed more than 750,000
refugees. But over the next decade, the risk of political, commercial and
military confrontation is highest in Asia, which accounts for a growing
percentage of global growth, competing rising powers and a lack of multilateral
institutions that can manage the resulting security risks. A rising China is
sending shock waves through the region, provoking conflict in the East and South
China Seas. North Korea remains a wild card: the regime will ultimately
collapse, but when and how will make all the difference. For India, China and
Russia, Asia is a profitable – but volatile – arena.
Finally,
demographics and size differentials matter. China and India each have more than
double the populations of Russia, Brazil, Turkey and Mexico combined. But China
already has the largest elderly population in the world (more than 130 million
Chinese are over the age of 65) and a fertility rate of just 1.55: well below
the replacement rate of 2.1, and the lowest among the six. A recent government
agency survey forecasts that the share of China’s population aged over 60 will
grow from 12 per cent in 2010 to 34 per cent by 2050 – and China’s working-age
population began to shrink in 2012.
Russia is also
ageing, with just 15 per cent of the population under 15 years old, whereas
Mexico and India are youthful at 29 and 31 per cent, better than the global
average.
. . . and they’re heading in completely
different directions
Though all of the external factors matter – the
US Fed’s taper, the end of the commodity super-cycle, new demands from and
communication channels for citizens – the governments themselves are the main
reason these markets are emerging no more. Do these six countries have the
willingness and capacity to make the hard choices that can put their economies
on a healthy long-term footing? Their ability to deliver on much-needed reforms
varies enormously.
Turkey and Russia
are likely down and out for the foreseeable future. In Turkey, Erdogan has used
the country’s growing polarisation to his political advantage, but at the
expense of its long-term economic outlook. He remains favoured to become his
country’s first directly elected president in August, setting him up to
(mis)govern the country through to 2024.
In Russia,
President Vladimir Putin is buttressing his popularity with an aggressive and
costly campaign to derail Ukraine’s attempt to move towards Europe. The ruble
and stock market plunged after the annexation of Crimea. Already depressing
growth forecasts have been revised downward, sanctions have been imposed and
$50bn in capital flight occurred in the first quarter alone (which matched all
of last year’s). Longer-term, Putin is undermining his best geopolitical and
economic weapon: energy. Europe is accelerating its long-term diversification
away from Russia, and the US is moving towards exporting liquefied natural gas
(LNG). Russia’s tremendous overreliance on state revenue from energy exports –
and its lack of effort to rebalance before it’s too late – is a big part of what
makes Russia a “submerging market”.
Efforts by India
and Brazil to restructure their economies may prove slower-moving than many are
hoping. After Narendra Modi’s historic landslide election in May, many expect
him to bring his successful “no red tape, only red carpet” approach from his
home state of Gujarat to the national stage. But unlike in China or Russia,
power in India remains substantially decentralised, and the (now opposition)
Congress Party remains the dominant force in India’s upper house of parliament.
We won’t see quick legislative reforms on sensitive issues; changes, at least
for the near term, will be more incremental, even if India’s longer-term outlook
remains a question mark. In Brazil, Dilma Rousseff faces a tough re-election
battle; with a weaker mandate on the back of softer approval ratings, she
wouldn’t be able to push through big-bang reforms in her second term. Economic
policy would likely improve, but only incrementally.
Mexico is a rare
bright spot for sustained reform. Last year, President Enrique Peña Nieto
approved key economic measures on tax reform, regulatory framework changes to
promote competition and an energy-sector overhaul. Continued progress on reforms
is still on track, even if there remains much to be done and it won’t happen
overnight.
Unfortunately,
Mexico’s success may be the exception that proves the rule. Unlike most emerging
markets, Mexico was largely on the sidelines during the boom of the 2000s. It
didn’t leverage the commodity super-cycle. It experienced low growth, declining
oil production and less of a dip in poverty (the rate was 52.4 per cent 20 years
ago and dipped as low as 42.7 per cent in 2006, but in 2012 poverty went up
again to 51.3 per cent). Whereas other emerging markets have been plagued by
complacencies born from the success they enjoyed during that decade, the urgency
for adjustment has grown steadily in Mexico.
China is the true outlier
China is the
real game-changer. It is simply too big, too different from any other country
and too crucial for the global economy to be considered a part of anyone else’s
club. Its economy is bigger than those of Brazil, Russia, India, Mexico and
Turkey combined, and it continues to grow at a faster clip than any of them.
According to International Monetary Fund forecasts, China will account for
roughly a quarter of total global growth over the period 2011-2014.
More importantly,
there is no other country with a more uncertain future.
As Beijing
undertakes its most ambitious economic reforms in decades, the potential
outcomes provide the single biggest worry for the global economy.
China can’t keep
growing the way it did f
or the past 30
years – on the back of state-driven investment and cheap labour. Xi Jinping
understands that China must shift to a more consumer-driven, liberalised
economic model. He has begun taking the transformative first steps with an
ambitious reform agenda around the environment, the financial sector and
inefficient state-owned enterprises.
In the near term,
the prospects for reform look good. Growth has slowed at a modest pace – that is
part of what building a more sustainable model requires – and there has not yet
been strong political pushback from powerful figures who don’t want
change.
But China’s
economic transformation is unprecedented in terms of the scope and the stakes.
It will require an enormous transfer of wealth from large domestic companies,
many of them state-owned, to Chinese citizens, who will increasingly demand a
more open and accountable political system. Success will threaten the vested
interests of all the influential leaders who have enriched themselves off the
status quo for decades. And the leadership is undertaking these reforms at a
time when hundreds of millions of Chinese are now online. In an environment
where ideas and information flow at an unprecedented rate, dissent and unrest
can emerge and grow in unpredictable ways.
Moreover, a liberalised economy will create greater
competition, from foreign firms among others. Coupled with a necessary gradual
economicslowdown, that will force companies to cut costs – and even employees.
We are already witnessing an escalation of worker protests and a surge in labour
unrest, with the largest strike yet occurring in Guangdong Province in April
this year. If a future economic slowdown proves unmanageable, it could provoke
cascading bank defaults or a major credit crisis. Or an unanticipated foreign
policy or environmental crisis could shock the system and put citizens on the
streets, too.
As Leo Tolstoy
said, “All happy families are alike; each unhappy family is unhappy in its own
way.” That’s a good rule of thumb for the shift in emerging markets’ fortunes
between the 2000s and today. China will soon boast the world’s largest economy.
When it does, it will still be poor, and thus potentially unstable. It will be
far from ready to take on global responsibilities appropriate to a country of
its size and influence. Beyond China, virtually all these countries rose on a
fortuitous tide of historically unusual circumstances. Now they are going their
separate ways – and just at the moment when they have begun to
matter.
Ian Bremmer is
the president of Eurasia Group and the author of “Every Nation for Itself:
Winners and Losers in a G-Zero World” (Portfolio,
£9.99)