Emerging Markets to the Rescue?

Even at a time of world crisis and evolving institutional and political chaos – at a time when the US and Italy’s debt has been downgraded by the rating agencies and the European Union time and again shows that it is not up to the challenge of the mounting financial crunch – there is some good news coming from elsewhere. So-called emerging markets prove that they are indeed the growing economies, pulling the world out from the edge of yet another recession. It’s true not only – and as usual – for China, but also for Brazil and a number of other developing countries. This could be the year in which India’s GDP overcomes the GDP of Japan and becomes the third largest economy after the US and China. It is also the year during which the world economy is growing exclusively thanks to the growth of developing countries as the GDP of advanced countries remains flat.

But “emerging markets” now include “developing” countries beyond the BRICS, that is Brazil, Russia, India, China, and South Africa. I’ve just come back from another visit to one such economy: Vietnam. This fast expanding nation – already exceeding 90 million people and by the end of decade will join the club of countries with over 100 million people – has been growing during the time of global crisis, in 2008-11, by 6.3 percent on average. The 25 percent jump in output over four years of the world’s crisis is a remarkable achievement, even among the other fast growing economies of the “emerging world”.

Of course, considering the still very low level of development (the Vietnamese GDP per capita, on purchasing power parity, is hovering around 3,300 dollars, or a miserable 28 percent of the world average) such occurrences don’t make any significant impact on the global economy, since Vietnam’s contribution to the overall output is negligible. However, regionally it does matter. If even a poor country, as Vietnam still is, grows for a long time at such speed, it enforces the entire regional grouping of Association of South East Asian Nations, or ASEAN, with the population of over 600 million. If Vietnam is able to double its GDP every ten years, in two decades time it can deliver over a billion dollars of goods and services. Since its growth path relies on an export-led strategy – and correctly so – it has positive consequences for other trading nations too, regionally and worldwide.

As much as it is naïve to believe that China, the other BRICS economies, and broadly the emerging markets will save the world – because they won’t, and the rich Western nations must find their own way out of the current mess – it is true that little by little does the trick. The fast expanding developing countries have helped in recent years to save the world economy, for the time being, from another contraction. Yet they, in turn, depend on the growth in advance economies too. It’s virtually impossible for giants like China and India, or middle open economies, like Vietnam or Thailand, to hold on to their growth, if the markets for their output stagnate or shrink. It is necessary in all of these countries to shift towards swifter growing domestic demand and in some of them, including China and Vietnam, to modify the extreme version of an export-led growth model. Though, if they want to sustain the current rate of growth, the aggregate demand of the rich countries must begin to grow again as well.

As for Vietnam, the biggest economic challenges are the escalating fiscal deficit, which, if properly counted, may exceed this year 10 percent of GDP (general government balance, including local governments), the soaring inflation, which can reach in 2011 as much as 20 percent ( CPI), growing income inequality, with the Gini coefficient somewhere between 37-39, and the malaise of corruption. The latter can eat out a lion share of positive results of structural reforms executed in the recent years in many countries. It also erodes the social support for further going market-oriented reforms, without which the success story will not continue.

Thus, this is also a time for change in leading emerging markets: from the BRICS countries to other economies all over the world. Further going economic liberalization and institutional streamlining is a must. Corruption must be fought with full commitment and the issue of income inequality must be addressed properly. And not only because of the moral concern, but because too much inequality is harmful for capital formation and turn  against the business expansion.

The worst thing that could happen to the world economy in this current age of chaos is a collapse of economic dynamism in emerging markets: both large, like China, and small, like Vietnam. Hopefully, we will be spared this fate, because it doesn’t have to occur. But we must heed the call that this is not a time for business as usual. This is a time for change.