Major economic forecasters such as JP Morgan and S&P Global Ratings paint an optimistic picture of emerging markets’ growth prospects this year. But there are multiple reasons to believe that the consensus view will soon prove untenable.
BERKELEY – The spread of the prairie fire fueled by the omicron variant adds a new element of uncertainty to the global economy. But when it comes to emerging markets, the consensus is that the prospects for those economies remain bright. JP Morgan Global Research expects the collective GDP of that set to grow 4.6% this year, faster than its 2015-19 trend. S&P Global Ratings is even more optimistic and projects that emerging economies will expand by 4.8% in 2022.
Surprisingly, these growth rates are practically identical to the forecasts for 2022 published by the International Monetary Fund, in October 2019, that is, before the pandemic detonated. It has become a popular dictum that covid changes everything, or rather, everything except the outlook for emerging markets.
In fact, there are many reasons to worry, because this consensus is too flattering. First, emerging economies are now more indebted. The public debt/GDP ratio was already rising before the start of the pandemic. But now they have reached alarming heights, at more than 60% of GDP.
While no one doubts the wisdom of borrowing to respond to a public health emergency and economic crisis, these large debts pose management challenges. Scarce fiscal resources that could otherwise be devoted to health care, education, and infrastructure will have to be diverted to debt service. And the burden will only get heavier as the US Federal Reserve’s tighter monetary policy and capital shortages around the world push interest rates higher.
Furthermore, public debt is only part of the problem. Since the start of the pandemic, the debts of households and non-financial corporations have increased almost as rapidly as the debts of the public sectors. It is likely that when any of these private debts fail, the losses will be socialized and end up on government balance sheets.
The second reason to be wary of the forecasting firm consensus on emerging markets is that the risk of working indoors has spurred accelerated automation in advanced economies. Because the need for close hand-eye coordination previously thwarted such efforts, the traditional route to higher incomes for emerging markets and developing countries has been through the export of labor-intensive manufactures. While these industries do not require large investments or highly-skilled labor, they familiarize workers with factory discipline, allow for hands-on learning, get companies used to competing in global markets, and generate foreign exchange.
The fear is that these manufactures will soon be produced by robots and 3D printers in the same high-wage countries where they are sold. This perspective reinforces established concerns about “premature deindustrialization” in emerging markets.
Related to the above, global supply chains, so important to emerging economies, experienced major disruptions due to the pandemic, prompting companies to source inputs from sources closer to their production plants. Developed country governments, for their part, have cited scarcity and economic security concerns as justification for creating incentives for firms to add more manufacturing.
For emerging markets, the negative effects are not unlike those of accelerated automation. Many low- and middle-income countries start with simpler assembly tasks before moving on to more sophisticated manufacturing operations.
These opportunities will shrink as advanced economies do more home assembly.
Mexico can benefit from the efforts of US companies to shorten their supply chains. The economies of Eastern Europe can benefit from a similar desire on the part of the countries of the European Union. But South Asia, Africa and Latin America can be isolated.
Above all, there is the impact of Covid-19 on the formation of human capital. Although negative everywhere, the effects are likely to be particularly severe in emerging markets. Few emerging markets have the high-speed broadband needed for effective distance learning.
A slower rate of vaccination will mean continued school closures and absenteeism. According to a World Bank estimate, the proportion of children in emerging markets and developing countries who cannot read and understand simple text by the age of 10 will increase from 53% to 63% as a result of the pandemic.
The most powerful counterargument is that emerging markets will benefit from a supercharged global economy. Productivity growth in advanced economies, which had been trending down for several decades, was strong during the pandemic, especially in the United States. The technological and organizational changes brought about by the pandemic could now sustain that acceleration. Faster growth in developed countries would then create additional demand for emerging market exports.
At this stage, this argument is purely hypothetical. The recent pickup in productivity growth in advanced economies can be attributed entirely to business cycle factors; more recently, to companies that use their resources more intensively as economies recover from their 2020 lows. In fact, the trend in productivity closely resembles that of previous cyclical recoveries, meaning that there is evidence of a lasting acceleration.
But not everything is pessimism. In contrast to previous downturns, emerging market central banks and governments have been able to respond in a stabilizing manner, reflecting their success in building credibility. Until now, the bank failures and financial crashes that have historically marked such episodes have been few and far between. The production and administration of vaccines are increasing. That said, downward revisions to growth forecasts are almost certain to come.
The author
He is a professor of economics at the University of California, Berkeley, and a former senior policy advisor to the International Monetary Fund. He is the author of numerous books, including In defense of public debt.
Reference-www.eleconomista.com.mx