WORLD VIEW: Some economic sunshine through the clouds

By Jonathan Power

 MONDAY’S news was that China’s annual growth rate has dropped below the red line of 7%. It is 6.9% and probably falling.

These figures were published shortly after the IMF said that sub-Saharan Africa is experiencing “solid growth”. Last week the World Bank released its new average annual growth estimates for black Africa. It was 4.5% last year but this year it is going up to 4.6% and by 2017 it will be 5.1%.  This is less than the 5.3% before the great recession (precipitated by American banks), but considering all its recent knocks, not least China buying less raw materials, Africa is holding up pretty well.

In fact what we used to call the “Third World” is a mixed bag of good and bad news. Which would you like to read about first? More bad news? Here it is:

Emerging markets for the sixth consecutive year face falling growth rates. Currencies have hit 15-year lows. Stocks, once soaring ahead of developed countries, have been flat for the last 6 years. Private sector debt has been increasing fast. The outflow of funds has accelerated and in the last year was over one trillion US dollars. Stock market and currency turbulence have raised questions about where China is going. The late president of France, Charles de Gaulle, once quipped about Brazil, “Brazil has a great future, and always will”. Maybe he should have said that about China.

In Brazil a big corruption scandal, including allegations that the government has illegally manipulated its fiscal accounts, has helped stall the economy.

In India, despite many campaign promises, Prime Minister Narendra Modi has not succeeded in opening the economic spigot. In fact the present day rise in growth owes itself largely to measures put in place by the previous government of Prime Minister Manmohan Singh.

In Indonesia, the economy has slowed to levels not seen since 2009. In Turkey a dictatorial president, making mistake after mistake, has made it difficult to halt the slide in the economy.

Looking back, those who assumed there would only be sunny skies made a big mistake. As Professor Jeffrey Garten of Yale says, “In the 1990s too many projections were straight-lined from the outsized performance of emerging markets over several years. These projections were based on a period that included a phenomenal business expansion in the US with policy makers closing their eyes to the rickety foundations of the big banks, exceptional optimism about the economy in the European Union without foreseeing the Euro crisis and China’s take off that included its voracious appetite for the commodities that other emerging markets exported but which could not last.” All the benign projections were wrong.

Now for the good news:  First, the dramatic fall in extreme poverty over the last 50 years, from 50% of the world to 10% today. Second, the rise of billions of people into the middle class and the move of   billions from the countryside to the towns where there are far greater opportunities for individual advancement. Third, the dramatic improvements in public health and education. The latter have continued to advance despite the setbacks in growth.

Even in this time of recession and economic mismanagement Brazil’s external debt as a percentage of GDP is less than half of what it used to be in 2002 and its reserves as a percentage of its debt are more than 4 times what they were in 2002. Mexico, South Korea, India and Indonesia are in the same good position. Foreign investment in emerging economies increased tenfold between 2005 and 2014, about 30% faster than it did in the advanced nations. All these countries are well enough positioned to fend off further global turmoil.

The good news abounds. Twenty years ago who would have guessed that India’s Tata Group would be the largest private-sector employer in the UK or that Mexican companies, Cemex and Bimbo, would become the US’s market leaders in cement production and bread-making or that the Chinese Lenovo would be on a par with Hewlett-Packard as the world’s largest seller of personal computers?  Who would have guessed that the share of the developing world’s companies on Fortune’s Global 500 list would rise from 5% to 26% in the span of 13 years?

Moreover, the good news could continue- India reaching a growth rate of 10% (which it briefly did under Singh) and keeping it going; Brazil sorting itself out, which, with its stable institutions and non-violent political culture, it should be able to do; and the US unleashing its potential if the Republicans would give President Barack Obama leeway to be more Keynesian. China will continue to slow down but Europe should speed up. We could also see a significant decline in African poverty and many countries doing far better than the continent’s average – a good number will grow at a handsome 7%
Fingers crossed.