Azerbaijan 17.4
Equatorial Guinea 11.7
China 10
Liberia 9.5
Qatar 9.3
Sudan 9.1
Armenia 9
Georgia 9
Panama 8.9
- Among emerging markets, China will remain by far the main recipient, with almost 6% of the global total and 16% of projected inflows into emerging markets.
- There is likely to be some acceleration of the relocation of labour-intensive manufacturing to emerging markets, although this is unlikely to be as dramatic as many observers hope or fear.
- The offshoring of services will accelerate—which will also feed protectionist sentiment, although this form of internationalisation is accompanied by relatively modest capital flows.
- Investment by companies from leading emerging markets is likely to continue to gain in importance.
Have the economies really emerged?
The emerging economies have probably not lived up to their expectations. Barring China which has really emerged as a big power in world economy the other countries are still struggling to come to terms with their challenges and progress. India has not lived up to the expectations in terms of growth and is struggling to control inflation and the turmoil caused by terrorist activities. Brazil and Russia on the other side have been struggling to maintain consistent growth rates.
Looking ahead the impact of the US recession could play further spoil sport. There have been questions raised on sustainability of the emerging economies in the light of the recessing in the US markets.
The Cooling Down Effect
I believe that developing countries including China and India, where red-hot growth has lifted hundreds of millions of people out of poverty in recent years, are showing signs of economic cooling as the effects of the downturn that started in the United States continue to spread around the globe.
Fears that booming emerging markets are becoming caught up in a global slowdown helped send the dollar soaring this week. Investors continue to flee juggernauts such as Russia into safer dollar-denominated investments. The shift comes as the prices for commodities from developing countries, particularly oil, drop precipitously.
For many of these countries, a modest slowdown may actually be good news. Some had been growing unsustainably fast, raising the spectre of inflation and threatening long-term prosperity. Yet the slowdown is also confronting the largest emerging nations with a key test. After years of breakneck growth, they must recalibrate their economic policies to avoid steeper downturns that could stymie job creation, hinder efforts to reduce poverty and lead to political instability.
Basically, what you've got is the emerging world now slowing at the same time as the developed world," said Michael Hartnett, chief emerging markets strategist for the Washington Post "Though the magnitude of their slowdown is a lot more modest, it is a negative for the global economy. The question now, obviously, is how much will they slow down?"
The developing world had remained relatively resilient against the global turbulence -- particularly given the pummelling many countries took during the Asian and Latin American financial crises of the 1990s and the early 2000s. But as the First World economies now decelerate, demand for the goods and services from emerging markets is being curbed. Many developing countries had only recently been cashing in on the rise in commodities prices.
While they are still growing at rates that would be the envy of developed nations, the signs of a shift in fortunes are sprouting up from Shanghai to New Delhi to Sao Paulo.
In India, the high-tech and outsourcing sectors are softening as they absorb cutbacks from U.S. corporate clients. In China, diminished export expansion is cooling the economy from a growth rate of 12 percent last year to an estimated 9 to 10 percent this year, while the stock market in Shanghai has fallen more than 60 percent since its peak in October. In Brazil, exports slipped last month after surging for months.
Though still awash in oil money, Russia's economy lagged in August, a slowdown that was exacerbated when foreign investors pulled billions of dollars out of the country after its invasion of neighbouring Georgia. Last week, the Russians intervened in the currency market more heavily than they had since the late 1990s to prop up the ruble, and the cost to protect government bonds from default shot up. The country's benchmark index on Thursday sank to its lowest since January 2006.
Nowhere is the economic balancing act being watched more closely than in China, the undisputed powerhouse of developing nations; it is now vitally important as an export market for much of the world. As Chinese growth cools, policymakers in Beijing are changing tactics. Once, the overriding concern there was that consumers and businesses would spend too much, driving up inflation. But the government has apparently decided that slower growth is now the greater threat, moving in recent weeks to loosen lending to regional banks, which could in turn provide more loans to medium and small businesses.
China also has an ace in the hole with almost $2 trillion in cash reserves, leaving it free to spend on massive infrastructure projects that will keep feeding the domestic economy. All indications are that the cash will flow. For years, analysts have argued that China's biggest challenge would come during periods of slow global growth, when it would have to look to its increasingly massive middle class to fuel its economic expansion. Consumer demand now accounts for only about 35 percent of China's economy, about half the proportion in the United States. No one knows how long will it take for Chinese consumers to spend more.
However there are some experts who had (in the earlier part of the recession) said that the emerging economies had de-coupled and had thereby been safeguarded.
A big reason for the same lies in the Middle East and China. Much of the Middle East is swimming in oil money -- petro-dollars -- while China has built up its own huge stock of sino-dollars. These petro-dollars and sino-dollars aren't just sitting there in the Middle East and in China. They're being put to work - building new infrastructure in both places: skyscrapers, power plants, power grids, roads, ports. And building middle classes that, while still relatively small, want the things middle classes in advanced nations want - cars, refrigerators, houses, and lots of stuff to fill their houses.
All this spending on infrastructure and on goods and services by emerging middle classes, in turn, is pulling in resources, goods and services from the rest of the world. That includes exports from other emerging economies.
Is this de-coupling of emerging from developed economies good news for America? Yes and no. It's good news to the extent that even as America falls into recession, developing nations will continue to demand some of our exports. They'll also generate healthy returns for American investors who put money into them. These export and investment revenues will offset a bit of the decline here.
But in a more significant way, the de-coupling is not at all good news for us. It means the price of many things we buy from developing nations -- especially raw materials like oil - will continue to be high, and might even rise. Years ago, recessions in the United States depressed prices in the developing world, including oil prices -- and these price drops helped cushion us against even deeper recessions. Now it's the reverse. China's almost insatiable need for Middle-East oil, for example, continues to bolster oil prices even though demand for oil is slowing here as the American economy slows. As a result, high global oil prices are making our slump even worse.
So it's two cheers for the developing world. Emerging economies are growing almost regardless of downturns in rich nations. In terms of global equity and long-term stability, we should all be thankful.
But viewed narrowly and in the short term, from the perspective of world's richest nation now heading into deep recession, it's only two cheers and not three.
The catalyst for future growth in Emerging Economies
What next and how will the emerging economies sustain their growth?
Internet-based technologies are serving as a catalyst for economic growth and social advancement in the world’s developing economies. These technologies reduce computing costs, improve transparency in government, make countries more competitive, and provide new ways to reach under-served consumers. Emerging countries that take advantage of the benefits of Internet-based technologies are more likely to help their citizens become richer, healthier, and better educated.
This transformation is detailed in Path to growth: the power of technology in emerging markets, a paper reported by the Economist Intelligence Unit and sponsored by Cisco Systems. From the delivery of public services to the way small businesses find new customers, high-bandwidth networks are helping remove barriers that previously had constrained developing countries.
“Internet-based technologies present an opportunity to help the emerging world move straight to Web 2.0,” said Nigel Holloway, Research Director for the Economist Intelligence Unit in North America.
“The Internet protocol (IP) network has become the cornerstone of many applications, making collaboration more common and enabling some countries to develop whole new business sectors. Investment in IP-based technologies for contact centres, for example, has helped Romania develop a growing outsourcing industry. These technologies can lay the groundwork for new applications and business models, thereby helping emerging markets grow.”
Yet installing the infrastructure is insufficient by itself. Technology investment can be a waste of money if emerging countries lack the capability or institutional framework to use it effectively. What is crucial is the way in which Internet-based technologies are applied. One key to successful application is the adoption of a long-term view. The South African Municipality of Ekurhuleni, for example, plans to use the FIFA Soccer World Cup in 2010 as a catalyst for technological development. But over the longer term, the municipality is focusing on the legacy that will remain after the event is over: broadband connectivity for remote facilities and departments including medical centres, schools, fire stations, libraries and workshops. The aim is to increase the productivity of municipal employees and enhance the quality of life for the citizens they serve.
Emerging markets can advance straight to the kind of collaborative, secure, peer-to-peer computing models now being rolled out in more advanced economies without bearing the associated development costs or the burden of traditional software licence models. As application development becomes cheaper and more accessible, new opportunities are opening up for local developers—both in their home markets and abroad. Effective skills transfer is central to sustainable Internet-based technologies, particularly when leading-edge technology is being deployed.
Cost based competitiveness in Emerging Economies
Another key area of scope for emerging economies is their cost based competitiveness. Over half of firms (56%) operating in emerging markets cite product or service quality as the number one factor impacting on their success. Competitive prices (41%) and a strong brand appeal (24%) are important too, but quality is viewed as key if firms are to tap into domestic demand in emerging countries. And, in the view of most firms, succeeding in the domestic market is an imperative—a clear majority of executives (71%) cite tapping domestic markets as their primary reasons for operating in the emerging world. This is far greater than the number of firms which view their emerging world operations merely as a way to cut production costs (28%) or gain access to natural resources (13%).
Many top executives are bullish about the growth prospects of these countries. The emerging markets have delivered strong economic growth during the last decade, a trend that is forecast to continue. According to the executives, confidence could barely be higher: nearly nine out of ten (87%) are optimistic about their company’s revenue growth over the next two years (just 3% are pessimistic). Similarly, about eight out of ten (79%) are optimistic about profitability (just 6% are not).
Barring a few individual exceptions, executives believe the overall risk level is falling in every country in the emerging economies. Most of the decline is explained by falling macroeconomic risk. Given the tough economic conditions currently being experienced within developed markets, this decline in emerging world risk highlights how confident executives are that the emerging world volatility of the past has been greatly reduced.
Let us now look at the prospects of each of the big BRIC countries:
China
China is one of the world’s largest recipients of FDI. Although FDI inflows actually fell slightly in 2006, to US$78.1bn, this was still one of the highest totals in the world. Despite concerns about rising cost pressures, China remains a favoured base for foreign companies wishing to reduce production costs. Nevertheless, companies wishing to sell into the domestic market still find the country’s business environment a difficult one in which to operate.
Despite improvements in recent years, the Chinese market is characterised by intense competition, bureaucratic hurdles and an opaque legal system. Nevertheless, many foreign companies are now starting to make good profits (even if there are significant variations across sectors). China is also becoming an important outward investor, and this trend will continue. Owing to its rising stock of foreign-exchange reserves, as well as booming demand for natural resources, in particular oil, China will become an increasingly important source of investment for many resource-rich countries in Africa, Central Asia and Latin America over the forecast period. Overall, these countries have given a cautious welcome to Chinese investment.
The GDP of China is expected to grow at 9% or above in the next 5 years indicating a bright future prospect. China with growing business scales and a well oiled government functioning has already forged ahead of many developed economies to become the number 2 economy and is expected to forge ahead even further.
India
India had shown significant potential but has slowed down recently and has disappointed. FDI inflows will rise sharply during the next 3 years, but will still remain very low by international standards.
The Congress-led coalition government has made significant progress in opening the economy to foreign investment, but further progress before the next election, due by May 2009 at the latest, will be constrained by opposition from the government’s political allies in the Left Front. The main opposition party, the Bharatiya Janata Party (BJP), is in some ways more free-market than Congress, but its Hindu-nationalist rhetoric, coupled with its reliance on groups such as small traders for support, would make it wary of moving too quickly were it to form the next government.
Foreign investors will be attracted by major new opportunities in infrastructure projects. Telecommunications and energy are likely to emerge as other high-potential industries for FDI. There is a lot of scope for enhancement and development in the fields of infrastructure and telecommunications in India. India is expected to grow at 7-8% in the next few years.
Brazil
Policy improvements over the past decade have placed Brazil on a path of sustainable, albeit moderate, growth. An inflation-targeting regime has helped to bring inflation closer towards OECD levels, exchange-rate volatility has been reduced, real incomes are expanding and interest rates are declining (although they remain high).
A large domestic market, natural resource wealth and a welcoming attitude to foreign investment have attracted foreign firms across a wide array of sectors. However, the current president, Luis Inácio Lula da Silva, of the left-wing Partido dos Trabalhadores (PT), who began his second four-year term in January 2007, seems unlikely to capitalise on his government’s strong starting position to put forward any ambitious structural reforms.
Brazil’s overall business environment remains impaired by weak political effectiveness, which hampers efforts to reform a complex and burdensome tax system, improve regulation, tackle crime and address deficiencies in the labour market and bottlenecks in the physical infrastructure. These shortcomings will continue to restrict investment expansion, constraining GDP growth to below the government’s target of 5% real growth per year.
Russia
Russia’s business environment will benefit from improvements in infrastructure, gradual reforms in the financial sector, and regulatory changes in the trade regime and other areas associated with expected membership of the World Trade Organisation (WTO). However, many problems will remain and the rate of improvement will be much slower than seemed possible in the early years of Vladimir Putin’s presidency.
Although Russia’s business environment is forecast to improve in 2007-11, things are not very positive. Trends in the direction of greater state control have increased investor uncertainty. Nevertheless, foreign investors will be attracted by Russia’s natural resources and large and dynamic domestic market. Surveys show that foreign investment in Russia often yields higher returns than investment in other leading emerging markets.
This suggests that many foreign companies have developed the skills and local knowledge necessary to navigate the Russian business environment. An Economist Intelligence Unit survey of 455 Western companies in early 2007 showed that the majority were optimistic about the likely evolution of Russia’s operating environment the next few years.
Russia is also suffering from a talent crunch situation. They do not have sufficient trained employee work force and there is a huge debate on outsourcing or hiring from outside.
Given all these constraints Russia is expected GDP growth is pegged at 4-4.5%.
