Month: November 2017

Which Emerging Markets are actually Emerging?

Why some countries prosper and others don’t is one of the most contentious debates that concerns economists, political scientists and policy makers. After W.W. II and during the Cold War wealthy countries embraced the notion that good institutions (rule of law, education, free markets) teamed up with technology and savings would allow poor countries (called “latecomers”) to catch up. These theories were famously promoted by economists like Walt Rostow and pursued through foreign aid and institutions like the World Bank. The results 50 years later are surprising. With a few exceptions — East Asia,  Singapore and, more recently, China and Eastern Europe — there has been very little catching up by the poor. Most gains have been achieved by the already relatively prosperous; for example, the country that has had the largest relative increase in per capita income has been Norway.

The data from the World Bank measuring per capita income relative to the United States, though not comprehensive,  is revealing: “catching up” is a reality for the few; most stagnate; and many actually lose ground.

Measuring GDP/capita of countries as a percentage of the GDP per capital of the United States for the past 50 years, what we discover from the data (which covers 78 countries over this time-frame)  is that the greatest gains were achieved by countries that had already secured relatively high income levels 50 years ago. In the chart below, which shows the countries that increased their ratio by more than 10%, we see Norway as the top gainer, increasing by 90 percentage points from 56.5% of the GDP/capita of the U.S. to 145.5% (145.5-56.5=90).  Singapore, Hong Kong, Korea and are the non-European highlights; all of these started from low levels of GDP/capita, particularly China and Korea. Korea, which now has reached the level of Spain, in 1967 had income per capita which was only 3% of the U.S. level, half of Brazil’s level and in line with the poorest African countries.  Uruguay, Trinidad and Tobago and Malaysia also appear with more moderate gains, just above 10%. (Note: the data is in current dollars, so currency movements impact the data)

 

The Biggest Gainers, 50 years

The vast majority of countries of interest to emerging market investors made very moderate gains over this period, in essence proving unable to make progress in bridging the gap with the U.S. The chart below shows those countries that have achieved between zero and ten percent gains in relative GDP/capita compared to the U.S. over the 50-year period. This includes the middle-income countries of Latin America, Turkey and Thailand, examples of economies that have fallen into the “middle income trap.” India, the Philippines and Nigeria are examples of lower income countries that have also made very little progress in bridging the income gap, despite enormous potential for productivity improvements.

The Stagnant Countries, 50 years

Perplexingly, it is the poorer countries that make the least progress, including many very low-income countries of Africa.  But this list of serious under-achievers also includes South Africa, Argentina, Zimbabwe and Venezuela, countries that are moving from middle-income status downwards.

 

The Losing Countries, 50 years

Taking a look over shorter periods, we can see some interesting trends developing. 30 Years coincides with the beginning of modernization reforms in China (1980) and in India  (1991),  the fall of the Berlin Wall (1989) and accelerated European integration. The chart below shows the past 30 years, including 123 countries.  Of note is the rise of Ireland (“the Celtic Tiger”), New Zealand , Australia and Israel, and the generalized strength of a European region benefitting from economic integration which drive improvements in incomes in Spain, Portugal and Turkey.  The absence of emerging market countries, except for the Asian Tigers and China, is striking, though the good performance of Uruguay (the “Switzerland of Latin America”) and reform-minded Chile are significant exceptions.

The Winners over the past 30 years

Looking at the past 15 years, we see very interesting new trends. The World Bank has new increased their data set to 164 countries over this period, adding Russia and its former Iron Curtain comrades, among others.  The chart below shows these very interesting developments, with, for the first time, as slew of emerging markets appearing.  Of the 27 names on the chart, ten, including China, are former communist, centrally-planned economies, that have undergone profound economic reforms.

The Winners over the past 15 years

 

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Putin’s Embrace of “One Belt, One Road”

The national identity of Russia is intrinsically tied to the mastery  of the Eurasian steppes, the grassland plains that  stretch from Hungary to Northern China. The territorial expansion of Moscow, from the 16th century onward, required  wresting control of the steppes away from the Mongols and securing the fertile black earth plains of modern-day Ukraine and Central Russia. The eventual collapse of the Mongol empire in the 17th century allowed the extension of the Russian empire to the pacific. Russian geo-political control over the steppes, Siberia and the Pacific coast has been largely uncontested for centuries.

However, the economic rise of China over the past decades and its increasingly outward-looking pretensions, as highlighted by President Xi Jinping’s ambitious “One Belt, One Road Initiative” (OBOR) changes everything for Russia.  While Russia has seen the steppes mainly for their value in securing geopolitical control of the Eurasian center, Xi envisions a return to the commercial dynamism of the historical Silk Road, which united the Far East with the Middle East and Europe for centuries, until the collapse of the Mongol empire. The Chinese have been aggressively executing Xi’s vision, building infrastructure to connect China with the West and becoming the largest investor in the natural resources of the former Soviet Republics.

Surprisingly, perhaps because of pragmatism and acceptance of Xi’s promise that the OBOR is aimed at benefiting all participants equally, so far there appears to be little resistance on the part of Russia to Xi’s grand and transformative plan. To the contrary, there has been a rapprochement between Putin and Xi, who have met on frequent occasions over the past several years. In a recent state visit to Moscow, Xi announced $10 billion in agreements for OBOR-related infrastructure investments and told the media that relations between the two countries were currently at their “best time in history” and that Russia and China were each other’s “most trustworthy strategic partners.”

Russia’s cuddling up with China is probably its best strategic option at this time. First, neither China nor Russia have to worry about business relations being undermined by volatile domestic politics or high-minded demands for human rights, and, in that sense, they see themselves as reliable partners. Second, both parties have an interest in weakening what they consider to be the arbitrary and hegemonic power of the United States. For example, both would like to see a weakening of dominance of the U.S. dollar and America’s discretionary control of the global financial system, so it is no surprise that Russia is accepting payment in yuan for commodities and that China is setting up a Petro-yuan-gold trading infrastructure in Shanghai and Hong Kong to facilitate non-dollar transactions.

Most importantly, however, is the fact that Asia will be the driving force of global growth and that its center of activity will be in China and its Far East neighbors. Driven by China, Asia’s share of world GDP will grow to 35% by 2022 (IMF forecast), and almost all of global growth in marginal output will come from Asia.  With its abundant energy, mineral and farm resources, Russia is best positioned to meet growing demand for natural resources in Asia.

A remarkable essay written by President Putin this week clearly states Russia’s current state of mind regarding Asia, and the seemingly total embrace of Xi’s OBOR vision. In a remarkable turn of events, Putin and Xi have become the defenders of open markets and predictable rules of commerce, in stark contrast to Donald Trumps “America First” ideology.

Putin writes: (excerpts, full note available here.)

“As a major Eurasian power with vast Far Eastern territories that boast significant potential, Russia has a stake in the successful future of the Asia-Pacific region, and in promoting sustainable and comprehensive growth throughout its territory. We believe that effective economic integration based on the principles of openness, mutual benefit and the universal rules of the World Trade Organization is the primary means of achieving this goal.

We support the idea of forming an Asia-Pacific free-trade area. We believe this is in our practical interest and represents an opportunity to strengthen our positions in the region’s rapidly growing markets. Indeed, over the past five years, the share of APEC economies in Russia’s foreign trade has increased from 23 percent to 31 percent, and from 17 percent to 24 percent in exports. We have no intention of stopping there…

On a related note, I would like to mention our idea to create the Greater Eurasian Partnership. We suggested forming it on the basis of the Eurasian Economic Union and China’s Belt and Road initiative. To reiterate, this is a flexible modern project open to other participants.

Comprehensive development of infrastructure, including transportation, telecommunications and energy, will serve as the basis for effective integration. Today, Russia is modernizing its sea and air ports in the Russian Far East, developing transcontinental rail routes, and building new gas and oil pipelines. We are committed to bilateral and multilateral infrastructure projects that will link our economies and markets — such as the Energy Super Ring that unites Russia, China, Japan and the Republic of Korea, and the Sakhalin-Hokkaido transport link.

We are particularly focused on integrating Russia’s Siberian and Far Eastern territories into this broader network. This includes a range of measures to enhance the investment appeal of our regions and to integrate Russian enterprises into international production chains.

For Russia, the development of our Far East is a national priority for the 21st century. We are talking about creating territories of advanced economic growth in that region, pursuing large-scale development of natural resources and supporting advanced high-tech industries, as well as investing in human capital, education and health care, and forming competitive research centers…

We intend to engage in substantive discussions on all these topics at the 25th APEC Economic Leaders’ Meeting this week. I am confident that, acting together, we will find solutions to the challenge of supporting the steady, balanced and harmonious growth of our shared region, and securing its prosperity. Russia is ready for such a collaborative effort.”

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India’s Star Rises in the World Bank’s Doing Business 2018 Survey

The World Bank has conducted its “Ease of Doing Business” survey for fifteen years, providing a comparative view of business regulation around the world over an extended period of time. The survey is aimed at providing a comparative basis to help policy makers address issues that impact entrepreneurial activity. The rankings resulting from the survey are an important indication of how business-friendly countries are and how successful they can be in attracting the entrepreneurial capital to succeed in an increasingly competitive global environment. The survey ranks 190 countries. The top thirty can be considered an elite in terms of providing a regulatory environment amenable to business. A top 50 ranking is good. A ranking above 100 indicates that a country’s business community is crippled by bureaucracy and rent-seeking agents. A poor ranking is particularly debilitating for a small country that does not have the market scale and diversity to attract capital that large countries like Brazil, China and India have.

There were several important revelations from the 2018 survey published this week.

  • India improved its ranking from 130th to 100th, which is a significant improvement. This confirms a recent trend and lends credence to the government’s very ambitious objective of improving the country’s ranking to 50 during the current Modi Administration.
  • India’s improvement highlights Brazil’s sorry performance. Brazil and India have long been competing for the position of lowest ranked of the major emerging market economies. Brazil fell two points in the latest ranking, to 125th and now has a secure hold on the bottom rung.
  • Indonesia, the third of the large emerging markets economies with consistently poor scores over the history of the survey, has been steadily improving its performance for the past six years, and reached 72nd in 2018, which compares to 129th in 2012.
  • Asia, by and large, provides good business regulation and is improving. In addition to India and Indonesia, Vietnam is showing steady improvements and now has a ranking of 68, compared to 99 in 2014. China also is gradually improving. Taiwan, Malaysia, Thailand and South Korea are all elite in terms of business regulation.
  • The Philippines provide somewhat of a glaring exception in Asia. Though the country has improved significantly from the very low ranking of 2011, it has significantly deteriorated over the past four years, and it obtained a ranking of 113th in the 2018 survey. Given how competitive the Asian region is and the improving trends, the Philippines appear to be at a growing disadvantage.
  • In Europe, the remarkable trend is the surge of Russia and much of Eastern Europe. At a 2018 ranking of 35th, Russia is approaching the “elite” countries in terms of the quality of business regulation. Russia has improved every year since 2012, when it ranked at 123rd. Poland’s ranking at 27th secures an “elite” standing. Moreover, the improvements in Eastern Europe are much more profound. Georgia, Macedonia, Estonia, Lithuania and Latvia all rank in the top twenty, ahead of most Western European countries, including Germany, and are well ahead of the Mediterranean countries, France, Spain, Italy, Greece and Turkey.
  • South Africa appears to be on a ruinous path. Its ranking has fallen steadily for nine years, taking the country from elite status to 82nd.
  • Latin America is also on a steady decline, losing competitiveness to the other regions of the world. Mexico is the only bright spot, just because it has maintained its decent ranking around the 50th level. Chile, Peru and Colombia have all seen consistent and worrisome declines in recent years. Argentina and Brazil are secure in their abysmal rankings, near the bottom for economies of this relative importance. Not to mention, Venezuela which is essentially closed for business. With a wave of business-friendly governments now rising to power in Latin America, it will be interesting to see if these negative trends can be reverted in upcoming surveys.

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