Deglobalization and Technological Disruption

Deglobalization and rapid technological change are likely to be the two main drivers of economic and stock market performance in emerging markets for the next five years. Every country faces different combinations of challenges and opportunities and how they deal with these will make a big difference in whether they prosper in our rapidly changing world.

Deglobalization

The intense globalization of the past decades, which had not been seen since the last decades of the 19th century, was a boon to the global economy, while at the same time dramatically redistributing relative income: to the poorer countries and away from the developed ones; and to super-wealthy individuals and away from everyone else. The political effects of this redistribution have become evident in recent years, leading to a dramatic corruption crack-down in China and the rise of populism in the West in the shape of Brexit and Donald Trump.

The clear beneficiaries of globalization were those manufacturing countries that integrated themselves in global value chains. These were mainly in Asia, though countries like Mexico and Turkey also participated. Some small, highly competitive countries also benefitted from better access for their exported goods. And, of course, consumers in developed economies benefitted from cheaper imports.

The relative losers were those countries that fought the trend (Brazil, India, South Africa, Venezuela, Indonesia, Russia) or were too small or uncompetitive to participate.

Unfortunately, those countries that did everything right during this cycle and participated fully in the upside of globalization may now have more to lose. Those countries highly integrated into global value chains and highly dependent on exports may now suffer relative underperformance unless they can find other sources of growth.

On the other hand, those countries that never embraced globalization –Brazil and India for example — may now be well positioned. Given the size of their domestic markets and ample growth opportunities that are unlinked to the global economy, they could still attract investments and thrive in a world where country-to-country trade deals based on reciprocal market access become more the norm.

China also seems well positioned. Given the size of its economy, further export-led growth was never going to be plausible. Moreover, the Chinese economy is coincidentally entering into a phase where it will be driven by domestic consumption and improvements to the “quality” of life.

Developed economies also are generally well positioned. Protectionism may lead initially to a welcomed increase in wages. Over time, it will trigger investments in automation technologies and accelerate the opportunities for “on-shoring,” the relocation of manufacturing closer to the customer in the developed countries. Two examples of this are: Adidas operating highly automated sneaker plants in Germany, and cloud computing and artificial intelligence undermining the low-value-added services of the Indian information technology industry.

Technology

There are two main thrusts of technological innovation that will dramatically impact emerging markets in coming years: 1. Artificial intelligence and robotics; and 2. Renewable energy.

With regards to technology, there are two factors to consider; whether a country can benefit as a developer of new technologies; and whether a country can successfully embrace the adoption of new technologies.

In terms of participating in the benefits of the development and commercialization of new technologies, it seems today that only East-Asian emerging markets (China, Korea, Taiwan) are well positioned to do so. China, following the path of its East-Asian neighbors and committing huge government support, is already becoming a leader in many technologies (internet, mobile telephony/5g, drones, high-speed trains, electric vehicles, solar and wind, among others).

In terms of the potential for countries to embrace new technologies, the path is much less clear.

New technologies offer enormous opportunities for emerging markets to leapfrog to state-of-the art conditions with much lower costs and vastly better productivity. For example, China has built a world class telecommunications network based on mobile technology without having had to make huge investments in fixed telephony networks. In Brazil, fixed lines are likely to become nothing more than a bad memory for people over 50 years of age. In Vietnam and India, the average person will have never experienced a fixed line. The potential for leap-frogging is the greatest in the poorer countries which have no attachment to legacy technologies, such as Africa, India and China.

A multitude of new technologies now being deployed will ramp-up dramatically in coming years, including cloud computing, artificial intelligence, drones, electric and autonomous vehicles, e.commerce, fintech, and battery-centric renewable energy. Many of these technologies will be very disruptive to businesses, that will lobby hard to protect legacy markets. Every country will deal differently with these disruptive forces, depending on the vision of policy makers and the power of entrenched interests to block change.

China has embraced technology for idiosyncratic reasons. China started from so low a level of economic development and the pace of change has been so fast that entrenched interests did not oppose new technologies. But that is not the case in most places, particularly the stagnant middle-income countries with powerful entrenched interests and rent-seeking politicians.

Take a country like Brazil. New technologies may face a phalanx of opposition from manufacturers, unions and local politicians, aimed at discouraging entrepreneurs. While in China, multinational automobile firms have quickly toed the Party line and committed to electricity vehicle investments, in Brazil they are likely to resist for as long as possible.

India is probably the country with most to gain from disruptive changes. It has a tech-savvy elite which has been instrumental in pushing for digitalization, such as the recently implemented AADHAAR national biometric digital identification program, which opens huge opportunities for digital commerce and fintech. With a very large proportion of its population with no access to basic public, financial and commercial services, AADHAAR provides significant opportunities for the Indian masses to gain access to state-of-the art technologies. This is now happening with smart-phones and will soon ramp up with battery-centric renewable energy and fintech services, giving countless isolated villagers access to modernity for the first time. Also, with only a fraction of the population currently with access to automobiles, in India there is no legacy infrastructure standing in the way of electric vehicles.

Though it is difficult to predict how things will play out, the following chart attempts to map-out how de-globalization and technological disruption may affect the major countries in emerging markets.

 

 

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  • Ground broken on China-Thai railroad (Caixing)
  • China’s new winter sports resort ( WIC)
  • China cannot be a global leader (China File)

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