Abstract
Emerging markets are important for global economic growth. In the post-crisis era, they played a vital role in global economic recovery. However, frequent financial turmoil in emerging markets over the years exposed flaws with the economic structures and financial markets of these countries. This articledescribes the overall economic conditions and structures of emerging markets and analyzes the driving forces of economic growth. It is established that emerging markets, especially of Asian countries, contributed significantly to the global economic growth over the last few decades. The main drivers of economic growth vary among the emerging markets. While some countries rely on energy resources, others have their economic growth driven by cheap labor and high savings. Meanwhile, emerging markets with rapid and stable economic growth over a long period of time have some characteristics in common. For example, they all carefully manage the opening-up processes. The articlealso investigates the major problems that emerging economies encounter in economic development. For example, the overreliance on the global market makes some countries vulnerable to external shocks; the fragile domestic financial market leads to frequent financial crises; the improper economic structure makes some countries excessively dependent on foreign markets; and some countries are stuck in economic stagnation.
Introduction
An Overview of Economic Development in Emerging Markets
Emerging markets represent economies with large economic scale, rapid economic growth, good economic structure, and sufficient growth potential (Fang et al., 2012; IMF, 2004; Kvint, 2009). Hu et al. (2018) selected 30 such emerging markets with the most development potential across the globe (subsequently referred to as E30). The E30 are located in Asia, Latin America, and Africa. They contribute 34.2% on aggregate to the total global economic output, and constitute 62.5% of the world’s total population (Figure 1). 1 By the World Bank’s standard, most emerging markets are middle-income economies. 2 They play an increasingly important role in the world economy.
Since the new millennium, emerging markets have been expanding their shares in the global economy. In 2017, E30 had a total GDP of US$27.7 trillion, accounting for 34.2% of the world’s total, far more than 16.6% in 2000. The 2008 global financial turmoil inflicted a negative shock on the developed economies, but it turned out to be an important opportunity for emerging markets. In a post-crisis era, the developed economies registered lackluster growth, whereas the economy of emerging markets briskly rebounded and took up a growing share in the global economy.
Which countries and regions are credited with improvement in the economic status of emerging markets? Geographically speaking, Asian countries lead the economic growth of E30 countries. On an aggregate, they accounted for 71% of the total GDP of the E30 countries in 2017, showing an increase of 19.7% compared to that in 2000. By contrast, the share of Latin American economies went down from 34.8% in 2000 to 17.8 % in 2017 (Figure 2). The top five of the largest emerging markets in Asia were China, India, Indonesia, Turkey, and Saudi Arabia, which on an aggregate contributed 88.3% of the total economic output by Asian emerging markets. Among the five countries, China and India, the largest and second largest economy respectively, registered the fastest and most stable economic growth. From 2000 to 2017, the two economies never experienced negative growth, and their average GDP growth rate was 9.3% and 6.6%, respectively. The proportion of China’s GDP in the E30 soared from 21.8% in 2000 to 43.9% in 2017, marking China as an important engine for global economic growth.
Despite an increasing share in the global economic output, emerging markets lag far behind the developed economies. Of the E30, only three countries stepped into the high-income economy level, and the remaining were all middle-income economies. In 2017, the average GDP per capita of E30 was US$7,272, still much lower than the world average of US$10,769. The figure, meanwhile, was higher than the middle-income countries, which stood at US$5,229. Emerging markets in different continents vary in terms of the developmental stage. Those in Europe were better developed with a GDP per capita of US$11,802, approaching the threshold of a high-income economy. The GDP per capita of emerging markets in Latin America, where development is relatively balanced, was US$8,864. This was followed, the GDP per capita of Asian emerging markets, which was US$6,606. However, the development gap in Asia was huge. In the richest country, Saudi Arabia, the GDP per capita was as high as US$20,804, which is 14 times that of Pakistan (US$1,467), the poorest country in this area. African countries were underdeveloped, with a GDP per capita standing at merely US$3,423. Except South Africa, emerging markets in Africa are all low- and middle-income economies.
Emerging markets have maintained robust growth since the beginning of the new millennium. Statistics indicate that the GDP growth rate of E30 countries kept abreast with the middle-income countries. Over the last two decades, their average growth rate was about 2.6% higher than the world average. These emerging markets maintained positive economic growth even during the global financial crisis. After 2009, their economy briskly rebounded, and in 2010, it recovered to the high growth rate before the crisis. Thereafter, they have maintained an economic growth rate above 4%.
Emerging markets have been an engine for global economic growth over the last decade. The economic landscapes in these countries are also changing. The growth rate of GDP per capita of Asian emerging markets has been higher than their European and Latin American counterparts. Over the last 10 years, the growth rate of E30’s GDP per capita averaged 2.71%, higher than the world average of 1.22% and the average of middle-income countries, which was 2.14%. Emerging economies in Asia, represented by China and India, are catching up with their peers in Latin America and Europe. In 2000, the GDP per capita in China and India was US$959 and US$443, which is about 12.4% and 5.8%, respectively, of Argentina’s figure. In 2017, the proportion rose to 60% and 13.6% of Argentina’s figure, for China and India, respectively. As shown in Figure 3, the GDP per capita of E30 is negatively correlated with its growth rate. Countries with lower GDP per capita registered rapid economic growth and narrowed the gap with developed economies over the last decade. Notably, the statistical law does not apply to all countries. Compared to its peers, China registered faster economic growth with an annual growth rate of GDP per capita logged at 7.7%. However, the growth rates of Egypt, Pakistan, Guatemala, Iran, Tunisia, and South Africa were much lower than the countries at a similar economic development level. These low-growth countries share a common feature: political and economic instability leading to high economic volatility and growth stagnation at a certain stage.
The Economic Engines of the Emerging Markets
Located in Asia, Africa, Latin America, and East Europe, the E30 countries have diverse geological location, resource endowment, and political environment. This determines the heterogeneity of their economic structures and development models. Based on the analysis of their economic and trade structures, this article explores the driving forces behind the economic growth of the E30 countries.
High Level of Opening Up
The Proportion of Imports and Exports in Total GDP in 2017 (%).
Source: The World Bank WDI Database.
Emerging economies are net exporters of goods and services. In 2017, E30 countries registered trade surpluses of US$236.6 billion, around 0.87% of their GDP on aggregate. Each country differed in trade conditions. Among these, the emerging markets in Asia with the highest level of opening up registered more surpluses. For example, the proportion of trade surpluses in their GDP was 3.1%, 7.1%, and 13.4% in Vietnam, Malaysia, and Thailand, respectively. With a relatively low cost of labor, these countries grew to be world powerhouses of medium- and low-end manufacturing, and provided the world with labor-intensive goods. Apart from these Southeast Asian countries, economies with rich resources such as Kazakhstan and Russia registered trade surpluses owing to their large reserves of energy resource exports. Countries with high trade deficits were those lacking economic stability and industrial foundation. Most of them are Latin American or African countries, including Tunisia (−11.4%), Egypt (−10.4%), and Morocco (−9.3%) (Figure 4). Moderate trade surplus is the most important channel for emerging economies to earn foreign exchange. According to China’s experiences, it not only helps them import the productive capital and promote industrial upgrading, but also preserves their financial stability. After the financial turmoil in 1997, emerging markets in Asia swiftly adjusted their economic structures, maintained their current accounts well, and worked to build sound and stable financial systems. Over the last 20 years, they have managed to maintain rapid and stable economic growth even in the face of severe external hits such as the global financial crisis.
A closer look at the imports and exports of emerging markets provides more insights into their economic structure. Overall, the proportion of trade with developed economies in the total foreign trade for emerging markets has been declining over the last two decades, dropping from 75% in 1999 to 59% in 2017. 3 Such a decline is in line with the overall trend of global trade. Trade with developed economies will generate a certain degree of spillover effect. However, export businesses will learn advanced technologies and management experiences in this process. At the initial stage of economic takeoff, the learning process will give full play to the advantages of developing countries. Declining trade with developed economies over the recent years, manifested declining demands in developed economies and relocation of the manufacturing industry. For another, it showed that developing countries represented by the E30 are taking increasingly important positions in the global value chains.
What have emerging markets been exporting? Overall, emerging markets depend heavily on energy exports, which, on average, accounted for 18% 4 of the E30’s total exports, much higher than the world average of 11.9%. The proportion in some countries rich in oil, gas, and other natural resources, such as Saudi Arabia, Iran, Kazakhstan, and Russia, even exceeded 50%. Energy export is an important means for emerging markets to earn foreign currency, and an important engine of economic growth. However, it is also one of the most likely triggers for economic and financial crisis as the export depends heavily on external factors. Countries relying heavily on exports of commodities, such as oil, gas, and mineral resources, are likely to suffer from drastic financial volatilities when the commodity prices spiral downward. By contrast, countries with a diverse export structure and less reliance on commodity exports, including Poland, China, and Chile, show stronger economic resilience and can better withstand external economic and political hits.
Manufacturing Exports and Hi-tech Exports in Emerging Markets (average from 2015 to 2017).
Source: The World Bank WDI Database.
Driving Forces of Economic Growth
The E30 countries are located in Asia, Europe, Latin America, and Africa. Brazil and Argentina in Latin America are rich in mineral resources. Poland and Romania in Europe boast abundant capital and a complete industrial foundation. Indonesia and Vietnam in Southeast Asia have plenty of young labor and cheap land. Tunisia and Morocco in Africa are close to developed economies in southern Europe across the Mediterranean Sea. These countries made use of their distinctive advantages to boost economic development. Overall, the driving forces of economic growth of the E30 countries range from energy and resource exports, education and human resources, to savings and investment. Meanwhile, a common feature among the emerging markets that reached high levels of economic development is their openness to the rest of the world and having a stable economic and political environment.
Energy Reserves Are a Driving Force of Economic Growth for Many Emerging Markets
Many emerging markets are rich in energy and natural resources. By region, emerging markets in West Asia and Middle East have the richest energy reserves, including Saudi Arabia, the largest oil producer with an annual fossil energy output per capita of 20 tons. The annual fossil energy output in Kazakhstan and Iran also exceeds 5 tons. Compared to these West Asian countries, South Asian and Southeast Asian countries such as India, Pakistan, Vietnam, and Thailand, as well as African countries including Tunisia and Egypt are poor in natural resources. In E30, Pakistan has the smallest energy reserve with an annual fossil energy output of merely 0.15 ton per capita. Overall, the average annual fossil energy output of emerging markets was 1.38 tons, and the world average was 1.5 tons (Figure 5). For a small number of emerging markets, energy export is the main source of foreign currency earnings and economic growth. However, the model cannot be replicated in all countries.
Fossil energy resources include petroleum, natural gas, and coal. The total output of fossil energy equals the output of all energy types measured in tons of oil equivalent.
Energy export is a shortcut to economic growth as shown in Figure 6. Countries with high outputs of fossil energy, except for Iran which was frequently sanctioned, all rose to middle- and high-income rank with a GDP per capita reaching US$10,000. Saudi Arabia is the richest emerging economy, whose fossil energy output per capita stood at around 20 tons, and the GDP per capita exceeded US$20,000. However, energy reserve is not a prerequisite for economic growth in emerging markets. Countries with a per capita fossil energy production lower than the world average nevertheless attained rapid economic growth, for example, China, Poland, Romania, and Turkey. There is no association between high energy outputs and high economic growth. Saudi Arabia, a country with a per capita fossil energy output surpassing 20 tons, was hit by drastic economic downturns. China, a country with severe insufficiency of energy supply and depending on foreign supplies for more than 70% of its oil consumption, maintained an annual growth rate of 9.2% from 1999 to 2017. Even amid the global financial turmoil, China registered an economic growth rate of around 10% and did not experience economic recession. Apart from China, whose economic growth was hailed as a miracle, Vietnam, whose per capita energy output was only one-third of the world average, achieved a rapid and stable economic growth at an average annual growth rate of around 6.3% over the last two decades. Therefore, among the factors affecting economic growth in emerging markets, energy reserve only applies to certain countries. The development model depending on energy exports may not be suitable for all emerging markets.
Abundant Educated Labor Is an Important Engine of Economic Growth for Emerging Markets
Emerging markets have large populations. In 2017, the total population of E30 countries was 4.694 billion, about 62.5% of the global total. China and India have a combined population of 2.725 billion, accounting for 58% of the total population of E30 countries. A large population means not only a huge consumer market, but also abundant labor force for economic growth. As shown in Table 3, the population growth rate of E30 countries, as a whole, was about 1%, and by country, the average reached 1.25%. Of the population accounting for two-thirds of the world total, 67.2% are young people aged 15–64, with working abilities. The proportion is higher than the world average of 65.46% and the average of middle-income countries, which is 66.7%. The abundant supply of labor is an important driving force for some emerging markets. Those registering substantial growth in recent years are generally countries with a young population. Although China’s population is aging, people aged 15–64 in 2017 still accounted for 71.7% of the national total. Some other Southeast Asian countries also had abundant labor resources. For example, the proportion of people aged 15–64 in Thailand, Malaysia, and Vietnam were 71.3%, 69.4%, and 69.8%, respectively. The abundant supply of cheap labor laid an important foundation for these developing countries to catch up with the developed ones.
Gross university enrolment rate is the proportion of citizens finishing secondary education and being admitted to universities (with or without degrees) in the total population.
Population Growth and Education Level in Emerging Markets (average from 2015 to 2017).
Source: Authors’ analysis based on the World Bank WDI Database.
Note: Proportion of young people is the proportion of people aged 15–64 in the total population.
High Savings Promote Economic Growth in Emerging Markets
Apart from natural resources and cheap labor, high savings determine reduced investment costs and are also an important engine of economic growth for many emerging market economies.
Overall, the saving rates in E30 countries are lower than the world average. However, different continents show differing saving patterns. The saving rates in Asia are substantially higher. Among the E30 countries, China has the highest savings rate, with figures between 2015 and 2017 averaging 46.6%, about 20% higher than the world average. The resident saving rates in West Asian countries including Iran, Kazakhstan, and Saudi Arabia were also relatively high. It was due to high energy export and low consumption. High-saving countries can also be found in Southeast Asia, with the saving rates in Thailand, Indonesia, and Malaysia all exceeding 30%, which is higher than the world average and the average of middle-income countries. Most low-saving countries are located in Latin America and Africa. The saving rates in Egypt and Guatemala were lower than 5%. Argentina and Brazil, the largest economies in Latin America, registered saving rates of around 20%. Low-saving rates reduce credit supply and push up the interest rate, which adds to the cost of financing and restrains economic growth. As shown in Figure 8, the interest rates in high-saving countries are relatively low. The average annual interest rate in China was as low as 4.35%, whereas in Brazil it was 47.7%.
While lowering the domestic financing costs, high savings also reduce the reliance of the E30 countries on external capital. Compared to Latin American countries, the proportion of external debt in the total GDP of East Asian and Southeast Asian countries was relatively low. Therefore, the solvency risk of these Asian economies is controllable. High savings, low interest rates, and low external indebtedness created a stable financial environment that is suitable for an economic start-up. As shown in Figure 9, except for some outliers, there is a positive correlation between the saving rate and GDP growth of emerging markets. Due to proactive fiscal stimulus packages, China’s saving rate even exceeded 50% after the global financial crisis in 2008, and its investment also surpassed 45%. With high savings and investments, China registered a GDP growth rate of around 10%. In comparison, countries with low saving rates such as Argentina and Colombia were plagued by low economic growth. Particularly, during the global financial turmoil, low-saving countries were unable to withstand the storm as well as high-saving economies did, and thus slipped into economic recession.
Carefully Managed Opening-up Is an Important Engine of Economic Growth for Emerging Markets
Despite different resource endowments and development paths, the E30 countries share one characteristic in common, that is, a fully open market. Opening up is an important driving force behind the economic take-off of emerging markets. Countries rich in energy resources, such as Saudi Arabia and Russia, and those lacking resources including Poland and Thailand, need to integrate themselves into the world economy and find their respective appropriate positions in the global value chain. Through opening up, countries are able to develop industries that they have an edge in and bring in new technologies to promote industrial upgrading.
Overall, the current accounts of E30 countries are more open than those of other countries. The imports and exports on aggregate of the E30 countries account for 47.3% of their total GDP. Excluding the three major open economies, namely, China, India, and Brazil, the figure was 63.6%, which is higher than the world average and the average of middle-income countries. On one hand, fully opening up enables emerging markets to export competitive products to markets across the world. In this process, emerging economies earn foreign exchange and foster export-oriented industries, which in turn contributes to the development of domestic manufacturers. On the other hand, while doing businesses with developed economies, the companies of the emerging market economy have a chance to learn from their counterparties about advanced technologies and management expertise, which helps domestic companies to build their strengths and better integrate into the global market.
China is a case in point when it comes to the success of economic development through opening up. China has a highly open goods market and a moderately open financial market. In the process of opening up, China adopted a progressive stance. It first allowed foreign access to its domestic goods market, and then to the financial sector. The carefully designed gradual liberalization brought in high skills and management expertise, which in turn promoted industrial upgrading. Meanwhile, it enabled moderate protection of the domestic industries and created a stable environment for them to grow. More importantly, the carefully managed liberation ensured stability of the domestic financial market, which is particularly important to emerging markets. Figure 10 shows the exchange rates of currencies in China, South Korea, Japan, and Singapore against the US dollar. It can be seen that in the 1960s, when Asian economies including South Korea, Japan, and Singapore began to take off, the currencies of these countries maintained relative stability against the US dollar. Since its reform and opening up, China had been pegging its currency to the US dollar or adopting a managed floating exchange rate system. When reforming the foreign exchange regimes, it adopts administrative orders or market approaches to prevent drastic changes in the exchange rate. A stable exchange rate is conducive to stabilize the market expectations, which is essential to boost exports and create a favorable financial environment for growth.
The Economic Problems of Emerging Markets
With the population aggregate accounting for 62.5% of the world total, emerging markets contributed 34.2% to the global economic output. Despite rapid economic growth and huge potential, these countries, except the largest economy China, were unable to play an important role in the global economic system, particularly in the global financial market, because of their economic size and low economic development. The major and better-developed emerging markets such as China, Brazil, and Turkey face problems of economic restructuring, whereas smaller emerging economies including Ghana, Pakistan, and Uzbekistan urgently need to seek sources for economic growth based on their endowments. In the development process, these emerging markets face four major problems that are discussed below.
The Export-oriented Development Model Makes Emerging Markets Vulnerable to External Forces
While facilitating economic take-off, the export-oriented development model became a trigger for disturbance in the financial market in emerging economies. These countries are inevitably affected by global and regional financial crises. The symptoms include drastic depreciation of currencies and turmoil in the financial market. Over recent years, while the US started a process of raising the interest rate which led to a stronger US dollar, a large quantity of international capital returned to the US Under the circumstances, major emerging markets in Asia, Africa, and Latin America have witnessed depreciating currencies to varying degrees since 2018. The currencies of China, India, and Brazil went down around 6%, 11%, and 15%, respectively, in 2018, while Turkish Lira and South African Rand depreciated close to 30% and about 14%, respectively (Figure 11). In addition to its direct consequences of drastic currency depreciation and capital flight, a strong US dollar generated herd behavior. Distrust of international investors in the government and financial markets of emerging economies, and their corresponding panic led to skyrocketing bond rates and a plummeting stock market in emerging economies.
Financial fluctuation triggered by external factors leads to depreciation of financial assets and further affects consumption by residents through income effect. It also erodes the value of collateral, which together with an increasingly rising interest rate, poses a negative impact on investment in production sectors. More importantly, the uncertainties in the financial market derived from external shocks undermine the confidence of the investors for the future, which twists production and investment and depresses economic growth. There are many cases in history where emerging markets were adversely affected by policy adjustment and economic fluctuations of developed economies. As the emerging economies are in economic cycles that are different from the developed countries, the monetary and fiscal policies of the US and the Euro zone often have some unwanted spillover effects on the emerging markets. This usually aggravates economic turmoil in these emerging economies and leads to economic stagnation or even recession.
Fragile Domestic Financial Market Is the Fundamental Reason for Frequent Financial Crises in Emerging Markets
Capital account regulations help mitigate external shocks. Nevertheless, the regulation cannot effectively smooth out economic fluctuations or eradicate financial crisis. Figures 12 and 13 show cross-border capital flows in China and other emerging markets after the global financial crisis in 2008. Similar to the situation in other emerging markets, China saw a continuous inflow of capital before the financial crisis. Although originating in the US financial market, the crisis rapidly engulfed other developed economies and emerging markets. China also witnessed reversed capital flow during the crisis as large-scale capital flew out. In late 2008, the amount of capital that flew out was 7.1% of the GDP. Some other emerging markets in Europe and Asia, including Russia and Malaysia, suffered an even more drastic capital flight. After the crisis, emerging economies managed to pull themselves out of the mire. The rapid rebound attracted huge inflow of international capital. However, since 2014, as the US economy recovered, the Federal Reserve put an end to its quantitative easing policy, began to unwind its balance sheet, and raised the interest rate. Affected by this, cross-border capital flow in some emerging markets was reversed once again. In China, the constant surplus of capital account in the private sector became a constant deficit, with the amount of cross-border capital from 2014 to 2016 accounting for an average of 4.6% of the GDP. Eastern European countries, including Russia and Romania, and Asian countries, such as Malaysia, the Philippines, and Thailand, also experienced rapid capital flight. Turkey was the country hit hardest by the strong US dollar and other external factors in 2018. The exchange rate of Turkish Lira against US dollar went straight from 3.78 in the early 2018 down to 6.89 in mid-August, which was the lowest level. The single-day slump was as high as around 20%, which was a situation on the brink of exchange rate collapse. Fluctuations on the foreign exchange market caused ripples in the stock and bond markets. In 2018, the overnight rate in Turkey soared by more than 10%; the Borsa Istanbul 100 Index went down a cumulative of 20%. With its fragile economic fundamentals compounded by a complicated international environment, Turkey had its financial risks accumulated. As of the end of 2017, the debt-to-GDP ratio in the non-financial sectors reached as high as 113%, an increase of close to 30% and higher than in early 2008. Its proportion of short-term foreign debts in total foreign exchange reserve crossed the red line. Due to the high leverage and current account deficits, Turkey always suffers from more default risks and monetary mismatching problems in the banking system when the US monetary policy tightens. These are potential risks threatening its economic growth. Differing from the financial fragility in Turkey, some other emerging economies, including Chile, Peru, and Mexico, maintained a relatively stable capital net inflow even when the Federal Reserve shrunk its balance sheet and raised the interest rate. They are only slightly affected by the monetary policy changes in developed economies, even though their financial markets are fully open to foreign investors. 5
Moderate capital controls help cushion against external financial shocks. However, the most important weapon against external financial risks is a sound and stable financial system and real economy. Emerging markets are mostly developing countries. The depth and width of their financial markets are not at par with the developed economies. In the process of rapid development, policy makers mainly focus on boosting economic growth, but fail to pay equal attention to problems with the financial system. For example, before the Asian financial crisis in 1997, credit expanded rapidly in the banking system of Southeast Asian emerging economies such as Thailand. A huge amount of international capital poured in, causing serious monetary mismatching in the balance sheets of banks. These countries became particularly vulnerable to external shocks when their exports were less competitive, and the government had no stable funding. In 1996, Thailand’s foreign debts totaled US$108.7 billion, of which US$47.7 billion were short term, and far exceeded the country’s foreign exchange reserve. In the same year, Thailand’s current account witnessed a deficit as high as 8% of its GDP. Problems with the domestic financial system and economic structure are fundamental reasons why emerging economies are vulnerable to external shocks.
With Unitary Economic Structure, Emerging Economies Are Highly Dependent on External Factors
Many emerging economies have unitary economic structures. Their economic growth mainly depends on a certain industry, while complete industrial chains have not yet been formed. In some energy-dependent countries such as Saudi Arabia and Kazakhstan, energy exports account for more than 60% of their total exports. In the meantime, these countries rely heavily on imports. After the 2008 global financial crisis, the net exports of Saudi Arabia surpassed 25% of the total GDP, and the net exports in Kazakhstan also reached around 20%. Some industrialized economies among the emerging markets also depend heavily on external demands, a typical example of which is India. On one hand, India lacks energy and resources, and depends on imports to satisfy the demands of industrial production for raw materials. On the other hand, it boasts hi-tech industry and high-end services, and its manufacturing sector is weak. The hollowed-out industrial structure fails to create enough jobs, which lowers people’s livelihoods, and increases inequality and overdependence on external factors. When the commodity price in the international market fluctuates or developed economies such as the US change their economic policies, countries with a unitary economic structure (even energy-reliant countries exporting commodities such as gas or industrialized countries such as India) are more vulnerable than those having a complete industrial chain and less dependence on external forces.
Economies with a unitary economic structure are not only vulnerable to external shocks, but also stay weak in the face of political turbulence. Major oil producers such as Iran and Russia have suffered from increasingly severe sanctions by the US over the past years. After withdrawing from the Iran nuclear deal in May 2018, the US restored economic sanctions against Iran, which included bans on trade in oil and minerals with Iran, and sanctions against foreign financial institutions dealing with the Iranian central bank. The move aimed to strangle Iran’s oil industry, which the country’s economy depended on, and consolidate the political status and economic interests of the US in the Middle East. After the Ukrainian crisis in 2014, the US imposed waves of sanctions on Russia. The sanctions targeted senior management of some businesses, government officials, and the national defense, energy, and finance sectors. Since 2019, the US has been threatening to impose sanctions against the Nord Stream 2 Pipeline project, a project benefiting both Russia and European countries by transporting natural gas into major European countries from Russia. The arbitrary unilateral sanctions and long-arm jurisdiction by the US severely affected the economy in emerging markets, while the excessive dependence on oil and other energy industries left Iran and Russia few options in the face of US sanctions. Further consequences are the turmoil in the financial market, rapid recession in the real economy, and severe hit to people’s livelihoods (Figure 14).
Some Countries Are Stuck in Economic Stagnation
Among the emerging markets, some countries have sound and solid foundations for economic growth. However, these countries have seen declining economic growth, aggravated economic turbulence, and long-term stagnation. As shown in Figure 15, some Latin American countries had already achieved high-level economic development in the 1960s. Argentina’s GDP per capita in 1974 registered at US$2,845, about 39.4% of the US figure, indicating that Argentina had reached a high-income country status. However, over the last few decades, Argentina failed to catch up with the US in terms of economic growth and fell far behind. After the sovereignty debt crisis in Latin America in the 1980s and the financial crisis in 2008, Argentina’s economy has been in a tailspin with its GDP per capita being merely 6.8% of the US figure. Despite rapid rebound after the crisis, the country failed to sustain development due to its fragile financial system and unstable political environment. As of the end of 2018, Argentina’s GDP per capita stood at US$11,653, still at the level of a middle-income country. Other emerging economies that suffered from long-time economic stagnation also failed to narrow the development gap with the US even after 50 years of development. In the late 1960s, the GDP per capita of Brazil, Mexico, and South Africa stood at more than 10% of the US figure. In 2018, the GDP per capita of the countries was still around 15% of the US figure.
Unlike the above-mentioned emerging markets, Asian emerging economies such as Singapore and South Korea successfully narrowed the development gap during the same period. From the 1960s to 1990s, the GDP per capita of these countries and regions shot up to the level of developed economies, from a similar starting point as the above-mentioned economies. Japan’s GDP per capita rose from US$1,669 in 1969 to US$43,440 in 1995, and the proportion to the US figure increased from 22% to 151%. The GDP per capita figures in Singapore and Hong Kong went up to US$64,582 and US$48,717 in 2018, respectively, from Argentina’s level, accounting for 103% and 78% of the US figure, respectively (Figure 16). These figures are far higher than the threshold for high-income economies.
Starting from similar positions, these emerging economies reaped different economic benefits. This is because the countries in Latin America and Africa, including Argentina, Brazil, and South Africa, chose development paths different from their Asian counterparts. Asian economies including Japan and China strived to boost the manufacturing sector while creating an open business environment. At the early stage of their development, they learned from the technologies of the Western developed economies, consolidated the manufacturing foundation, upgraded the competitiveness of the manufacturing sector, and secured key positions along the global industrial chains. Focusing on entrepôt trade, Hong Kong and Singapore found their optimal positions in the global market. These two economies improved their port infrastructure, developed high-end services, and financed businesses. They also worked to secure a position in the high-tech sector. By contrast, Latin American countries were plagued by the middle-income trap with Brazil as a representative, and failed to give full play to their core competitiveness. Brazil is rich in natural resources, including fertile soil suitable for soybean, rubber trees, and orchards, and forests covering as high as 62% of its land. Brazil is also rich in water resources as each person has access to 29,000 m3 of fresh water on average. The country ranked fifteenth in the world in terms of proven oil reserves and has a wide variety of mineral resources including titanium, tin, and iron ores. 6 However, Brazil failed to use these natural resources to build up mature, modernized agriculture and industries. In the 1950s, the country vigorously implemented policies of import substitution industrialization, and was committed to building a complete industrial system. Since then, Brazil witnessed rapid economic growth for decades. However, in the process of economic take-off, the government failed to re-distribute the wealth properly, and the manufacturing sector was unable to create enough jobs due to the distorted industrial structure. The result was the widening gap between the rich and the poor. The income inequality has since been restraining Brazil’s economic development. The huge amount of foreign debt as a result of the import substitution strategy is another fundamental reason why Brazil and other Latin American countries were frequently hit by financial turbulence. Thanks to the neo-liberalist reform in the 1990s, Brazil’s economy had a brief uplift. After the market became the dominating force, rampant economic expansion led to a shift of focus from a balance between fairness and efficiency to an emphasis on efficiency. The government’s role was constantly undermined, making it incompetent in countercyclical management. From the perspective of macroeconomics, the country was weak in tackling economic risks. As developed economies like the US tightened monetary policy, raised the interest rate or faced economic downturn pressure, emerging markets in Latin America suffered from substantial capital flight and domestic economic turbulence. The economic crises in the early 1980s and late 1990s made it more difficult for Argentina, Brazil, and other Latin American countries to get back on a fast track, and sent them to even greater economic stagnation.
The Economic Outlook of the Emerging Markets
Emerging markets across the world represent a new force in global development. They are big on the economic scale, rapid in economic growth, and robust in growth momentum. They have been an important force leading global economic growth over the last decades and will play a greater role in poverty eradication and improvement of people’s livelihood in the future. The global economic and political landscape has fundamentally changed over the past years. Western developed economies represented by the US stirred protectionist sentiments and picked trade frictions. In the face of increasing uncertainties and the hindrance by Western developed nations including the US, emerging markets should focus on enhancing their industrial competitiveness, pushing for domestic reforms, maintaining economic and political stability, and securing an indispensable place in the global value chain. Prospectively, emerging markets are expected to change the global economic and governance landscapes in the following aspects.
Emerging Markets Will Work Together to Mitigate the Macroeconomic Risks
Emerging markets are in similar developmental stages and face similar problems. Thus, it will be a win-win choice for the emerging economies to build a financial cooperative framework. After the Asian financial crisis, the ten ASEAN countries along with China, Japan, and South Korea signed the Chiang Mai Initiative, a regional currency swap arrangement that allocated a foreign exchange reserves pool for emergency uses in case of financial crisis. Compared to multilateral cooperative arrangements proposed by the IMF, the regional arrangement for financial cooperation offers more efficient and timely solutions. In case of a crisis, a country often needs to wait for two to three weeks before receiving financial bailout from the IMF. Under the Chiang Mai Initiative, a bail-out requires a shorter time, simpler procedure, and fewer conditions. However, the arrangement is restricted to some emerging markets in Asia. Apart from the small coverage, it has less funding compared to the IMF, making it unable to help emerging markets in other continents cope with crises. Therefore, it is necessary to build a cross-regional financial stability framework applicable to emerging markets including major Latin American economies. In this way, in the face of financial turbulence, the framework will provide timely and efficient contingency arrangement. In addition to the bailout of member countries during a financial crisis, the framework can monitor its macro-economy and financial market of its member states on a regular basis, promote dialogues and technical support to policymakers of the fragile economies, and offer timely warning against potential risks.
BRICS Countries Will Jointly Seek New Opportunities for Development
The BRICS refers to five major emerging economies, namely Brazil, Russia, India, China, and South Africa. They have a large territory, population, and economic scale, and play a significant role in the global economy. 7 Located in four continents, the BRICS countries connect the northern and southern hemispheres. Although they have different resource endowments and industrial structures, they are ranked as a developing country and face similar development issues. The differences and common grounds provide a foundation for their future cooperation.
At present, the New Development Bank, equally funded by BRICS member countries, is based in Shanghai, China. The financial institution is committed to financing infrastructure projects in developing countries. Moreover, it works to solve the problems encountered by the emerging markets in their development process. The BRICS countries will play an increasingly important role in global economic governance. China’s economic strength will get stronger. It will strive for key roles in the global value chain, take solid steps to expand the middle class, and realize its goals of modernization. While consolidating its competencies in information technology and the high-end services sector, India can draw experience from China’s reforms and opening up over the last 40 years, make full use of its demographic dividends, and boost the manufacturing sector. This will create more jobs, improve people’s livelihoods, and eradicate poverty. Russia, Brazil, and South Africa are all rich in natural resources including gas and minerals, which are what India, China, and other emerging markets demand. This is an area where BRICS countries and all emerging markets can build up partnerships. BRICS countries should improve their information sharing mechanism, make commodity trade channels unimpeded, and strengthen cooperation in the global commodity market to secure more say at the global stage and create a stable and enabling international environment in line with the development interests of emerging markets.
Through Jointly Implementing the Belt and Road Initiative, Emerging Markets Will Foster New Economic Momentums
The Belt and Road Initiative has attracted many emerging markets since it was first proposed. The initiative is committed to creating a community featuring policy coordination and connectivity in infrastructure, trade, finance, and people-to-people exchanges. By taking an active role in the initiative, emerging markets will be able to fully integrate themselves into economic development in the East Asian region and participate in trades and investments with major developing countries including China. Under the international cooperation framework of the Belt and Road Initiative, some emerging markets can export their agricultural products and commodities to China. The export-oriented economic development model will help the emerging markets accumulate foreign exchange reserves and create job opportunities, thus contributing to the improvement of infrastructure and creating sound and solid conditions for their economic take-off and long-term development. With a stronger growth momentum, emerging markets will have more capability for tackling macroeconomic risks.
Besides promoting trade and investment among the Belt and Road countries, the Initiative also enhances regional and cross-regional infrastructure connectivity, which stimulates short-term economic growth, lowers the cost of transportation, and unleashes potential for long-term growth. In addition, cooperation with China in production capacity building will boost the development of the manufacturing sector in the emerging markets. In retrospect, every financial crisis hitting the emerging markets could find its root in structural problems hidden in their merchandise markets. This is true for Latin American countries with an overreliance on the energy sector, and for Southeast Asian countries with insufficient growth potential and institutional barriers hindering industrial upgrading. When the economic engines are weak, emerging markets have to endure heavy debt to maintain high economic growth. This leads to financial bubbles and bad debts and increases systematic financial risks. China has stepped into the post-industrialization stage with the largest manufacturing industry and strongest industrial production capacity in the world. Thus, international cooperation in production capacity under the Belt and Road Initiative will enable some emerging markets to make use of China’s capital, technology, and market to boost their own industrial development. With better connectivity and supplementary advantages, emerging markets will play a more important role on the global stage in the decades to come.
Footnotes
Declaration of Conflicting Interests
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.