A common mistake of bearish forecasters is to assume that when a current economic driver loses its force, the world will come to a shuddering halt. In the late 1980s, when the Tokyo exchange represented nearly half of the total value of global stock markets, the bears thought trouble in Japan could produce a worldwide crash, but within a few years the Tokyo market collapsed with hardly a ripple. In its wake stepped the United States, creating a sensation with new technology out of Silicon Valley. Similarly, the stumbling of the Asian “tiger economies” in the crisis of 1997–98 provoked new warnings of a planetary crash, which never came. The tigers including Thailand and Malaysia fell back, and a new emerging market boom brought larger economies like Brazil, Russia and India to the fore.
The great scientist Antoine Lavoisier captured this process well: nothing is lost, everything is transformed. Now the Brics (Brazil, Russia, India, China and South Africa) are losing speed, and new stars are picking up momentum. Last year China’s GDP growth rate fell below 8% for the first time in more than a decade, and it is likely to fall further as its own debt surpasses 200% of GDP, an unprecedented peak for a nation at China’s income level. Already the countries that have prospered mainly by selling raw materials to China – particularly oil from Russia and iron ore from Brazil – are suffering as China slows. Brazil and Russia saw GDP growth fall by more than half to just 3.5% and 1%, respectively, in 2012. India has slowed from 9% to 5%. This is normal – most hot economies fall off the burner after a good decade.
Now, some less celebrated economies are on the rise. In effect, the Third Coming of the emerging markets is in full swing. The first coming was the dizzy period when investors discovered these markets in late 1980s and early 1990s. The second coming was the unprecedented boom of the mid 2000s, when virtually all emerging markets started to take off together, lifted by their rebound from the crises of the late 1990s, by falling barriers to international trade, and above all by the tide of easy money pouring out of Europe and the United States. This nearly universal boom inspired mindless acronyms like the Brics, which assume these wildly different economies are all on a rock solid growth path.
Now the factors that drove the late boom are gone: the easy money and blue-sky optimism have disappeared, and latent domestic problems are resurfacing in the fading economies of the emerging world. The Third Coming will be marked by moderate and uneven growth, and each emerging nation needs to be understood as an individual story.
The new stars are like monks in the marketplace – anonymous but enlightened figures who will eventually draw the eyes of the crowd. In the Philippines, President Noynoy Aquino has shown the competence his country’s needed to restore some of the lustre its economy enjoyed half a century ago. Signs of a manufacturing comeback are beginning to appear as the Philippines benefits from shifts in its competitive position vis-à-vis China — a weakening currency, falling labour costs. The same shifts are also benefiting other economies across south-east Asia, including Thailand, where Prime Minister Yingluck Shinawatra is working quietly to extinguish the political tension between the capital and the countryside that exploded under the regime of her brother Thaksin.
In Latin America, outside of the region’s two largest economies – commodity-crazed Brazil and monopoly-ruled Mexico – a string of Pacific nations are attracting attention. Take a map of South America, draw a line down the middle and you see disappointment on the right, success on the left. After tracking each other closely for a decade, the Atlantic and Pacific coasts are starting to chart different growth paths. The prominent Atlantic economies – Venezuela, Argentina and Brazil – have little chance of keeping up with the expected emerging-market average of 4–5% GDP growth for the next five years. In stark contrast, the leading Pacific economies – Chile, Peru and Colombia – look likely to beat the high end of that forecast.
Though the Chilean economy may be peaking under a billionaire president who does not have the street credibility to push the reforms required to take the country to the next stage of development, Chilean businessmen are systematically shifting investments to Peru and Colombia, countries whose Chilean-style business environments prove equally welcoming. Peru was the fastest-growing Latin nation in the 2000s, and both Peru and Colombia are currently among the 10 fastest-growing developing economies.
No doubt some clever marketer is going to coin an acronym for some of these fast Latin economies. But don’t fall for that. In the Third Coming, every emerging nation needs to get in competitive shape, in its own way.
Ruchir Sharma is head of emerging markets and global macro at Morgan Stanley Investment Management and author of Breakout Nations: In Pursuit of the Next Economic Miracles (Norton paperback April 2013)