Everyone agrees, emerging markets are the new, new thing. But assessing the altered global economic dynamics and growth patterns requires specificity and incisiveness, not blind fervour that an Asian century beckons as the West enters potentially terminal economic and geopolitical decline. The big emerging markets, especially 'Chindia' among the BRICs (Brazil, Russia, India and China), and a few others - including Indonesia and Turkey - are the focal points. As fault lines in China's export-led growth model emerge, bigger bets are being placed on India's enormous potential. But, in truth, intrinsic differences shed more light on the BRICs than similarities. Applying generalisations and 'group-think' to emerging markets, India in particular, is misguided, given the already high expectations, asset prices and challenges.
First, caution about developed markets and optimism about emerging markets is justified. The 2008-09 global crash and ensuing recession exposed severe balance-sheet stress across the world's 'rich' countries, which proved to be poorer, more indebted and incapable of growing as fast as previously believed.
Applying generalisations and 'group-think' to emerging markets, India in particular, is misguided.
In contrast, emerging market countries had already deleveraged, restructured and reformed: India after its oil price-induced crisis in 1991; China devalued and dismantled the social safety net in 1994. And the list goes on to a who's who of emerging markets: Mexico 1994-95; Brazil 1995, 2002; Turkey 1999, 2002; Argentina and Russia 1994, 1998-2001; and the Association of South-east Asian Nations (Asean) in 1997.
Emerging market countries therefore sport solid national balance sheets and small contingent liabilities, moderately sized, heavily capitalised and tightly regulated financial sectors, and generally low fiscal commitments to health, education and welfare spending, particularly in China and India. A large share of basic necessities in consumption reflects low per capita income and itself implies greater exposure to commodity price shocks, but also far more headroom for increasing sales of consumer goods - durable and disposable alike. Low public spending and tax rates in general also imply headroom for consumption to rise with income.
In contrast, developed markets are saturated for basic necessities and durables, and luxuries have limited growth headroom. Furthermore, credit-funded Western consumption models - both private-credit Anglo-Saxon and public-credit EU versions - have run out of road. Developed markets and emerging markets are now on a level playing field, where income will drive living standards, rather than household credit-based extraction of equity wealth or public credit-based fiscal transfers.
The size of the matter
Even so, emerging market-led decoupling and global rebalancing is wishful thinking. The BRICs and emerging markets are simply not yet big enough to carry off rebalancing. BRIC consumption is $5000bn compared to more than $30,000bn in developed markets. Even the far higher rates of BRIC consumption growth than in the developed markets is not enough to rebalance and boost global growth in this cycle. Maybe after the next developed market crisis, emerging markets will be big enough to pull themselves up by the bootstraps - and the rest of the world, too. But global recovery here and now is at least as much about the West as emerging markets, and particularly about the US, given that it remains the world's largest economy and importer.
Decoupling should also get short shrift. True, emerging market growth far outpaced developed markets in this cycle. But decoupling can only mean emerging market and developed market business cycles have de-synchronised, not that emerging market growth continues to rise and fall in synch with developed market cycles; that has been true since the term emerging market was first coined in 1981. In fact, since then, emerging market-developed market business cycles have become more, not less synchronised, consistent with globalisation.
Moreover, rebalancing the world economy really hinges on China and the US. India and other emerging markets are better balanced. India's household consumption is in the 60% to 70% gross domestic product (GDP) range of most countries, rich or poor. Most continental economies are also closed; in India, the US and Brazil, trade is 20% to 25% of GDP. China's consumption is just 36% of GDP in a uniquely large, open and diversified economy. (Russia is also large and open with big trade surpluses, reflecting huge natural resource endowments, without which it would be more like a typical small, open economy.)
These two facts are flip sides of the same coin: China's export-heavy/consumption-light growth reflects low labour income and subsidised cost of capital, both of which are driven by the dollar peg, which imports US monetary policy. And US current account deficits and net external debt is the counterpart of surpluses in China and other major exporters. China's crisis response emphasises the point: a collapse in exports was almost completely offset by a fiscally led, credit-financed investment spree in 2009-10 of 5% of GDP, taking gross domestic investment to about 48% of GDP. The implicit signal is that China would like to go back to business as usual, export rather than consumption-led growth, consistent with a tightly managed foreign exchange policy. Consumption basically remained unchanged at about 36% of GDP, though five-year plans keep aiming to raise consumption with no success - about the only major target consistently missed.
Dividing lines
This begs some critical questions: when are the people going to share in the spoils of the breakneck growth of the People's Republic? Since China's main Western trading partners are in dire trouble, why not rebalance to consumption? It can be argued that China's state enterprises and banks benefit from a subsidised cost of capital and labour, arising from very low interest rates associated with the dollar peg. Lifting the cost of capital and labour to fully market-clearing prices by floating the exchange rate, and liberalising capital controls and price controls, would significantly damage or eliminate corporate profits and undermine high GDP and employment growth. These risks would undermine the growth model and the legitimacy of the Chinese state, so major changes are going to take a long time.
India's growth surge is occurring despite the government, China's largely because of it. China's economic miracle is a state-led, industrial revolution catch-up story, reflecting the efficiency of a strong, relatively centralised state in control. The main players are parastatals or foreign firms, to which this communist country has given protection from labour unrest. The result is superb on the face of it: gleaming infrastructure that is unprecedented for a country at China's per capita income levels, with bullet trains, airports, roads, urban - and increasingly extra-urban - infrastructure and productive capacity far exceeding current needs.
In contrast, India's economic renaissance is led by a private sector struggling to break free from the tethers of the 'licence Raj' - the mixed-economy central planning. The Indian model reflects the anarchy of multinational, multilingual democratic diversity, with multiparty coalition governments capable of making US gridlock politics look lightning fast. There is bureaucracy and corruption galore, as per the old saying: the British introduced red tape and the Indians perfected it.
The infrastructure deficit is not to be sneezed at. Businesses are straining at the leash imposed by bottlenecks of all kinds, whether transport infrastructure or petty corruption along transit routes that drives up the cost of transport sharply. Much of the growth had come from entirely new sectors, such as information technology or internationally traded services that capitalise on India's comparative advantages with a very large, cheap pool of English speakers, many with a good education and other skills. But private firms are setting up their own training and education facilities - as well as power and transit infrastructure well beyond normal logistics - to make up for the deficiencies of the state sector.
Geopolitics is another dividing line. India lost a 1962 border war to China over the still-disputed state of Arunachal Pradesh. Also, India's second public nuclear test bomb in 1998 - a quarter of a century after its first one and explained away as a scientific study of plate tectonics - was said by senior foreign and defence ministry officials to be aimed not at Pakistan, which almost immediately nuclearised, but at its true regional rival, China. In the US, the Clinton administration reacted badly at first. But the Bush and Obama administrations have deepened civilian nuclear co-operation dramatically. There is an implicit recognition that economic engagement with a resurgent China needs to be balanced by regional counterweights that bear more than a passing resemblance to the web of alliances during the Cold War.
There are of course major similarities. But even these strong similarities conceal underlying differences. China and India both entered the 20th century with large chunks of their populations in subsistence farming and existing in medieval living conditions. Large numbers of people are leapfrogging generations of economic growth and development to join a modern services and manufacturing economy in the 21st century. Both societies are changing fast with different sectors and elites in the vanguard, not just at home but also in the international sphere. China has lifted hundreds of millions out of poverty, creating billionaires where there were none. India has lifted scores of millions out of poverty while leaving three-quarters of a billion behind. All the while, it has multiplied the number of billionaires tenfold.
It is clear that much more of the world's growth and activity will come from Asia, Latin America, Africa, the Middle East and eastern Europe than ever before. But those watching them should remember that the BRICs and other major emerging markets are not cut from the same cloth.
Arnab Das is managing director of market research and strategy at Roubini Global Economics
