Several
Project Syndicate authors have recently declared the end of the emerging market
miracle. One example among others (Hausmann)
is a former finance minister of Chile, Andres
Velasco who recalls the former Yale development economist Carlos Diaz-Alejandro.
The latter used to say that the combination of high commodity prices, low world
interest rates, and abundant international liquidity would amount to economic
nirvana for developing countries.
Indeed,
many emerging markets submerged in 2013: Genius ecopainter Benn Steil (Council
on Foreign Relations, CFR) coined the term Emerging
Markets Taperitis in his highly recommendable CFR Geo-Graphics (28-10-2013). The currency, stock and
bond price reaction to a cautious statement by Fed Chairman Ben Bernanke (22-3-2013)
in some emerging markets had been swift. But the pain was not shared equally.
As the top figure in the CFR Geo-Graphic shows, those countries hit hardest by
taper-talk were those with large current-account deficits—Turkey, India,
Indonesia, and Brazil. They were also large beneficiaries of ´taper-talk
interruptus´ mid-September 2013, when the fed backed away from the March taper
talk. These events clearly indicate that holding down portfolio inflows and
imports is what emerging countries need. Mainstream advice against capital
inflow controls, reiterated by the OECD´s Adrian
Blundell-Wignall in the face of fresh evidence, remains irresponsible propaganda.
The
convergence process in favour of emerging countries has not only been based on
monetary factors, however. As has been documented (here;
and here;
and also here)
on this blog, it has been closely linked with China´s long rise[1].
While Hausmann and Velasco focus on Latin America, the lasting benefits of
China´s rise have been obtained by Asian countries embedded in an increasingly
China centric manufacturing value chain[2].
Have a look at the numbers from the OECD Latin American Economic Outlook 2014
(courtesy The Economist) to see where and where not there has been fundamental
catch-up in terms of total factor productivity in Asia (yes) and Latin America
(no). So the Hausmann-Velasco perspective boils down to Latin navel-gazing.
As for the
future, much will depend on China´s future growth path. In a paper forthcoming at
the Annual Economic Review in 2014[3],
Storesletten and Zilibotti deal with the commonly held Acemoglu-Robinson view that
China’s growth trajectory is unsustainable, in particular due to the
persistence of a non-democratic institutional framework so that it would not
escape an institution-driven middle-income trap. The Acemoglu-Robinson view, to be sure,
ignores the fact that non-democratic institutions can adapt under
contestability.
China’s
experience attests to the potency of experimentation in bringing about transformative
change, even in a rigid authoritarian, bureaucratic environment, and regardless
of strong political opposition. Though the impact of reform experiments varies
between policy domains, China’s experimentation-based policy process has been
essential to redefining basic policy parameters (Sebastian Heilmann, 2008)[4].
Empirical support for the thesis has been provided by Besley and Kudamatsu
(2007)[5]
who find that economic growth rates differ more substantially among autocracies
than among democracies. This is illustrated in the Figure below which depicts
the distribution of growth performance in autocracies and democracies that
survive for five years or more.
Successful autocracies outperform democracies at the top of the
distribution. The prerequisite: political institutions make political leaders
accountable, or make their survival in office depend on their policy
performance. This may explain the long rise of China as well as the survival of
China´s politbureau.
The recent decisions
of the Third Plenary Session of the 18th CPC Central Committee seem to have
identified crucial reform policies that will feed growth going forward. Urbanization
and financial reform will help further exploit productivity gains embedded in
China´s rural-urban and firm-size duality. Easing finance constraints for SMEs
will advance de facto privatization and shift resources to entrepreneurial firms
obviating the need for part of corporate savings. Reforming land rights will
help farmers through improved property rights and lower corruption. Household
savings will come down as a result of loosening the decades-long one-child
policy. There is still life in China´s convergence; do not bet on its imminent
collapse. And as long as China flourishes, so will most emerging countries.
[1] In GIGA Focus Global 09/2013, I deal with China´s past and future rise
at length (in German).
[2] Also African manufacturing starts to benefit via special economic
zones, foreign direct investment, infrastructure and low-cost capital goods.
[3] Storesletten, Kjetil, und Fabrizio Zilibotti
(2014), “China´s Great Convergence and Beyond”, Oslo/
Zürich, mimeo, Annual Economic Review.
[4] Heilmann, Sebastian (2008), “Policy Experimentation in China´s
Economic Rise”, in: Studies in Comparative International Development, 43, 1,
1-26.
[5] Besley, Timothy, und Masayuki Kudamatsu (2007), “Making Autocracy
Work”, CEPR Discussion Papers, 6371, London: Centre for Economic Policy Research.
