But emerging economies likely to continue along path of rapid growth.
A profound yet little commented upon change is occurring in the global economy. It is the relative strengthening of the public finances of the major emerging-market economies with respect to the crumbling public finances of the industrialised countries.
This change is likely to accelerate the tendency evident in recent years for the emerging-market countries to gain relative importance in the global economy. It is also likely to have profound political implications for international relations between those countries and those in the G7.
Earlier this year Bill Gross, the head of Pimco, the world’s largest bond fund, published a disturbing chart that he labelled “The Ring of Fire”. The chart encapsulates how compromised the public finances of so many major industrialised countries had become. It did so by highlighting the toxic combination of high public debt and of high budget deficit levels across a wide array of major industrialised countries. The most striking feature of the chart was that it underlined that not only were the public finances of Japan, Greece and Italy on unsustainable paths, so too were the public finances of France, Spain, the United Kingdom and the United States.
Sadly, “The Ring of Fire” chart suggests lacklustre economic growth performance in the industrialised countries in the years ahead, because one has to expect that, over the course of the economic cycle, high budget deficit levels will be associated with higher interest rates as industrialised-country governments compete with their private sectors for a limited pool of available financing. One would also expect that high public debt levels will undermine private sector confidence as both households and companies will come to fear the prospect of future distortive taxes to deal with compromised public finances.
A further reason for concern that compromised industrialised-country public finances will lead to lacklustre growth in these countries is that these poor finances occur across a wide array of countries. Because of this the Financial Times‘s Martin Wolf keeps reminding us, a synchronised attempt by these countries to address those poor public finances by higher taxes and by deep public-spending cuts could result in an insufficiency of global aggregate demand. This would be particularly problematic at a time when the industrialised countries’ economic recovery remains feeble and these economies are still burdened with troubled banking systems.
At the same time that poor public finances are clouding the economic prospects for the industrialised economies, a very different picture characterises the major emerging-market economies. Indeed, an extension of “The Ring of Fire” chart to the emerging-market economies reveals that growth in these economies is likely to be supported by relatively sound public finances.
It is striking that, whereas public debt levels in many major industrialised countries are headed towards exceeding 100% of GDP soon, those in the major emerging-market economies, with the notable exception of India, are generally in the range of 40% to 50% of GDP. And, with relatively small budget deficits in those countries, there is every reason to expect that their public debt levels will remain at healthy levels.
Already in the decade before the 2008-2009 economic crisis, a number of factors favoured considerably faster economic growth in the emerging-market economies than in the industrialised countries. In contrast to the slow-growing and ageing populations in the industrialised countries, emerging-market economies are characterised by younger and faster-growing populations. At the same time, savings rates in non-Japan Asia have considerably exceeded those in the G7, whereas the emerging-market economies are taking full advantage of the potential to grow rapidly by simply catching up technologically with the industrialised countries.
In the years immediately ahead, one must expect that the emerging-market economies will retain many of the advantages that have favoured their rapid growth in the recent past. There is now every reason to expect that these advantages will be amplified by the somewhat sounder public finances that characterise the emerging-market economies than those that characterise the industrial countries. And there is also every reason to expect that, as they become even more important in the global economy, the emerging markets will become increasingly vocal in pressing their case for their representation in international economic organisations such as the IMF to reflect their relative importance more fairly.
Desmond Lachman is a resident fellow at the American Enterprise Institute