New Growth Model for Emerging Markets

January 2, 2015

Advancing Economic Freedom for the Poor
New Growth Model for Emerging Markets
Yuwa Hedrick Wong

In the IMF’s latest World Economic Outlook report[1] growth forecast for the global economy has been revised downward to 3.3% for 2014 as a whole, about half of the pre-crisis level. Consumers in the advanced economies are still paying down and their debts and rebuilding their savings, hence demand for manufacturing imports from the emerging markets has been weak, and is unlikely to change any time soon. Global trade has been growing slower than global output since 2008, reversing the trend of the pre-crisis decades when trade grew about twice as fast as world GDP.[2]

In addition, there may well be a structural shift in manufacturing at work. Trade in manufacturing is changing due to new production technologies, which has the potential to replace mass production with highly customized and even one-off production performed close to the customers.[3] This trend, if fully realized as forecast, will erode the comparative advantages that emerging markets previously enjoyed in labor intensive mass manufacturing. In other words, export-oriented manufacturing, the path followed by the highly successful East Asian economies to fast track their industrialization and development (China being the latest to join that group), may no longer be available to other emerging markets in the future.

Apart from manufacturing, commodity exporters among emerging markets have already been severely affected by dramatically cooling demand. The slowdown in growth in China, which is needed for its economic rebalancing, is a major contributing factor. To the extent that China stays on course in its economic rebalancing, an upswing in commodity demand and prices will be unlikely.

Under these circumstances, emerging markets will have no choice but fall back on domestic demand to drive economic growth. There are two key parts to domestic demand: domestic consumption and domestic investment. For domestic demand to be an effective and sustainable driver of growth, these two parts have to become mutually reinforcing. If domestic investment leads to stronger growth in employment and income, then household consumption will rise in tandem with the expanding economy. Rising domestic consumption in turn opens up new and attractive opportunities for more investment. To set in motion this virtuous circle, however, there has to be a growing and increasingly prosperous middle class, with the fruits of the expanding economy widely shared among businesses large and small; benefiting local entrepreneurs and new business start-ups as well as the rank and file of ordinary workers. In other words, growth has to become more inclusive. This is the new growth model for emerging markets in today’s rapidly changing global economy.

 

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[1] World Economic Outlook: Legacies, Clouds, Uncertainties. October 2014, IMF
[2] Trade and Development Report, 2013, UNCTAD, Geneva. Chapter One.
[3] McAfee, A. and E. Brynjofsson, 2014. The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. MIT Press.

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