Back to Fundamentals in Emerging Markets..

Prof Dani Rodrik says that hype around emerging markets is now tapering off.  Much of the past growth was around foreign capital and buzz.

Following 15 years of hype, a new conventional wisdom has taken hold: emerging markets are in deep trouble. Many analysts had extrapolated rapid growth in countries such as Brazil, Russia, Turkey, and India into the indefinite future, calling them the new engines of the world economy. Now growth is down in almost all of them, and investors are pulling their money out – prompted in part by the expectation that the US Federal Reserve will raise interest rates in September. Their currencies have tumbled, while corruption scandals and other political difficulties have overwhelmed the economic narrative in places like Brazil and Turkey.

With hindsight, it has become clear that there was in fact no coherent growth story for most emerging markets. Scratch the surface, and you found high growth rates driven not by productive transformation but by domestic demand, in turn fueled by temporary commodity booms and unsustainable levels of public or, more often, private borrowing.

Yes, there are plenty of world-class firms in emerging markets, and the expansion of the middle-class is unmistakable. But only a tiny share of these economies’ labor is employed in productive enterprises, while informal, unproductive firms absorb the rest.

Compare this with the experience of the few countries that did emerge successfully, “graduating” to advanced-country status, and you can see the missing ingredient. South Korea and Taiwan grew on the back of rapid industrialization. As South Korean and Taiwanese peasants became factory workers, the economies of both countries – and, with a lag, their politics – were transformed. South Korea and Taiwan eventually became rich democracies.

By contrast, most of today’s emerging markets are deindustrializing prematurely. Services are not tradable to the same extent as manufactured goods, and for the most part do not exhibit the same technological dynamism. As a result, services have proved to be a poor substitute to export-oriented industrialization so far.

Well, over the years much if this hype has been built by so called global finance. They look for certain cute names and themes and build enormous hype around it. They ride on the cat show it like a tiger and then are clever enough to get off it and move to another cat. Emerging markets was one such theme. I mean look at India. You remove the equity market and FII story and the whole thing does not look great at all. There are problems with basic issues everywhere. But just because a really tiny % of public mostly living in Mumbai and some investors living abroad feel India is shining, it is shining. Most of these stories are either ignorant of the real issues in India or just pay lip service to it.

What took the developed world more than 150-200 years to figure is expected to be done by EMEs in much lesser time. Threats/warnings are issued that if thse countries do not get things going now, it will be never and so on. But there is no capacity to do things in such quick time. All kinds of examples are given like Singapore which echieved things in really quick time. But these do not fit in any of the other cases.

So, over and over again we keep seeing the same stories being repeated every 20-30 years. China once the darling of investors not too long ago is being dumped now. People forget that it is not possible for the country to keep growing. It had to slow down someday and it is doing now.

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