End of the EM Dream?

Since the COVID-19 pandemic began, I have periodically tried to assess what type of country, political system or culture has best dealt with the crisis. In general, while I biased to think that smaller advanced economies have done well, the only workable rule of thumb I can find, is that once a nation thinks it has triumphed over COVID, it immediately suffers a nasty reversal – the quick spread of the Delta variant across the USA and June’s outbreak in the Netherlands are two good examples.

Other people have done a better job than me at delineating the way governments have dealt with the coronavirus. One of the better explanations I have heard is from David Skilling who makes the distinction between liberal market economies (LMEs) and coordinated market economies (CMEs).  LMEs use decentralised, competitive and flexible market mechanisms; CMEs rely more on established informal, relational arrangements between a range of stakeholders. In that context, the liberal market economies were initially quicker to organise supplies of vaccines and to distribute them. In both models, anti-vaccine protests are on the rise, as we noted last week.

A new helpful study from Australia’s Lowy Institute adds to the debate. They have produced a COVID Performance Index which analyses data across 100 countries to determine how they have responded on economic, health and other criteria. Interestingly it shows that authoritarian countries have performed better than democratic ones, and more encouragingly that states with competent institutions, medical expertise and higher levels of trust in government have performed well. Many Asian countries have performed well, given they possess the above characteristics and potentially granted their prior experience with SARS. In addition, islands appear to do relatively well also. What is striking is that there is little difference in ‘COVID performance’ between developed and emerging countries.  

I found this interesting because I have a sense that for the first time in over twenty years, the pace of development of emerging economies is being checked, and manifestly slowed. There was a time when emerging market growth and the evolving consumer behaviour that accompanied it was one of the most exciting themes in financial markets, and for a spell, emerging markets easily outperformed developed ones (in the very long run there is little to separate them performance wise).

This is beginning to change and my sense that there is a gap opening up between the emerging world (outside China) and the developing world. The availability and roll-out of vaccines is one such marker (Ireland has a vaccination rate of 80% which contrasts to a rate of 3% across Africa).

In addition, in many of the exciting themes I have covered in recent notes, such as the race for rare earths/materials/places, the importance of cybersecurity, the premium on innovation and the scarcity of democracy, most emerging nations are far behind Europe, the US and China. There are exceptions of course, as the excellent Emerging World daily highlights (such as growing urbanization and the rise of ‘unicorn’ companies in South Korea and India), but my sense is that as the new, decisive trends of the 21st century are concerned, the emerging world is dropping off the pace.  

One notable indicator of this is interest rates. Developed world central banks continue to whirr their printing presses, amidst mild mannered talk of a ‘taper’. At the same time, 50% of emerging market central banks have raised interest rates, notably Brazil did so recently by a full 1%. The sense is that the emerging world is operating into a financial headwind, much of which is its own making. Turkey is a prime example of how a leader can destroy institutions, talent and the stock of economic potential.

Much of this is reflected in financial market prices, the performance of emerging market equity indices relative to developed markets is still close to the lows of the year, and both a stronger dollar and a ‘taper’ of asset purchases by the US Fed (tune into the Jackson Hole monetary policy offsite on 26th August).

The notion that the emerging world is now less speedy in terms of its growth outlook than the developed world is reinforced by GDP forecasts from the IMF which expects the economic rebound in Russia, Nigeria, Brazil and South Africa to tally at 3%, 2%, 2.6% and 2.2% respectively in 2022, as opposed to 4.2% for ‘sick economies’ like France and Italy, and 5.8% for Spain.

If my intuition is correct this means we may see greater economic, financial and political volatility across emerging markets, especially if interest rates continue to rise, and if in the near term Asia suffers a ‘delta’ led economic slowdown (lead indicators in China and Indonesia for example are dipping).

There are two more profound implications, both of which involve a breaking of steadily built expectations.

The first is that many emerging nations are held together socially and politically by the sense that they are on a path of improvement and prosperity. If that contract is broken, as it is manifestly in South Africa, this will produce greater political volatility.

The second relates to the relationship between the non-China emerging world and the developed world, to the extent that most developed world leaders recognize such a relationship. There are not many instances of the emerging world checking the power of the developed countries, but my feeling is that we will see both a growing dissatisfaction with world bodies (UN, IMF) and efforts to create new alliances between growing, populous countries from Rwanda to Nigeria to Bangladesh.

This might herald a new era where populous emerging nations seek to become more independent from the Western world (and potentially the China centric world), and by necessity seek to improve the quality of institutions, governance and transparency, all of which are lacking.  This will be a very long term project, but logically could well be the ‘next’ phase of the emerging world’s development path.

Have a great week ahead,


Gold Card Politics

Donald Trump, remember him? He recently asked his supporters to help choose the design of a ‘Trump card’ which they would carry as proof of their allegiance, and of course, their patriotism. Following several failed projects (blogs, radio shows) this lurid tactic represents the further gamification of politics and reflects Trump’s instinct for marketing and his aim to turn politics into a consumer goods subsector. No doubt donors of differing levels of generosity will be offered platinum and gold Trump cards.

There are two other, more serious implications. The first is that such a move, together with recent eye-popping fund-raising rounds by Trump, will deepen the divide in the Republican Party, and set the political agenda for the next midterm elections and 2024 presidential race. The first and main issue any Republican candidate must make is how to position vis a vis Trump (the Missouri Senate race for Roy Blunt’s seat is a case in point).

The second is that in the post COVID world (we are slowly getting there) we are seeing a range of new markers of political behaviour and values. The most striking and deadly is the difference between those who wish to get vaccinated and those who do not (sadly many in emerging countries don’t have this choice).

I have seen many versions of a chart that plots the proportion of people in each US state that have been vaccinated together with the predominant political affiliation in that state – Republican states have low vaccination rates whilst those in Democratic states have a much higher rate. I presume that any of those who will carry the Trump card, do not have a vaccination pass.

Similarly, in France vaccinations have become a political issue but what is not generally remarked on is that the number of people who have signed up to be vaccinated following Emmanuel Macron’s speech (where he declared cinema, restaurant going conditional on the production of a vaccine certificate) vastly outnumber those who protest against vaccines. What is now interesting is the way in which this ‘marker’ or divide is quickly becoming institutionalized  – many companies will only allow vaccinated employees to return to their offices and governments across a range of countries are tilting incentives towards those who are vaccinated.

I don’t disagree with this and think that as regards the COVID pandemic it is for the good. As a policy exercise it has lessons for how governments can shift, or ‘nudge’ to use the popular term, popular behaviour in positive ways. At the same time, it has obvious dangers in the sense that some governments may take the vaccination template and replicate it for other problems. Will it for example be applied to healthcare where those who drink, eat and smoke too much will be denied state funded healthcare or forced to pay a higher price for it?

What is equally interesting is the way in which the political climate will be shaped by the policy response to the COVID pandemic and the various trends (i.e., digitization) that it has set in motion. In short, what I have in mind is that healthcare related choices like vaccination have become markers of political identity, in the same way that at a country level a government’s stance on LGBT rights has become, in my view, a marker for broader qualities such as a country’s openness, the quality of its democracy and its ability to innovate.

If willingness to become vaccinated against COVID-19 is a marker of political disposition, what might others be?

Keeping with the idea that digitization is growing, one of the developments we may see in the future is the digital passport, effectively a key that can reliably identify someone and link their identity to a national database (i.e. social security). This development may become necessary as part of the roll out of digital currencies, as part of the broad initiative on cyber security and, to an extent, to police anti-social and illegal behaviour on the internet (note that the EU plans to have such a digital identity in operation by 2030).

As these measures come into place they will create political friction, and in particular a group of people who choose to be ‘outside’ or against the system. Other key and emerging issues will become political markers – an awareness of climate damage is now coming into mainstream politics, with Germany a lead test case, and the emergence of crypto and digital currencies will also test the sense that ‘with/against the system’ will become an axis in political debate that may supplant the traditional left/right.

Trump should have gone for a ‘Trump digital wallet’ rather than a gold card.

Have a great week ahead,