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,


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