August this year has been exceptionally unkind to the emerging world. We know that Egypt has been plunged into political and economic turmoil, yet that is only the most extreme case. Elsewhere, stories proliferate about economic slowdowns in Peru and China, and protests in Brazil and Turkey (among others).
Yet rather than viewing these events in the larger context of the past decade, the most common response is to write the obituary of emerging world development. As a lead article in the New York Times said this week: “with expectations mounting that the Federal Reserve, led by its departing chairman Ben S. Bernanke, may soon begin to tighten its monetary spigot, Istanbul’s skyline could well be a harbinger of an emerging-market bust brought on by unpaid loans, weakening currencies and, eventually, the possible failure of developers and banks.” The Wall Street Journal even got a tad cheeky, saying about the investing landscape, “Buying Dips? Stick To Hummus, Not Emerging Markets.”
These obituaries are likely to be premature. Our imperialist mindset — a hangover from the 20th century — suggests that developing countries are always helpless without the West. That says more about our limited analytical abilities than about how the emerging world will fare.
Sentiments of gloom, however, are widely shared by investors and analysts. The inside-baseball version involves a complicated narrative that judges emerging world growth by global money flows that move hither and yon depending on currency levels, interest rates and central banks actions. As one economist recently explained, “Cheap financing allowed emerging economies to temporarily live beyond their means, borrowing the difference from abroad: capital flows into such countries enabled them to import more than they exported.”
Such analysis posits that emerging world growth has rested on two increasingly shaky pillars: easy money emanating from the Federal Reserve and other central banks and the explosive growth of China over the past decade. With signs that money may soon be less easy to come by, and that China is turning away from big industrial projects and real estate and toward domestic consumption, there is a widely shared sense that the emerging world is about to go from golden to ugly.