Our imperial disdain for the emerging world

By Zachary Karabell
August 23, 2013

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.

To be fair, many of those predicting the demise of the emerging world growth are also likely inclined to see crises ahead in the United States, Japan and Europe. Pessimistic views of the future are ubiquitous, and this month’s tendency to call an end to global growth is simply the latest rotation that has seen similar death knells sounded for China, the European Union, Japan and the United States.

Yet there is something else here, a bit more troubling than just the usual doom and gloom. There is the belief that the success of the emerging world of late is simply another bubble created by central bank policy in the Western world, sort of a global housing bubble gone awry. In this scenario, all the talk of a newly confident, more affluent and politically stable emerging world masked deep structural faults, the most glaring of which was a dependence on cheap capital and Chinese imports of the raw materials many of these emerging countries provided.

That fits neatly into a long legacy of disdain for the ability of non-Western societies to manage their own affairs. European imperialists of the late 19th and early 20th century notoriously viewed their colonies as incapable of self-government. Even the much lauded Woodrow Wilson, championing self-determination, didn’t believe that non-Western societies could tend to themselves. He advocated for a system of “mandates,” whereby countries such as Iraq that desired independence would be tutored by European powers until they were deemed ready (for more, see A. Scott Berg’s new biography of Wilson).

It’s been many decades since then, but attitudes prevail. The European Union never has accepted Turkey as a potentially equal member of their club, notwithstanding Turkey’s unequivocal economic and political success over the past 20 years. Brazil has received more attention for recent protests about government corruption than it did for wise government policies that actively constrained the frothy speculation and run-away growth that hobbled it in the past. Peru’s growth is written off as a flash in the commodity pan. Investors dump Indonesian investments that were hastily acquired because of a naïve belief that Indonesia is somehow a proxy for China’s rise. Meanwhile the entire Indian economy is treated as though it’s in free-fall because of missteps by India’s central banks and recent significant weakness in the rupee.

Some of these views are also espoused within those countries, of course. Chinese analysts are often quite negative about China, Brazilian about Brazil, Indian about India and all about each other. The experience of being distinctly less powerful and affluent in the 19th and 20th centuries sowed a distinct lack of self-confidence and a strong conviction that good times are simply brief interludes. Corruption and conspiracy will ultimately ruin everything.

Yet what is most remarkable about the past decade is how those attitudes had begun to shift. That trend intensified after the financial crisis of 2008. Having been lectured to by Western authorities about the structural deficiencies of their economies, these societies watched the near-implosion of the American and European financial systems in 2008. Meanwhile, their own economies weathered the storm, as did China’s. Elites in the emerging world began to believe — rightly — that they could navigate their own economic fate and determine their own policies just as competently and perhaps more so. The rising incomes of hundreds of millions of their citizens was further proof.

Sentiment may have shifted dramatically in the past few months, but there is a substantial difference between that and structural collapse and crisis. Yes, emerging world economies are seeing slowing growth relative to the heightened rates of recent years, and yes, the shift to domestic demand-driven economic activity is not easy. But that is not the same as re-writing the script of the past decade and turning the achievements of many of these countries into a mirage.

When it comes time to write the story of the first years of the 21st century, the global narrative will not only be the struggles of the United States to adjust to a world of diffuse power, or the rise of China and the decline of Europe. It will be the way that substantial portions of the planet emerged from agrarian poverty into the early stages of urban affluence. It will be the way the Internet and the mobile revolution anchored by the rise of China began to reshape the vast regions of sub-Saharan Africa; how India’s middle classes started to redefine that country, and how millions in Latin America sloughed off decades of authoritarian incompetence and began to blossom. Never in human history have more people become more affluent more quickly than in the opening years of the 21st century.

They are not about to slink away in defeat. Having seen the possibility of a better life created by their own ingenuity and decisions, those billions are not about to collapse backward, anymore than equivalent millions in the United States and Europe in the 20th century did. Yes, collapse is always possible, and always will be. But enough with writing off a considerable portion of the planet because a few bankers in Washington might change how many bonds they purchase.

PHOTO: Clouds loom over the Mumbai skyline July 5, 2012. REUTERS/Ahmad Masood

14 comments

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Unfortunately the author misunderstands the nature of growth in the developing world over the past couple decades. The rise of China and countries that follow the neo-mercantalist model is dependent upon very wealthy markets in the West. Western corporations partner with local companies to undercut higher labor costs in the west (which is the main driver in the employment crisis)by building factories and providing technology. The local economy is then able to generate wealth from the consumer base created by the growth, but the main value source in these economies is multinational corporations from the west, selling to their consumers back home. Without a prosperous west, the rest doesn’t have a sufficient market to power their economies. They are on the road to creating one, but structural barriers exist because of corruption and elite power structures that try to control wealth, but in the process restrict it. I personally would prefer more developed countries in the world. It’d be better if multinationals had to compete for workers for a change. This would fuel a virtuous cycle of higher wages and benefits, leading to increased consumption and growth. The current system is hollowing itself out by depressing wages in the west, and capping wage growth potential in the rest.

Posted by agsocrates | Report as abusive

“Our imperialist mindset — a hangover from the 20th century — suggests that developing countries are always helpless without the West.” Do we really need to listen to an American who is in denial about fundamental fact?

The “emerging world” in most cases lacks the technology and the trained work force necessary to develop their own natural resources beyond those near the surface and easy to access. This is why they need to “partner” with more developed nations and companies for a “win-win” situation.

But poor countries full of poor people tend to get greedy really fast, and more than a few then poison the well of foreign financial and technical partnerships by nationalizing such ventures. They “want it all, now”. Only then do they discover they can’t even then competently continue to operate “up and running” installations.

Backward third world hell holes are not, as seems commonly believed, being “held back” by developed societies. To the contrary, with a population in many cases exploding at a rate that they cannot even feed themselves there is no foundation of education, knowledge, or skill to build on.

There are no domestic financial resources available to build the infrastructure and transportation necessary to profitably enter into international commerce. Is it any wonder that those societies with nothing to offer on the world market but urine, feces and more of themselves find little welcome, comfort or hope there?

You have to bring more to “the party” than an empty belly, starving children and empty hands out. To make something of nothing takes hard work, time, dedication and patience.

“Turkey success as a secular nation built under the leadership of Attaturk has become increasingly sabotaged by Islamists. It’s continued success is today in serious doubt. It is not enough that Brazil has made economic progress if government corruption is siphoning off the rewards essential to a brighter future. Investors are right to be cautious or look elsewhere when it comes to Peru or Indonesia.

The image of Indian as an economy that may some day somehow progress in spite of it’s exploding poverty classes is in free-fall because it’s leaders are weak or incompetent and it’s businesses are failing. India today has the “face” of the “gang rape” nation. Is it any wonder no one wants anything to do with a nation socially and financially imploding?

Yes, “Never in human history have more people become more affluent more quickly than in the opening years of the 21st century.” But that affluence has come mostly from “other people’s money”. That spigot is being throttled as sources realize that corruption and conspiracy remain just below the surface in poor countries. It is not a question of whether but of when these problems emerge and ultimately ruin everything.

The legacy of the information age is that the world is today able to do what must be done with fewer and fewer people. Traditional economics has always looked to population growth to create increased demand for more and more goods and services. Unfortunately we must come to grips with the fact that this economic “model” must yield to something else entirely new that can offer a sustainable and acceptable future.

With over SEVEN BILLION people already here it must be obvious to any who open their eyes that available land and natural resources cannot provide even half the hope of a life such as they see on TV every day. A future of ever growing frustration and political and economic turbulence is not one safe for investment. If anyone has a clear crystal ball, now’s the time to tell us where we’re going so we can prepare as best possible.

Posted by OneOfTheSheep | Report as abusive

Prosperity requires a predictable and consistent path to success. If that is not provided, then we consistently have what is, in a charmingly outmoded way, called an “emerging market”.

It is certainly possible for Western societies to join the “emerging” crowd if it tinkers with its success. This is more likely than a change of culture throughout most of the world. Prosperity has been the exception in human history, not the rule. “Control of outcomes” is uniformly the same in poor societies. Control of outcomes will indeed change things, but in a downward direction, not an upward one. “The rich get richer and the poor, poorer.”

Posted by usagadfly | Report as abusive

I wish these guys had a like/dislike function or a thumbs up button on the comments. Anway, thumbs up all. There is very often more to be learned from the commenters than those that can gain employment in corporations with agendas to be encouraged.

Posted by brotherkenny4 | Report as abusive

As the president of an analysis outfit and management firm he should have already figured out what was going to happen to emerging market economies once the Treasury complex began to regress. And so now he attempts to goad western investors back into the emerging markets by calling them names. Didn’t anyone tell this guy that hope isn’t an investment strategy?

Well he can take some solace that many analysts today see yields headed back down in a fear trade, and some accompanying stabilization in the emerging markets.

But what happens if the yields in the Treasury complex are exploding not because the Fed stopped “easing” but because asset and risk price discovery have been so completely jacked up by central back machination that our bubblelicious markets can no longer operate efficiently?

As for the Progressive Financial Analyst du jur, he can put his money where his mouth is, but he probably doesn’t have any left, exposing the bitterness of his loses with the broad-brush abuse of words like “imperialist”. He reminds one of that whiney kid in second grade crying on the playground after somebody walked off with his sack lunch.

“IMPERIALIST!! RACIST!!”

EPHH U homeboy. I’m tired of hearing it.

Posted by HamsterHerder | Report as abusive

“European imperialists of the late 19th and early 20th century notoriously viewed their colonies as incapable of self-government.” – Well, BRICS countries are not entirely former colonies, but probably except Brazil, the above quote well applies, IMHO…

Posted by UauS | Report as abusive

There was a bombastic statement at the last BRICS Conference about the founding of a fantastic new bank to rival the WMF. Whnere is it, and why doesn’t it do its job?

Posted by pbgd | Report as abusive

Life is full of ups and downs, so do nations. During the course of 4000 to 5000 years of Chinese history, there are abundant ups and downs.

‘Imperial disdain’ for other nations did occurred in China in about 1850. That disdain led to total neglect of other nations’ technological and social advancement. The consequence was ongoing military defeats and humiliation in the coming 100 years.

Posted by Kailim | Report as abusive

Sheep, My Crystal Ball is leaning towards all out world war, but with great intention from the 99% this can be avoided. The problem is that Fox controls most of the sheeple, who prefer the war machine. “They” can NOT figure out how to make a buck without using the War machine. Given the historical trend, placing your money in war and all things war is profitable. Or, removing your money from the MIC corps and not enabling bad behavior is the other option. Spending every single dollar as a vote on how you want the future to unfold is the only real voice a particular American has. Do Not Purchase Foreign Made Products. Do Not shop Walfart. Do Not purchase food grown outside of America.

Posted by 2Borknot2B | Report as abusive

While at times I wondered about the author’s sincerity and strange leanings about where he stood on issues, he is so correct on this matter of Imperialism…..There are 7 recognized civilizations in Western History…Rome was the 7th…that should be a hint…Out of Rome came 4 with England winning the inheritance of Rome…We in turn are the next in line….Get It…. The Repelican knows…Do you? He does..

Posted by repelican | Report as abusive

The author’s main argument seemed to be that so many Westerners look down on people in developing countries. Saying he’s wrong because people in developing countries can’t help themselves ironically proves the main point of his article. The article was more about ATTITUDES of people, predictions of developing nations being more self sustaining a side note.

Posted by Matt10101 | Report as abusive

A lot of misguided ideas here.

Unfortunately,

you cannot economics your way out

of what I have termed

the globalization trap.

Posted by Bozon | Report as abusive

I wish I had read this piece sooner. Very well done Mr. Karabell!
@agsocrates, I think he did point that out quite well and you appear to be “a case in point”. Of course there growth was driven by others (the west) investments. We invested didn’t we? The USCA would never have grown if it weren’t for Europe and the wars between the French and English. Also, the multinationals are now competing for workers. The race to the bottom ended a few years ago. Chinese and other Asian nations wages have grown considerably. An Indian programmer went from $12 and hour (fully loaded) to well over $40 today.

@OOTS, we started the same way with untrained workers and yet we are no longer depndant on other nations for investment…or are we? Don’t you also rant about how our education system is failing? Our new workers are really now on par with those emerging nations. In some cases we are far behind. That’s why we loose many high tech manufacturing opportunities. Yeah, we kept Catapillar, but we just recenty made our first cell phone and its not even top of the line. And of course “they want it all now”. So do we! So does everyone for that matter. And those emerging nations have the will to get it too. Their education systems are rapidly outpacing ours (and using ours; virtually all Ivy leagues have campuses in other countries now). They are learning to control their populations too. China obviously did. India’s biggest export is Indians and they have begun to decrease family size (see Hans Rosling TED Talk), even Mexico see’s the light and with our new Pope they will have a chance. India’s “Rape” culture (left from caste system) is only now known because they are intent on doing something about it. Otherwise you never would have even known. Snowden wasn’t Indian or he never would have even thought of it.

@usagadfly, very true, but modern communication (internet) is rapidly changing that as the author vaguly points out. The poor are much more aware now than ever before. There are riots in Africa because they now see how far behind they are.

@Brotherkenny4, Right on!

@HamsterHerder, There is more to life than analy retentive analysis, yields, and markets. The Author was obviously try to talk about the bigger picture that includes social aspects. And sorry you were picked on in school, I didn’t mean to scar you and your friends, please forgive us ignorant bullies.

@pbgd, it will come. The banksters of the world are fighting very hard to stop such things. Hence the title of this article.

@Kailim, indeed, and it looks like the USCA is in that position now. Did we really win the last three or four wars? A large part of the world is laughing at us.

@2Borknot2B, unfortunately 95% of the 99% haven’t a clue as to what’s going on, and don’t care. I think they are though getting tired of wars and prosthetics. Wars are not as profitable as they once were. We no longer need fleets of ships, tens of thousand of vehicles and planes. A few drones and buying a few media outlets will do. Trying to change the world through your spending habits is just going to make a lot of frustrated people with the same crappy products and food, just bought and rebranded by the same upper 5%.
—————-
It sure looks to me like the USA has perished and the USCA is an emerging global power.

Let’s hope more people read The Liberty Amendments and support its concepts even if they don’t like the author or the way he writes. Personally I think he gave president Obama to much credit in the book. He never should have mentioned him by name as he’s just a short term player in the big picture, and he’ll lose support form people that would otherwise have been supporters.

Wow, I really went to town on this one eh?

Posted by tmc | Report as abusive

Did anyone else notice that the countries mentioned in this article are home to some of the worlds oldest civilizations? Egypt China Peru Turkey. Their enemy is their mindset. It has held them back for centuries. Until that changes they will always be a few steps behind.

Posted by 123-100 | Report as abusive