Emerging Economies

The era of Globalisation continues...

Albeit this time, the rules of the game have changed. In the past, the so-called developing countries used to bank on the developed economies, particularly the US, to bail them out during times of trial. But now the landscape is changing. The capital flows have changed directions. New leaders are threatening to rule the global economy. Emerging economies being forced to devalue their currency, banks in these economies going bankrupt, the Governments defaulting on their loans are all things of the past now. In the current scenario, it is the western markets, especially the US, which are in troubled waters. With the disastrous subprime crisis and many of the investment firms and banks collapsing, the erstwhile superpower is in a severe financial crunch. Add to this the weakening dollar and you have trouble in paradise.

Many of the western institutions are imploring shareholders and creditors to give them a fillip. And no prizes for guessing who these knights in shining armours are: Investors from the Emerging Economies! For example, Singapore's Temasek Holdings has invested around $20bn in Barclays, Standard Chartered and Merrill Lynch, while the Government of Singapore Investment Corp has put $11bn into UBS and $6.9bn into Citigroup. The China Investment Corporation has taken a $5bn stake in Morgan Stanley and invested $3bn in Blackstone. The Abu Dhabi Investment Authority bought $7.5bn of Citigroup equity. And these are just the investments by the state. There are millions of private investors too in the market.

The sudden infusion of cash in these formerly cash-strapped countries can be attributed to the rising costs of commodities. A few years back, the oil price was about $11 a barrel and now it is fluttering around the $100 mark. The middle-east suddenly found itself doused in money. India and China are the fastest growing economies of the world, outpacing the saturating American and European economies. Much of the Chinese economy is represented in manufacturing. Walmart, the American retail giant, has most of its products manufactured in China. In contrast, India's economy is mainly powered by its world-class IT related services. It also happens to be the world's second largest software exporter. Almost 51% of India's GDP comes from its service sector. Formerly, excess population was one of the reasons held responsible for the poor economic conditions in these developing countries. But the bane has turned into a boon now. How else can we explain the cheap labour that has enticed many companies to offshore their operations to these economies? Hand-in-hand with the growing population comes the availability of new market opportunities. We see lot of foreign direct investments into the markets of these emerging economies. Influx of FDI has a positive effect on the local currency of the country, making it stronger, thus the exchange rate improves, boosting the purchasing power of the country.

Blame it on their traditional outlook of not preferring to spend beyond their means, but emerging economies have strong regulatory economic policies. Their central banks keep the currency stable and foreign currency reserves high. China's central bank now has foreign reserves totaling $1.6tr, Russia's has $519bn, India $314bn, Taiwan $287bn, South Korea $264bn, Brazil $195bn, and Singapore $178bn.

The emerging economies have become the changing face of the global scene. As World Bank President, Robert Zoellick rightly says, "G7 is now ineffective and should be replaced by the steering group that includes China, India and Brazil". And today emerging economies do not include just the BRIC (Brazil, Russia, India, and China); there are several other players in the field who are jumping on the bandwagon like the other developing countries in Asia, Latin America, Africa, and the Middle East. According to studies and projections done by PricewaterhouseCoopers, India would grow to almost 90% of the US Economy by 2050, China could overtake the US Economy by 2025 and Vietnam may be the fastest growing of the emerging economies, Nigeria, Philippines, Egypt and Bangladesh also have high growth potential.



The table here shows the GDPs of different countries projected for the year 2050. On careful observation, we see that for most of the developed countries like USA, Japan, Germany, UK, France etc., the GDP either remains the same or is decreasing. But for the emerging economies like China, the GDP increase is 500% and for India, it is a whopping 1200% increase.

The reality shaped by the emerging economies can be realized in the balanced growth across the world, challenging the lopsided economic clout of the Europeans and the Americans. In the past few years, China, India, and Russia, together with other fast-growing economies mostly in Asia and Latin America, have averaged almost 7% growth compared with 2.3% in rich economies. According to a study by Goldman Sachs, by 2039, Russia, India, China, and Brazil together could be larger than the combined economies of the United States, Japan, the United Kingdom, Germany, France, and Italy. China alone could be the world's second-largest economy by 2016 and could surpass the United States by 2041.

Look at the following examples appearing in the newspapers today:
- Brazil overtakes US as top destination for investment in biofuels.
- China overtakes UK as a key country for investment in renewable energy.
This is just the tip of the iceberg for bigger things to come. It won’t be long before these emerging economies are catapulted to the big league of the G7. Going into the future, the prominence of these emerging economies is only going to increase, with the power to influence the workings of the world economics.



China Rising:

Among these emerging economies, the one country that shows tremendous promise is China. The emergence of China as a formidable economy can be mainly attributed to the shift from a centrally-planned economy to a more market-oriented economy, development of the private sector and liberalisation. The rapidly growing economy of China, its huge export earnings and its unrivalled position as the global manufacturing leader – all these have had a resounding reverberation in the global economy.

Though the US is still the single largest economy, its economic supremacy is being eroded. In the early 2000s, China eclipsed Germany to become the world’s third largest economy with 6 per cent of the world gross domestic product (GDP). It is expected to overtake Japan's GDP within a decade. According to the Asian Development Bank (ADB; Manila), the Chinese economy grew 10.4% in the first half of 2008 and 12.2% in the second half of 2007. The economy has been extremely buoyant, with real GDP growth averaging more than 11 percent for the last several quarters with the GDP growth in 2007 being 11.9%.

China’s enormous potential market, cheap workforce and commitment to liberalise have attracted lots of foreign direct investment in the world. So much so, China has beaten Western Europe for the top spot for FDI ‘attractiveness’ and has been ranked the most attractive destination for foreign direct investment, ahead of Eastern Europe and Western Europe. Also, China topped the top ten High-Tech Exporters for the year 2005 with exports worth 406 Billion U.S. Dollars, beating United States, Japan and Germany to the top slot. According to predictions by Goldman Sachs, China’s currency could double in value in ten years’ time if the current growth rate continues.

Furthermore, the investment boom still continues in China. The purchases of U.S. bonds by the Chinese have risen to more than 2 percent of the GDP of the US. Also, the Shanghai stock index, over 2006 and 2007, has increased by 400%. By the end of 2007, China witnessed one of the year's best-performing stock markets and was home to the world's largest company for a few weeks. The evolution of China's version of Wall Street is a leap forward for an economy that is on its way to becoming a world leader.

Every economy has its share of challenges and the same holds true for China too. The extremely fast growth of China will eventually slow down as low-cost labour will give rise to higher wages and living standards. Intellectual property protection has been another major challenge in China. China's piracy on video, CD, and software continues to increase annually. China is one of the biggest violators of copyrights. China is also under the scanner for the environmental damages that it is causing due to lack of proper environmental regulations. China's GDP accounts for only about 5 percent of the world's total in the world, yet its coal consumption accounts for about 30 percent of the world's total; electricity consumption about 13 percent of the world's total; and consumption of steel products about 25 percent of the world's total. Another aspect that might hamper China’s growth is the low levels of innovation and its positioning as just a manufacturer. However the Chinese Government is taking initiatives to overcome these challenges. Measures are being taken for the regulation and implementation of the intellectual property rights. Stricter environmental regulations are being enforced to control its emissions of pollution. Steps are also being taken by the authorities to ensure that China is no longer just a workshop of the world. More emphasis is being laid on innovations. China aspires to move from the tag of “Made in China” to “Created in China”. With these problems taken care of, there is no stopping China from becoming the global superpower sooner than expected.

Behold! The hidden dragon is rearing its head and how!

References:
Euroweek (5/16/2008) Supplement, p33-35: Author: Evans, Julian
Economist, 2/16/2008, Vol. 386, Issue 8567
PricewaterhouseCoopers Press release
Goldman Sachs - Ideas
Global Insight, Inc.
Article by Ruthven, Phil. BRW, 1/17/2008, Vol. 30
U.S. News & World Report, 1/14/2008, Vol. 144