Don't be pessimistic about emerging markets
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THE WORLD economy is growing more slowly now than over the past few years - with little sign of any major upturn. The US Federal Reserve proved it when postponing an increase in interest rates, which was taken for granted just a few months ago.
With the United States demonstrating an improvement in its gross domestic product, it is safe to assume the cause of the economic slowdown lies elsewhere. Even the economic uncertainties in Europe cannot be seen as the main reasons. Rather, the emerging markets are the cause of concern.
Indeed, growth, which was strong for a long time in those markets, has considerably declined.
According to estimates, the economies in these markets are growing by between 3 and 4 per cent, which would be the lowest increase since the financial crisis.
The currencies of these countries are at their weakest since 2002, with large capital outflows ensuing.
Many emerging markets have rightly had a wake-up call. A number of commodity-rich countries have failed to use the boom years of high raw-material prices to reduce their dependence on natural resources or develop their economic systems.
However, the emerging markets are far from the deep-rooted crisis witnessed at the end of the last millennium.
Lessons from the Asian crisis of the time have been learned almost everywhere, and banks in some of the Asean countries that were mired in crisis in the 1990s are today in very good stead. Moreover, the currencies of most of the developing economies are no longer fixed; some nations have accumulated appreciable foreign-currency reserves and current-account surpluses, and dependence on foreign capital has declined.
The role of the state in establishing the conditions for economic development is also essential. In India, the government works hard to promote industrial growth across the country. In China too, politicians are sending out clear signals, intended to accelerate structural reforms and thus strengthen the economy.
Demands for something similar have likewise been directed just recently by the German government towards Brazil in an effort to avert the threat of recession.
Despite justified concerns about the development of emerging markets, I consider this mix of pessimism and high-minded lecturing to be inappropriate. China’s economy is not faltering and has merely seen its rate of growth slowing down.
Even if its current and forecast economic growth is no greater than 4-6 per cent, this rate still constitutes a substantial contribution to the world’s economic growth.
I am not closing my eyes on the obvious existing problems. However, after the gold-rush sentiment some emerging markets experienced during the previous years, perhaps we should also
acknowledge that economic cycles are part of life, with their upturns and downswings. A country such as China can actually benefit from a period of consolidation because the boom years also brought an accumulation of risks and threats.
In particular, I think about the issue of environmental protection, the high level of debt that has built up at banks, corporations and provincial governments, and also the booming shadow-banking sector.
Even if many emerging markets are experiencing more difficulties than in the past few years, I am firmly convinced that they will continue to play an even greater role in the global economy.
There are also good demographic reasons, as the populations in almost all emerging markets are growing fast.
Moreover, many emerging nations have seen the development of a well-educated middle class. By nurturing its service sector, for example, India has managed to create major hubs of highly qualified information-technology specialists, placing the country in a position to offer related services to numerous international corporations.
The establishment of a middle class also leads to increases in consumption and a desire for enhanced quality of life. This not only benefits the domestic economy but also increases demand for international consumer goods.
Also, the potential in China and India regarding the field of digitisation is huge. These two emerging countries now account for more than a billion Internet users, and the trend is growing fast.
I reckon that even if emerging markets may have dropped down a gear, there is no reason to doubt their ability to drive future success.
Kasper Rorsted is the CEO of Henkel, a company that holds globally leading market positions in both the consumer and industrial businesses. This article originally appeared in German.
