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The author is the president of Rockefeller International
“Resilience” is one of the buzzwords of the year. The term is widely used to describe the U.S. economy, which continues to stave off recession and boost global growth despite the steepest interest rate hikes in decades. But in the developing world, an even more amazing story of fortitude is unfolding.
Of the 25 largest emerging economies, three-quarters of the reported data beat their growth projections this year, with some countries such as India and Brazil doing so by a wide margin. Global economic growth forecasts for 2023 are rising, with most of that gain coming from emerging economies.
Few analysts expected this resurgence to come. They expect emerging economies to be particularly vulnerable to rising interest rates, a perception that remains dominated by the weakness of a heavily indebted China and a handful of smaller countries such as Ghana and Bolivia. expected to be targeted. But this situation does not include the other large developing nations, from India to Mexico, which account for half of the emerging economies in terms of economic output and more than half of the population.
Indeed, rising interest rates sparked the emerging world crises in the 1980s and 1990s, but many emerging economies repaired their banking systems and tightened financial discipline as they plunged into the 2020 pandemic. Borrowing less to stimulate the economy, the budget deficit grew by an average of 15% of gross domestic product from 2020 to 2022, half that of the United States. The old notion that “upstart” is just another word for recklessness no longer applies.
Now, an American story on dubious grounds. The US stock market is on the rise again, thanks in part to the artificial intelligence boom, but like all geeks, artificial intelligence will likely prove to be part of the hype. Meanwhile, economic growth is sustained by billions of dollars of stimulus funds still lying dormant in U.S. savings accounts and financial conditions far looser than the Federal Reserve would like. Despite the scale of rate hikes so far, the Fed says it still has a long way to go before inflation is contained.
By comparison, emerging market central banks have hiked rates faster than the Fed, are close to reaching their inflation targets, and are cutting rates again. Emerging markets typically have higher inflation, but barring outliers, median inflation is currently hovering around 5-6%, not higher than in the developed world. In the last 40 years, that hasn’t happened. Some central banks in developing countries have started cutting rates, and many others are likely to follow suit soon.
Emerging economies are on track to grow at an average rate of more than 4% over the next year, four times faster than developed economies. Developing economies typically grow faster than developed economies, but the gap has narrowed over the past decade and is now widening again. And money follows growth. Foreign investment in large emerging markets is increasing. Both currencies have appreciated against the dollar since late last year.
While U.S. budget deficits are likely to remain unusually high into the 2020s, they are already narrowing in most major emerging economies. As a result, emerging market recovery could be more sustainable.
But commentators continue to warn emerging economies of impending danger as if nothing has changed. Between the 1980s and his early ’90s, there were never fewer than 25 emerging nations in default, often including major powers such as Brazil and Turkey. Currently, there are only five countries, and they are all small, such as Belarus and Zambia.
Major emerging markets are generally in good financial shape, but each has its own strengths. So far this year, many parts of Asia have risen on the back of strong domestic demand. In Latin America, the main driver is exports, especially commodity exports, where prices remain strong. Net exports contribute 2 percentage points to growth in Latin America, and 8 percentage points in Chile. This is partly thanks to the sale of metals used in electric vehicles.
It is also working to “disconnect” from China. Emerging economies once grew in tandem with their main trading partner, China, but in recent years the link has weakened. As the Chinese government turned inward, developed countries sought to reduce their dependence on trade with China, creating opportunities for other emerging economies.
Developing countries never fit neatly into one storyline. There are 155 emerging markets, and as many still expect, if tightening financial conditions ultimately trigger a US recession, it will ripple outward, with some will cause problems. But their story so far, to borrow this buzzword, is a true story of resilience.
