A funny thing happened on the way to the decline of the United States and the rise of China, Brazil and other emerging markets: Many prominent analysts began wondering if the pessimistic predictions about America were wrong — and whether it was the emerging markets that were heading for trouble.
These international economic fads are always suspect, up or down. They seem to follow what I was (facetiously) told years ago was the guiding rule for columnists: Simplify, then exaggerate. So beware this latest revisionism, just like any other variety.
But some startling new assessments of global economic trends stand the “declinist” wisdom of recent years on its head. The revisionists argue that U.S. economic fundamentals are now stronger than they seemed, and that those of the BRICs — the emerging giants Brazil, Russia, India and China — are weaker.
Certainly, the financial markets are registering this new view. The Morgan Stanley Emerging Markets Index fell 5 percent last year, compared to a nearly 30 percent gain for the U.S. benchmark Standard & Poor’s 500 index. Meanwhile, the International Monetary Fund (IMF) predicted Tuesday that economic growth will rise this year and next in the United States and decline both years in China.
One influential revisionist has been Antoine van Agtmael, the economist who coined the hopeful term “emerging markets” in 1981. Van Agtmael has written several blistering assessments recently about the former rising superstars.
“A few years ago there was a widespread feeling that the developed world had fallen off its pedestal — that Asia had not only escaped the global financial crisis but that its system was somehow superior. That overconfidence seems gone now. Instead there is a sense of vulnerability,” he wrote in Foreign Policy in June 2012. “[T]he despair and fear felt by many in the United States is misplaced. In fact, there are early signs that the United States may be regaining some of its lost competitiveness in manufacturing and that China is losing some ground.”
The reversal of expectations was summarized last month in a report by Goldman Sachs titled “Emerging Markets: As the Tide Goes Out.” The authors warned that economic difficulties in China, Brazil, Russia, Turkey and other investment darlings aren’t just cyclical but require “a significant reassessment of emerging market countries” and an expectation of “underperformance and heightened volatility over the next 5 to 10 years.”
China is the bellwether, and here the Goldman Sachs report echoed themes cited by China’s own leaders: the country’s unbalanced growth; its demographic decline, with fewer young workers resulting in higher labor costs; its potentially deadly pollution problems; and its financial weaknesses. This last theme was highlighted in a December report by China’s Academy of Social Sciences, which noted that local-government debt reached the “alarming level” of about $3.3 trillion by the end of 2012, double what it was in 2010.
This municipal credit bubble poses a delicate dilemma for Chinese leaders: The country’s growth is slowing, with the IMF projecting that it will fall from 7.7 percent last year to 7.5 percent in 2014 and 7.3 percent in 2015. As the rate of growth shrinks (especially compared to its double-digit expansion of a decade ago), there’s a danger the local-debt balloon will pop, with significant social and political repercussions.
Brazil is another “economic miracle” that’s getting a skeptical new look. The Goldman Sachs report cites the country’s problems of high taxes, costly and distorting government subsidies and low labor productivity. Financial markets have taken note, with Brazilian equities, currency and local debt all falling by double digits last year.
One surprising new problem economy is Turkey, another stellar performer over the past decade. Because of its heavy external debt, estimated at about 45 percent of its gross domestic product, “Turkey is one of the economies most vulnerable to a shift in sentiment away from emerging markets,” noted Goldman Sachs. Turkey has new domestic political strains, too, as Prime Minister Recep Tayyip Erdogan, the Superman of a few years ago, copes with a domestic corruption scandal and the fracturing of his Islamist political base. Some analysts predict Erdogan will face a challenge from Turkey’s popular President Abdullah Gul.
As global competitors stumble, the United States has been picking up speed. Remarkable new shale oil and gas discoveries have reduced America’s energy vulnerability and made it a relatively low-cost manufacturing nation. It was a telling example of the new mood that the Wall Street Journal titled an article last year about van Agtmael and other revisionists: “Is the U.S. the Next Hot Emerging Market?”