The Emerging Markets Are Not Going to Save the World Economy

When the Western economies, including Europe, North America and Japan, went into a severe recession in 2008, early accounts emerged about the the possibility of the emerging economies, or the BRICS (Brazil, Russia, India, China, and South Africa), to propel global economic growth. Since 2008, the recovery in most Western countries with the exception of the US has been extraordinarily weak. On the other hand, the US is also facing weaker growth rates compared to the pre-crisis period. Much of the US economy is built on consumption (about 70%), and with weak job and wage growth, there are severe limitations to a consumer-led recovery. Europe has been bogged down by a currency and sovereign debt crisis, which is dealt with by austerity. These policy measures are expected to deteriorate the economy even further. Europe has essentially returned to a recession in 2012, and the outlook for 2013 is even more pessimistic. Japan is now posing an alternative with Abenomics: the aggressive government policy of raising public expenditure and investment projects coupled with currency devaluation is pushing up growth. But the not unjustified fear is that this growth will fizzle off. Currency devaluation is supposed to raise exports, but other countries will soon try to devalue as well, and since its main trading partners are facing less growth (such as US and China), this strategy will not remain efficacious indefinitely. Japan’s huge public debt is continuing to accumulate, thus posing a natural limit to fiscal expansion.

Given all this, experts compare the poor Western performance with the strong performance of the emerging market economies. The average emerging economy still has a lower GDP-per-capita than much of the developed countries, and there is plenty of opportunity to pick up. On its face, the claim that the emerging countries are doing well can very much be vindicated. The growth trajectory of the BRIC has been higher than the advanced economies (see image below). Even though, the growth rates too slumped in 2008 and 2009, there was a very sharp rebound in some countries. But most recently, there has been a slowdown even in the emerging countries. The economist, Nouriel Roubini, remarks that the magic streak of the emerging countries is over, and that these countries will not be able to escape the depressing economic trends in the developed countries. Brazil only grew by 1% last year, Russia grows by 2% this year, India grew 4% last year, China grew by 7.8% last year, and South Africa grew by 2.5% last year (Roubini 2013). These numbers are still more impressive than anything that can be found in the recession-ridden Europe. But the slowdown in the emerging markets is blowing a hole in the argument of those that think that emerging markets can continue to propel global growth rates. In July 2013, the IMF had announced that global growth for 2013 will only be 3.1% compared to the 3.3% it had predicted back in April (Smialek 2013).

BRIC Growth

So what is essentially the reason for the weakness of the emerging countries? Why can they not grow when the West is not growing? The answer is that much of the economic growth coming from the emerging countries has been export-led. And much of the exports are going to the most developed countries. The US, for example, has been sustaining the world’s largest trade deficit by absorbing much of China’s commodities while exporting little in return. So if the US or Europe for that matter are slumping, then the emerging countries are slumping too. But this condition can not be held against the emerging countries, because an export-led development strategy has been the only viable option for much of the emerging countries if they wanted to develop. The other option is an internally based economic model, also known as import substitution. This involves the reduction of imports from other countries, and an increase in domestic production with the help of protective tariffs and government subsidies for domestic industries. This industrial strategy was implemented in the 1960s and 1970s in post-colonial Africa and in Latin America, and had worked to some extent to improve the economic and social development of the countries. However, it largely failed due to a the continuing requirement of huge import resources to stimulate domestic production. Countries like Zambia, for example, were heavily dependent on successful copper export earnings, which had slumped in the mid-1970s with the oil crisis and the collapse in copper prices. The lack of revenues to subsidize domestic production led to the growing indebtedness of the state, and eventually forced the country to accept an IMF loan followed by harsh austerity policies (called structural adjustment), which predictably shackled the African continent into a cycle of debt and poverty.

On the face of it, import substitution industrialization is not a bad path to pursue for a poor country. In fact, this was the strategy, which was pursued by Europe and the US in the 19th century. The problem with that strategy is that it can only be pursued successfully if there are no other rich countries that can interfere with the domestic development process. Granted, the existence of rich countries help in the sense that the rich countries can provide the know-how and technology to the poor countries without the poor countries having to reinvent the wheel. On the other hand, it must be understood that the developed countries have subjugated Latin America and Africa as colonies during the 19th century, allowing today’s developed countries to generate economic wealth with the given resources of the colonies. No such colonies were available for the developing countries in the 1950s and 1960s. In addition, since much of the domestic production of the import-substituting countries relied on the import of parts from developed countries, huge costs were placed on these import-substituting countries. Another problem was that the developing countries were very inefficient, leading to high consumer prices and low growth rates, while lowering any opportunities for export. Inefficiency also coincided with more unemployment and more wealth and income inequality, which has a depressing effect on domestic consumption- the key to import substitution. (For a full review of import substitution industrialization in Latin America, consider Baer 1972).

The more successful development model for the non-Western countries was the export-led model pioneered by Hong Kong, Taiwan, Singapore and South Korea. These countries exploited their preferential access to Western markets (especially in Japan) to generate economic development through the export of manufacturing and service products. The advantage was that the export to rich countries was a sure way to generate revenues provided that the products could be provided at a comparative advantage. The weakness of the model is the strong vulnerability to external shocks, a problem which import substitution industrialization did not encounter. The decisive Keynesian critique of the export-led development model explains these external shocks by reference to the fallacy of composition. If some countries are able to expand their exports, they do so at the expense of another country, which is doing the import. Eventually, every country has to import, and every country also exports. But overall there are some countries that export more value than they import, and vice versa. Even as some countries carry trade surpluses, and other countries carry trade deficits, the global trade economic balance is zero (Palley 2003). Not everyone can be a net exporter. The essential dilemma is that the ensuing imbalances precipitate financial and economic crises in the absence of a smooth way of redistributing the surplus of one country to the deficit country, because the deficit countries are soon forced to halt their imports for lack of funds. The loans, which they receive from the surplus countries help them tide over, but merely delays the crisis. A financial crisis is equivalent to an external shock.

An external shock such as the Asian financial crisis in the late 1990s contributed to significant economic contraction in the Asian countries. The 2008 recession in the West similarly hurt the Asian economies heavily. China has adopted very much an export-led model, and its economic growth has been phenomenal. But this export-led growth is very much under attack with the ongoing recession in the West. This is why economic experts emphasize the importance of a ‘rebalancing’ of China’s economy from export to domestic consumption. China has generated sufficient surpluses in order to stimulate domestic demand. However, its state-focused economic development has induced the Chinese government to funnel much funds into public investment projects, which raises the investment share of the Chinese economy (Lee, Syed and Liu 2012). Now, there is nothing wrong with investment in the public infrastructure, because they have a use-value for the society over the long term. On the other hand, too much investment will imply an over-capacity relative to what the society itself can consume. Here the challenge lies in raising the share of domestic consumption through a dramatic rise in wages for most workers. China’s successful economic transformation may be crucial for the fate of the other emerging economies, such as Brazil, which relies on Chinese imports of food stuff and iron ore. Russia similarly depends on oil and gas exports to China. A dramatic slowdown in China implies a slowdown in other emerging markets.

In order to return to the initial question, will the emerging countries drive global growth even in the absence of a full recovery in the West? I find it rather unlikely. The global economy is in a very volatile environment. The debt overhang of countries, private individuals and businesses thanks to financialization, and the enormous inequality of income and wealth across the world, make it very difficult for many companies and countries to raise investments and for consumers to increase their purchases. While emerging countries will try the best they can to make the best out of the situation, they can not insulate themselves from the external shock of weaker export markets in the western countries. Unlimited economic growth is, by no means, the best goal for mankind due to the ever greater resource consumption and environmental damage that aggregate economic growth requires. But in the absence of systematic changes to the capitalist economy, which has essentially taken on global reach, we have to acknowledge the dire implications of a global growth crisis: namely the increase in the global unemployment rate, the stagnation of wages and the rise of social discontent.


Baer, Werner. 1972. “Import Substitution and Industrialization in Latin America: Experiences and Interpretations.” Latin American Research Review 7(1):95-122.

Lee, Il Houng, Murtaza Syed and Xueyan Liu. 2012. “Is China Over-Investing and Does It Matter?” IMF Working Paper, No 12/277.

Palley, Thomas I. 2003. “Export-led Growth: Evidence of Developing Country Crowding-Out.” In Economic Integration, Regionalism and Globalization, edited by Arestis, Baddeley and McCombie. Cheltenham: Edward Elgar.

Roubini, Nouriel. 2013. “Trouble in Emerging-Market Paradise.” Project-Syndicate, July 22.

Smialek, Jeanna. 2013. “IMF Reduces Global Growth Outlook as US Expansion Weakens.” Bloomberg, July 9.

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