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So there you have it. The US Federal Reserve sets monetary policy to fit conditions in the US economy. If decisions taken by the Fed cause collateral damage elsewhere, well, tant pis. So much for global governance.

Janet Yellen was loud and clear in her testimony to Congress this week. In so far as the Fed’s policy of withdrawing monetary stimulus had spooked markets in emerging economies, the turbulence did not represent a “substantial risk to the US economic outlook”. Put this another way: the world’s most powerful central bank pays attention to what happens in China, India or Turkey only in so far as it washes back over the US.

In one respect, the Fed chairwoman was offering a statement of both the obvious and the politically prudent. The duty of the Fed is to promote the economic wellbeing of the US. Had Ms Yellen said it was tailoring its tapering programme to the wishes of policy makers in Beijing, Delhi or Ankara, her first appearance before Congress as chairwoman might have been her last. Members of the House of Representatives are not noted for their devotion to multilateralism.

The emerging economies take a different view. Raghuram Rajan, India’s central bank governor, hasattacked the US for its apparent indifference to the global upheaval as rising states have been forced to raise interest rates in the face of Fed tapering. He has half a point: while the west headed into recession after the global financial crash, it was growth in the emerging world that kept the economic show on the road. Now that the US is recovering, it has returned to the old selfish ways.

The snag is that had Mr Rajan been in Ms Yellen’s seat he would have said much the same thing. Like the Fed, the Indian central bank sets interest rates to suit national economic conditions. The governor answers to Indian politicians. They would not applaud a policy framed to accommodate the concerns of central banks elsewhere.

I suspect that Mr Rajan would say the dollar’s position as the world’s reserve currency places a special responsibility on the Fed. But for as long as India, China and the rest remain jealous guardians of national sovereignty, asking the US to adopt a uniquely internationalist stance is futile.

There was a moment in the immediate aftermath of the global financial crash when governments from the advanced and rising states seemed ready to break the cycle of selfishness. In the early meetings of the Group of 20 nations, policy makers recognised their national interest in the mutual endeavour to prevent a slide into a 1930s style-recession.

It did not last. The passing of the immediate crisis has seen meetings of the G20 fall into the familiar pattern of such international gatherings: the responsibility to act in the wider global interest always belongs to someone else. None have been more jealous guardians of national prerogatives than the emerging economies.

The facts of economic interdependence cannot be wished away. At some point turbulence in the rising world may well exact a toll on the US; at which point, presumably, Ms Yellen could argue that countervailing action was in the US national interest. But this represents a strategy of waiting for the damage to be done. What a waste.

Less than two months in to 2014, parallels with events a century ago, when the first world war put an end to an earlier era of globalisation, are already wearing thin. In an eloquent speech in London the other day, Christine Lagarde, the managing director of the International Monetary Fund, suggested that policy makers should focus instead on another anniversary.

The 44 nations who gathered at Bretton Woods in 1944, Ms Lagarde observed in her BBC Dimbleby lecture, understood the connection between interdependence and collective action. The architects of the IMF and the World Bank looked beyond the deceptive lure of unvarnished sovereignty.

At this, the original multilateral moment, the representatives of 44 nations, Ms Lagarde recalled, “were determined to set a new course – based on mutual trust and co-operation, on the principle that peace and prosperity flow from the font of co-operation, on the belief that the broad global interest trumps narrow self-interest”.

Now there’s a manifesto for the G20.

Philip Stephens

Fonte: FT

In 1955, Walter Reuther, head of the US car workers’ union, told of a visit to a new automatically operated Ford plant. Pointing to all the robots, his host asked: “How are you going to collect union dues from those guys?” Mr Reuther replied: “And how are you going to get them to buy Fords?” Automation is not new. Neither is the debate about its effects. How far, then, does what Erik Brynjolfsson and Andrew McAfee call The Second Machine Age alter the questions or the answers?

I laid out the core argument last week. I noted that the rise of information technology coincides with increasing income inequality. Lawrence Mishel of the Washington-based Economic Policy Institute challenges the notion that the former has been the principal cause of the latter. Mr Mishel notes: “Rising executive pay and the expansion of, and better pay in, the financial sector can account for two-thirds of increased incomes at the top.” Changing social norms, the rise of stock-based remuneration and the extraordinary expansion of the financial sector also contributed. While it was a factor, technology has not determined economic outcomes.

Yet technology could become far more important. Professor Brynjolfsson and Mr McAfee also argue that it will make us more prosperous; and it will shift the distribution of opportunities among workers and between workers and owners of capital.

The economic impacts of new technologies are many and complex. They include: new services, such as Facebook; disintermediation of old systems of distribution via iTunes or Amazon; new products, such as smartphones; and new machines, such as robots. The latter awaken fears that intelligent machines will render a vast number of people redundant. A recent paper by Carl Frey and Michael Osborne of Oxford university concludes that 47 per cent of US jobs are at high risk from automation. In the 19th century, they argue, machines replaced artisans and benefited unskilled labour. In the 20th century, computers replaced middle-income jobs, creating a polarised labour market. Over the next decades, however, “most workers in transport and logistics occupations, together with the bulk of office and administrative support workers, and labour in production occupations, are likely to be substituted by computer capital”. Moreover, “computerisation will mainly substitute for low-skill and low-wage jobs in the near future. By contrast, high-skill and high-wage occupations are the least susceptible to computer capital.” This, then, would exacerbate inequality.

Jeffrey Sachs of Columbia university and Laurence Kotlikoff of Boston university even argue that the rise in productivity might make future generations worse off in aggregate. The replacement of workers by robots could shift income from the former to the robots’ owners, most of whom will be retired and are assumed to save less than the young. This would lower investment in human capital because the young could no longer afford to pay for it; and in machines because savings in this economy would fall.

The argument that a rise in potential productivity would make us permanently worse off is ingenious. More plausible, to me at least, are other possibilities: there could be a large adjustment shock as workers are laid off; the market wages of unskilled people might fall far below a socially acceptable minimum; and, combined with other new technologies, robots might make the distribution of income far more unequal than it is already.

So what should be done?

First, the new technologies will bring good and bad. We can shape the good and manage the bad.

Second, education is not a magic wand. One reason is that we do not know what skills will be demanded three decades hence. Also, if Mr Frey and Prof Osborne are right, so many low- to middle-skilled jobs are at risk that it may already be too late for anybody much over 18 and many children. Finally, even if the demand for creative, entrepreneurial and high-level knowledge services were to grow on the required scale, which is highly unlikely, turning us all into the happy few is surely a fantasy.

Third, we must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?

Fourth, we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. In this way, the potential for a more enjoyable life might become a reality. The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects.

Finally, if labour shedding does accelerate, it will be essential to ensure that demand expands in tandem with the rise in potential supply. If we succeed, many of the worries over a lack of jobs will fade away. Given the failure to achieve this in the past seven years, That may well not happen. But we could do better if we wanted to.

The rise of intelligent machines is a moment in history. It will change many things, including our economy. But their potential is clear: they will make it possible for human beings to live far better lives. Whether they end up doing so depends on how the gains are produced and distributed. It is possible that the ultimate result will be a tiny minority of huge winners and a vast number of losers. But such an outcome would be a choice not a destiny. A form of techno-feudalism is unnecessary. Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them.


Martin Wolf


Fonte: FT

Germany has surrendered and the euro is saved. That seems to be the markets’ interpretation of last week’s ruling by the German constitutional court on the European Central Bank’s “whatever it takes” policy to save the single currency. The judges’ ruling essentially boiled down to this: “We don’t like what the ECB is doing. We think it illegal. But only the European Court of Justice can strike it down.”

Since the European Court is highly unlikely to accept this invitation, the ECB will be able to preserve its policy of Outright Monetary Transactions – essentially a promise to be the buyer of last resort for the bonds issued by eurozone countries. Had the German courts struck down the ECB’s policy last week you would have seen chaos on the markets. Instead, calm prevailed.

The ECB’s initial announcement of its bond-buying policy in mid-2012 was, without doubt, a turning point in the euro crisis – preventing the borrowing costs of Italy and Spain from soaring to unbearable levels. Now the ECB may be tempted to go even further. With the threat of deflation haunting Europe, the bank is under pressure to launch a European version of quantitative easing, imitating the US, Japanese and British authorities. Mario Draghi, the ECB president, wary of the reaction in Germany, has hitherto suggested that such a policy would be illegal. But now that he knows the German courts are likely to refer any such decision to the more integrationist ECJ, he may decide to be a bit bolder.

The court’s ruling has profound political implications. Germany seems essentially to have accepted that, even though the euro is Germany’s currency, its management is not subject to control by German institutions. Since the German representative on the ECB board is easily outvoted by the board members from the rest of Europe, German eurosceptics feel checkmated.

But European integrationists should restrain their cheers. They could pay a heavy political price for victories of this sort. The cost could be a steady undermining of the legitimacy of the European project and the euro in Germany, the EU’s largest state and strongest economy.

Two of the most respected institutions in Germany, the Bundesbank and the constitutional court, are now on record as registering profound objections to the policies underpinning the euro.

As long as the German economy is strong, such laments are unlikely to churn up mainstream German politics. But when things get tough, as they inevitably will at some point, the intellectual groundwork has been laid for a “stab-in-the-back” theory that will explain Germany’s problems by reference to the illegal and improvident acts of the European institutions.

In European countries that are already suffering economically, the political backlash against the EU and the euro is already rising. The EU’s own polls show the popularity of the union plummeting in core countries such as France, Italy and Spain. Henri Guaino, a close adviser to Nicolas Sarkozy when he was president of France, recently gave an interview in which he speculated gloomily: “Monetary policy mistakes can destroy a society.”

May’s European elections will provide a test of strength for anti-EU parties across the continent. Discontent with a weak economy and the euro is likely to merge with the growing backlash against free movement of people within the EU. This was shown in the weekend’s referendum that rejected the policy in Switzerland, which is not a member of the EU but is part of the free-movement zone.

The results of the European elections in May are likely to be a shock, with anti-European or borderline racist parties, such as the French National Front, winning or coming close to victory in France, the Netherlands, Greece, the UK and Austria. Such dramatic results could destabilise markets and will make it harder for centrist politicians to make the compromises that are always needed to keep Europe going.

In response to this Doomsday scenario, an optimistic pro-European could point out that, even if the anti-EU parties make big gains, there will still be a safe pro-euro and pro-EU majority in the European parliament once the centre-right and centre-left parties group together. As economies gradually recover, so the strength of anti-European forces could recede. Ultimately, the euro will not only have survived, it will emerge strengthened from the crisis, since key institutions, in particular the ECB, will have gained the powers they need to make it work.

That is certainly one way things could work out. But there is also a different, darker interpretation that I find more convincing. This holds that the economic crisis has gravely damaged the euro. It has stripped the project of support and legitimacy and exposed the design flaws in the single currency. The biggest flaw remains the lack of a large central budget and a transfer union of the sort that makes other federal currencies, such as the dollar, work.

That weakness can only be remedied by the creation of something much closer to a European state. But the crisis has profoundly undermined the pro-European sentiment that would be necessary to build a United States of Europe. Even in Germany, which has historically supported the European ideal, the country’s most respected institutions are crying foul.

As a result, the euro is stuck with a floundering economy, inadequate institutions and weak support. That does not sound like a long-term recipe for success to me.

Gideon Rachman

FT

Financial markets began 2014 in an ebullient mood. Omens of economic recovery in the developed world buoyed investors across the globe. Troubles in emerging markets, it was thought, would amount only to a handful of little local difficulties.

It did not last.

In developed markets, the past three weeks have seen the steepest falls in equity prices since mid-2013, when fears that the US Federal Reserve would begin phasing out its massive bond-buying programme caused interest rates to surge. This time, however, there has been no rise in short-term interest rates in the US or Europe, and bond yields have fallen slightly. There has been no change then in the market’s reading of the Fed or the European Central Bank’s policy stance.

Instead, traders have been rattled by the indications that global economic demand is weaker than thought. Inflation now stands at about a paltry 1 per cent in the US and Europe, and there has been a string of disappointing data on US economic activity.

In previous years, this combination of events might already have had the Fed signalling a willingness to use monetary policy to stimulate the economy. But so far in 2014 the silence has been deafening.

Investors have long believed that under Alan Greenspan and then Ben Bernanke, the Fed deliberately shielded the stock market from losses by using monetary policy to lift share prices whenever they suffered steep falls. Now investors are debating whether Janet Yellen, the incoming chairwoman, will do the same. Many are nervous. Ms Yellen has been silent on all the main issues for almost a year. Stanley Fischer, the likely vice-chairman, is thought to be sceptical about some of the most dovish aspects of recent Fed orthodoxy.

None of this would matter if the US economy had maintained the healthy rates of growth seen in late 2013. But growth seems to have dipped to about 2 per cent in the current quarter, from 3.5 per cent in the second half of last year. Markets had been cheered by a recent outbreak of sanity in Congress, which has slowed the pace of spending cuts compared to last year and now seems less likely to take America back to the brink of technical default. But now the fear is that this will not be enough. The economy might return to earth with a thud, as it did after a short spurt of growth in 2009-10.

The Fed plans to taper its asset purchases only very gradually. Yields on long-term bonds may be affected by as little as 1 per cent. If the US economy proved unable to withstand even this featherweight touch, market optimists would lose their nerve. The stock market has risen a very long way – shares are currently selling for fairly high multiples of company profits, by historical standards. A bear market could ensue.

Yet these fears seem overblown. The January weakness in US employment data, and in the ISM manufacturing survey, shocked the markets, but other statistics have painted a brighter picture. The slowdown may turn out to be a blip, caused by a one-off pause while companies run down excess inventories, or the effects of extraordinary weather. If this view proves correct – and I think it will – the recovery will strengthen later in the year.

This sanguine assessment does not, however, apply to the emerging markets, where a storm is brewing.

Since the Fed began its quantitative easing, investors who could no longer earn their keep buying US government debt have ventured further afield. This has resulted in a huge influx of capital into countries such as Turkey and Brazil. But the ensuing credit bubbles were not sufficiently controlled by monetary authorities, and now that policy is being tightened in the west, they threaten to burst. Central banks in emerging markets have been pleading for help. But these calls have been politely dismissed by both the Fed and ECB, whose job is to look after their economy at home.

Now China has decided to reverse its own huge monetary stimulus. Both of the world’s major economic powers are therefore pulling in the wrong direction for most emerging nations. They have not been helped by the collapse in the yen, which in effect cuts the price of Japanese products, or the euro area’s growing trade surplus. They have little option but to let their currencies slide, with rising interest rates and slowing growth rates looking inevitable.

In many emerging markets, monetary conditions are tightening sharply – just what these economies do not need. In the wake of a boom fuelled by cheap credit, the spectre of widespread insolvency looms.

All eyes are now on China. Few, if any, major economies have emerged intact from a credit bubble as intensive as the one in China’s shadow banking sector today. But no country has had $3.5tn of liquid reserves to fall back on either.

China’s decision in December to bail out an investment product distributed by its largest bank shows that for now the authorities would rather absorb the losses of the private sector than sow panic among investors. But before this is over there will be failures in financial institutions, just as there were in 1998 when Premier Zhu Rongji allowed the collapse of Gitic to serve as a lesson to others.

Investors are asking whether the markets can survive tapering by the Fed. The harder question is whether they can survive a monetary tightening by the People’s Bank of China. Many are betting on a bumpy landing, but one that does not involve a serious recession. They may be right, but China is where the unknown unknowns in the global economy currently lurk.


Gavyn Davies



FT

Throughout the developed world, record levels of youth unemployment are spreading feelings of hopelessness across an entire generation. Yet what is striking is that policy makers hardly seem to care.

It is only part of the answer to observe that not everyone is suffering equally: for much of wealthy northern Europe, for instance, it hardly registers. And although it is true that in some of the badly affected countries the figures have been pretty high for several decades now, the crisis has made them much worse. The real problem is not economic; it is political. An epoch of some two centuries is ending, and the young are the main losers.

The rise of modern states coincided with a valorisation of youth. Napoleon marked the change. After him, age came to be associated with the ancien regime, youth with the hope of something better. Scarcely out of university, the great Polish poet, Adam Mickiewicz, wrote his “Ode to Youth” in 1820, perhaps the best-known expression of this attitude. Founded a decade later, Giuseppe Mazzini’s Young Italy generated endless spin-offs – there was a Young Germany and a Young Poland, not to mention Young Ottomans and later Young Turks. A radical umbrella group, Young Europe, briefly brought many of them together, turning the name of the continent into the emblem of a fairer, more peaceful and more brotherly age ahead. The contrast is striking with what Europe has now come to stand for – a vision dreamt up by old men, now out of touch and increasingly out of mind.

In the 19th century such groups spoke about the future but seemed a long way from being able to shape it as their successors did in the century that followed. Communism spawned a new superpower, the Soviet Union, a state dedicated to creating a new man cast in the image of athletic fitness and health. The Communist party called upon a new generation, untainted by past loyalties, to build what the Soviets called “really existing socialism”. Purges weeded out the old, providing opportunities for the young. As Leni Riefenstahl’s films testify, the far right had an equally obsessive fixation on youth. Schoolchildren were mobilised for the party; dictators such as Mussolini were always ripping open their shirts to demonstrate their virility.

Written off by their critics as gerontocracies, the interwar democracies started to see their young people as a national resource as well. Looking back from the perspective of the 2008 financial crisis – with its paltry regulatory or legislative response – one is struck by how far western societies moved after the 1929 Wall Street crash. They did not change course immediately, but over a period of two decades they brought in welfare policies – in health, public housing and industrial relations – that transformed generational prospects.

From the 1940s onwards, they focused more and more on the young. The new generation had shown itself to be indispensable in the most important way of all: modern warfare was inconceivable without armies of the young. Two world wars and the sacrifice of millions of youths cemented a new kind of social guarantee across the developed world. From the 1950s the young came to possess life chances – through schooling, expanded access to university and the demand created by near full employment – that had been enjoyed by no previous generation. That this era coincided with America’s rise to global supremacy was no coincidence, for this was a superpower that flaunted its youth, a country where Eisenhower’s years of experience were no virtue, and JFK’s youth one of his greatest assets.

Today things look different. Heirs of the Golden Age still run the show, and septuagenarian rock stars hog the limelight. Meanwhile the young face dismal employment prospects, insecurity if they do land a job, and soaring bills for their housing and education. Their plight is an extraordinary generational triumph for their parents’ cohort. In the US, escalating college tuition fees have prompted little protest. Occupy Wall Street was supposed to spur a larger social revolt on the debt question but it failed. In countries on the front line of the eurozone crisis, a doomed generation – facing something in the region of 65 per cent youth unemployment – backs neither the existing parties nor any of the radical alternatives, seeing in all of them, indeed in politics itself, the expressions of the era that got them into this mess.

Understandable as this attitude might be, it is also self-defeating. For until the grievances of the young can assume a political expression more threatening to the established order, the sad truth is that nothing much will change. Modern warfare requires few soldiers. There is no ideology of youth any more, and it is not just the unemployed under-25s who have lost faith in the future. From the point of view of the modern state and its politicians, who needs the young?


Mark Mazower is professor of history at Columbia University and author of ‘Governing the World: The History of an Idea’

People are responsible for the foreseeable consequences of their actions, whether or not they intend to cause them. The Federal Open Market Committee, which sets monetary policy in the US, is no exception.

Many have expressed surprise at the Fed’s silence on the financial turmoil in emerging markets. Its statements since June 19 2013 have made no reference to economic conditions outside the US. They could have been written by the central bank of a closed economy.

Following the Fed’s premature announcement on May 22 that it would begin to scale back its $85bn-a-month bond-buying programme, many emerging markets experienced a sudden reversal of capital inflows followed by sharp exchange rate depreciations, large increases in longer-duration domestic currency bond yields and significant stock market declines. These effects were especially pronounced in India, Indonesia, Brazil, South Africa and Turkey.

On September 18 the Fed changed its mind, and announced that it would not yet taper its asset purchases after all. This led to a partial reversal of the exodus of capital from emerging markets and a partial recovery in asset prices. In the past month, however, there has been a second bout of unrest. In part this was the result of political instability and economic mismanagement in countries such as Turkey and Argentina. But it was exacerbated by renewed worries about tapering and fears that the Fed might raise interest rates sooner than previously expected.

Some argue that the Fed should not worry about the effects its actions have on emerging economies. Its mandate is to promote maximum employment, stable prices and moderate long-term interest rates. The Federal Reserve Act does not specifically add: “ . . . in the USA”. But this is clearly what is meant. If the Fed were to attach any intrinsic weight to the effect of its actions on the rest of the world, it might be in violation of its legal mandate.

Even if one accepts this, however, it should not prevent the Fed from taking account of the external impact of its actions to the extent that these feed back into the US economy. Through trade and financial linkages, financial and economic distress in foreign markets can come home to roost. This should be reason enough to worry about the foreign repercussions of US monetary policy. The Fed’s silence on the external impact of its policies may indicate that it believes there are no external effects. This view is untenable.

To argue that the Fed has contributed to economic and financial turmoil in emerging markets since the middle of 2013 is not to deny that many of the afflicted countries bear much of the responsibility for their predicament. Their recent structural reform efforts have been nugatory. In many places, economic policy has proved startlingly inept since the beginning of the era of low interest rates and extraordinary liquidity measures.

Nor is this to say that the Fed’s actions have been misguided. It is not even to say that an alternative Fed policy would have been better from the point of view of emerging markets themselves. It is merely to acknowledge the interconnectedness of the global financial system, and the vulnerability of most emerging markets to the monetary policy actions of the central banks of large western economies.

Raghuram Rajan, governor of the Reserve Bank of India, is right to call for more international co-operation between central banks. US policy makers should display wisdom and good manners. If the Fed creates the impression that it does not care about the consequences of its actions, it will sow anger in the emerging world. If it appears not even to understand the consequences, it will also sow fear. Neither is in America’s interest.


Willem Buiter is chief economist at Citi

In 1996 a friend of mine called Jim Rohwer published a book called Asia Rising. A few months later, Asia crashed. The financial crisis of 1997 made my colleague’s book look foolish. I thought of Jim Rohwer (who died prematurely in 2001) last week as a I listened to another Jim – Jim O’Neill, formerly of Goldman Sachs – defending his bullish views on emerging markets in a radio interview.

Mr O’Neill coined the term Brics for Brazil, Russia, India and China, just before the emerging market boom of the past decade really got going. He was rewarded for his prescience, and his ability to coin a good acronym, with guru status. Now Mr O’Neill is back, talking up the delicious-sounding Mints (Mexico, Indonesia, Nigeria, Turkey) as the next group of rising economic powers. But this year his timing is a bit off. Investors are panicking about emerging markets and Turkey – the pay-off in the Mint – is at the forefront of the crisis

One moral of these stories is that in punditry, as in investment, timing is everything. It is possible to be right at the wrong time – and that is what happened to Rohwer. His bullishness about Asia was fully vindicated in the 17 years after the appearance of his book. It just looked badly wrong in the crucial months after publication, as the International Monetary Fund was forced to bail out South Korea, Thailand and Indonesia.

The speed of the recovery in Asia was just as startling as the speed of the collapse. South Korea is once again regarded as a model economy, and its per capita gross domestic product has almost tripled since the near disaster of 1997. Thailand and Indonesia also bounced back.

Those stories are worth remembering amid the current panic. The next year could make boosters of emerging markets, such as Mr O’Neill, look like false prophets. But over the course of the next decade, they will be proved right – again.

The reason for this is that the factors that have propelled the rise of non-western economies in the past 40 years still apply. These include lower labour costs, rising productivity, huge improvements in the communications and transport that connect them to global markets, a rising middle class, a boom in world trade as tariffs have fallen and the spread of best practice in everything from management techniques to macroeconomic policy. Added to this is the drive of people all over the world – from factory hands to entrepreneurs – who have realised that they are not condemned to poverty, and that a better life is there for the taking.
The rise of non-western economies is a deeply rooted historic shift that can survive any number of shocks

In the past half century, these powerful forces have allowed emerging markets (or developing nations or rising powers, if you prefer) to grow much faster than the developed world. In their recent book, Emerging Markets, Ayhan Kose and Eswar Prasad show that the economies of a group of the most prominent emerging markets (including China, India and Brazil) have grown by about 600 per cent since 1960 – compared with 300 per cent for the richer, industrialised nations. Even over the past 20 years, they write, “emerging markets’ share of world GDP, private consumption, investment and trade nearly doubled”.

The effect has been to transform the global economy. Michael Spence, a Nobel Prize-winning economist, writes that in 1950 only about 15 per cent of the world’s population lived in developed economies. In the intervening 65 years, the benefits of industrialisation, trade and rapid economic growth have spread to large parts of Asia, Latin America – and now Africa.

The story is far from over. Professor Spence argues that we are in the midst of a “century-long journey in the global economy. The end point is likely to be a world in which perhaps 75 per cent or more of the world’s people live in advanced countries.” If anything, the pace is likely to increase as the implications of the communications revolution become clearer and more entrenched.

The rise of the emerging markets will, however, be punctuated by crises such as the one we are experiencing today. These, too, have been part of the story all along. The Asian financial crisis of 1997 was not an isolated event. There was the tequila crisis in Mexico in 1994 and the Indian financial crisis of 1991. If you enter the words “Latin American financial crisis” into Google, it helpfully offers to complete the phrase with the dates – 1980, 1990s, 1998 and 2002. Yet despite all this, most of the leading economies of Latin America – Brazil, Mexico, Chile and others – have experienced real improvements in living standards and reductions in poverty.

The emerging markets have also sometimes been rocked by political crises that led investors to panic. Most dramatically of all, there were the protests in Beijing’s Tiananmen Square and subsequent massacre in 1989. Who at the time would have predicted that – in spite of all this political turmoil – the Chinese economy would more than double in size over the next decade, and then do the same again in the decade after that?

The moral of the story is that the rise of non-western economies is a deeply rooted historic shift that can survive any number of economic and political shocks. It would be a big mistake to confuse a temporary crisis with a change to this powerful trend. The bursting of the dotcom bubble in 2001 did not mean that the internet was massively overhyped, even though some people jumped to that conclusion at the time. In the same way, today’s turmoil will not change the fact that emerging markets will grow faster than the developed world for decades to come.


Gideon Rachman


FT