Anders Åslund: The Submerging Market Threat

It is time to put the rise of the emerging economies in perspective. The rapid economic growth in much of the developing world since the beginning of the century was fuelled by a commodity boom and an overextension of credit. But, because the emerging-market boom was not accompanied by sufficient structural reforms, it was not sustainable.

Today, most of the major emerging economies have experienced a severe reversal of fortune. Russia and Brazil have plunged into severe crises, with double-digit inflation accompanying a 4% contraction in GDP last year. South Africa is barely growing. China’s phenomenal rate of expansion has slowed to below 7%. Unsurprisingly, Goldman Sachs has closed its money-losing BRIC fund for investment in Brazil, Russia, India, and China.

Indeed, the future of the BRICS (including South Africa) – and that of other emerging markets – looks gloomy. Outside of Asia, most developing economies are principally commodity exporters, and thus are highly exposed to price shocks. Plunging oil prices have cut the value of the Russian rouble by more than half against the US dollar, and further declines appear likely – especially if the US Federal Reserve continues to hike interest rates.

Commodity prices are likely to stay low for one or two decades, as they did in the 1980s and 1990s. When it comes to oil, for example, shale gas, tight oil, liquefied natural gas, and increasingly competitive solar and wind energy are boosting energy supply, even as a decade of high prices has spurred conservation and reduced demand.

The commodity crunch is likely to prove painful to people in emerging markets, who often measure their income in US dollars. As exchange rates fall, they will quickly feel much poorer. Governments will suffer, too, as their foreign debt – boosted by fiscal and monetary expansion that yielded little growth – becomes much more burdensome, while the export stimulus from lower exchange rates will be small, owing to the absence of new capacity outside the commodity sectors. As countries come under pressure to make payments, multiple emerging-market debt crises are likely.

In the short term, Brazil arouses the most worry, given its large public debt and its vast budget deficit. In the medium term, however, China appears even more frightening. As a rule of thumb, an emerging economy’s total private- and public-sector debt should not exceed 100% of GDP. China’s total debt is now more than 250% of GDP.


The BRICS countries’ critical shortcoming is poor governance. On its corruption perception index of 175 countries, Transparency International ranks South Africa 61st, Brazil and India 76th, China 83rd, and Russia 119th. Poor governance limits a country’s ability to create lasting wealth and productive capacity – even if the shortcomings become evident and damaging only when booms turn to busts. As Warren Buffet has put it, “You only find out who is swimming naked when the tide goes out.”

To combat corruption effectively, people need to oust corrupt leaders, which is why democracy is vital. The regime changes in Ukraine and Argentina, and the opposition’s victory in Venezuela’s recent parliamentary election, are harbingers of what is to come. Brazil may be next.

The emerging markets may rise again, if and when improved governance and structural reforms are implemented to boost potential growth. But that will take time. We should not be surprised to see two decades of slow global growth.

The West cannot afford to be complacent. After having focused too much on demand management, Europe should be trying to reduce the fiscal and regulatory burden of the state, so that its economies can start growing again. It should also open up stunted markets for labour, services, capital, and digital products.

The West needs to work together to set global standards while it still can. Democracy, the rule of law, and market-based economies are all worth fighting for. Russia’s aggression in Ukraine and the wars in North Africa and the Middle East have demonstrated why NATO should be strengthened, and that Europe must become serious about defending itself – rather than simply continuing to depend on the United States.

In coordinating Western sanctions against Russia, the G7 has already achieved renewed significance. This should be followed by efforts to manage the coming stagnation. The Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership are both important initiatives in this regard.

Western-led organisations and institutional arrangements will become especially important as international organisations struggle to remain relevant. The United Nations, in particular, will likely be crippled by Russian and Chinese vetoes in the Security Council. Only the International Monetary Fund can be expected to rise in prominence, as major emerging economies – most likely Venezuela, Argentina, and Brazil – end up as its wards.

Economics aside, China and Russia are likely to pose the biggest challenge. These two large emerging countries are still led by authoritarian governments, headed by ruling elites who – given how much wealth they have amassed – may be the most corrupt in history.

As they come under pressure, their transformations are unlikely to be peaceful. The Kremlin has already shown, with its wars in Ukraine and Syria, that it is ready to counter domestic malaise with external aggression. That is unlikely to change unless something is done to stop it. The fall of the emerging economies could have a far more lasting impact than their rise.

About the Author

Anders Åslund is a senior fellow at the Atlantic Council in Washington.

Copyright: Project Syndicate, 2016.