One of my friends said, in the course of the month of March, that emerging economies have yet again proven that they are nothing high-beta (high octane) versions of developed country assets. In that sense, one could easily mimic an emerging market asset by leveraging up on developed country assets. That is from an investor perspective – an investor from a developed country. They do not offer any real diversification to an investor.
What about emerging markets themselves? Why have they just ended up being a turbo-charged versions of developed country assets – on the up and on the downside?
My guesses are as follows:
(1) With very few exceptions, emerging economies’ fortunes rely on demand from developed countries – either directly or indirectly.
(2) Very few have vibrant domestic economies, not just in terms of consumption share of GDP but also domestic production capabilities. Those who have the former do not have the latter and those who have the latter are dependent on external demand.
(3) They have liberalised capital flows too soon and without imposing any costs on fickle and short-term flows.
Much capital invested in developing countries is from overseas and doesn’t stick around when disaster hits — a record $83.3 billion fled last month from emerging stocks and bonds, the Institute of International Finance said this week.
Finally, there is usually little fiscal room to spend more and ease the pain. Currency depreciation makes it costlier to service overseas debt which by end-2018 amounted to 35% of GDP without counting China, the World Bank estimates. [Link]
That is partly because of their lack of (perceived) economic strength and clout and/or capture by western discourse and much else.
(4) In good times, developing economies have not dedicated efforts to strengthening their defences and economic resilience. They do not build buffers.
(5) There is no multi-polarity in global reserve currencies. Of course, if we have them, it could be a mixed blessing for other reasons.
(6) There is no independent economic thinking in the sense that emerging economies do not put in the effort or scholarship to develop economic development approaches suited to their context and history, drawn from the best and the worst of their own experiences and that of others.
(7) Those who do are not encouraged or they are captured eventually. The system (establishment), in thrall to the received wisdom of the West (or worse) do not let them invest the intellectual effort required to build such indigenous and appropriate economic models. Consequently, an intellectual ecosystem that would make it easier to develop such a tailor-made approach is not created.