While the U.S. and much of Europe continue to rebound from years of slow growth, emerging markets are slowing and many analysts still think China has a hard landing in its future. There’s no consensus on what is causing the slowdown. According to Natixis economist Patrick Artus there isn’t one factor affecting all of these countries, but they are all undergoing economic transition and failing to coordinate the change in different ways. He argues that they need “to be capable of organizing a parallel rise in wages, product sophistication, education level, infrastructure, and the capacity to use savings,” and none of them has managed to bring all four factors together. Until they do, they can expect the structural slowdown to continue.
Emerging Markets Lag Far Behind
“Infrastructure shortcomings (energy production, transport infrastructure) not only hold back activity, especially industrial activity, but also contribute to persistently high inflation,” says Artus, explaining the first problem that emerging markets are failing to tackle. Comparing per capita electricity production and transportation puts the US firmly ahead of the rest of the world, followed by EU-15, and emerging markets lag far behind.
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There’s no easy fix to this problem, as the reduced economic activity makes it harder for governments to build infrastructure just when it’s needed most.
Cheap labor one of the main drivers behind emerging market growth
Cheap labor, one of the main drivers behind emerging market growth in the past, presents two related problems. First, young people are getting university degrees at a rate that far outstrips the growth of highly skilled jobs they have been told to expect after graduation. While it may sound illiberal, from a strictly financial perspective the money spent training young people for non-existent jobs has been spent inefficiently. Even worse, having a large number of young, educated, unemployed people contributes to social instability. Ideally the educated workforce should grow in lockstep with white collar job creation, but the first has proven to be significantly easier to accomplish.
The unit price of labor has increased in many emerging markets
Even when looking at unskilled and moderately skilled labor, the unit price of labor has increased in many emerging markets, but product sophistication and value-added has stayed constant, making these nations less competitive. In some cases the sharp divide in education exacerbates the situation, as some workers demand wages that are too high to remain competitive, while others are illiterate and effectively excluded from the job market. Brazil and India are standouts here with their respective trade surpluses vanishing and turning into a trade deficit.
National savings rates in Turkey, Brazil, and South Africa are so low that a balance of payments crisis is always on the horizon. India has enough national savings to avoid a currency crisis, but not enough to finance capital projects domestically. Both situations result in chronic external debt and the growing perception of emerging risk.
Analysts have gotten so used to grouping emerging markets together, especially BRIC countries, that looking for a single cause for the emerging market slowdown is common (and usually premised on changes in developed economies), but the common factor is the difficulty of making the transition from emerging market to developed economy. “To prevent growth crises in emerging countries, there must be a “harmonious” dynamics, says Artus, including “the capacity to cause an increase at the same rate in wages, the level of product sophistication (productivity), infrastructure (energy, transport), the education level, savings and the capacity to use savings.”