Fast recovery for emerging markets?

Emerging economies better placed to weather financial storm, say analysts.

Government stimulus packages have helped China’s economy gain momentum [EPA] 

Emerging and developing countries have experienced sustained economic growth, despite the global financial crisis.

According to the recent International Monetary Fund (IMF) World Economic Outlook, these countries will grow 1.5 per cent in 2009 and 4.7 per cent in 2010.

China and India, as economic locomotives among the emerging markets, are coming relatively strong out of the crisis.

Based on the IMF estimations, China’s growth for 2009 will be 7.5 per cent and 8.5 per cent in 2010. The numbers for India are 5.4 per cent for 2009 and 6.5 per cent for 2010.

China’s performance is especially impressive and there are three main reasons why China managed to deal with the crisis effectively.

Firstly, China’s leadership reacted very quickly and decisively to the crisis. Secondly, they have run the economy conservatively, avoiding the accumulation of debts while building up large foreign reserves.

Consumer confidence

Thirdly, China has a huge domestic market and boosted national consumption through various economic stimulus packages. As a result, the leadership regained consumers’ confidence.

The vehicle industry in China, for example, is soaring. Compared to the previous year, commercial vehicle sales rose by 60.6 per cent in July 2009, truck sales were up 46.4 per cent (with heavy trucks up by 85.7 per cent), and the sale of buses rose by 82.8 per cent, mainly driven by a 103.1 per cent rise in minibus sales.

“With growth in China now projected at close to eight per cent for 2009 as a whole … the chances of a truly global recovery have increased”

Robert Zoellick, president of the World Bank

And with sales up by 64.5 per cent for passenger vehicles, China set a new record. That frees capital to be invested in other parts of the world, such as Africa.

During his visit to China in early September, Robert Zoellick, the World Bank president, underlined the importance of China to the global economy.

“With growth in China now projected at close to eight per cent for 2009 as a whole, and signs of stabilisation in many other economies in Asia and around the world, the chances of a truly global recovery have increased measurably,” he noted.

Advanced countries, including the Euro zone, the US and Japan, have a lot more difficulties coming out of the crisis. They sit on large debts and have to deal with saturated domestic markets allowing little space for growth.

It started with the housing bubble in the US. Cheap credit and the prospects of favourable long-term returns on the housing market led American consumers to borrow relentlessly.

When interest rates rose and housing prices dropped, many people were unable to make the payments. The same happened, albeit on a larger scale, to investment banks from all over the world who had put their money into the American housing market.

The housing bubble burst in July 2007, pulling the world into the biggest financial crisis since the great depression. The bankruptcy of Lehman Brothers in mid-2008 became the symbol of economic meltdown.

US, Europe and Japan

And recovery is slow. According to the IMF, global economic growth is minus 1.4 per cent for 2009, while for 2010 a positive growth of 2.5 per cent is expected.

The outlook is less promising when only looking at advanced countries, including the US, Euro area and Japan.

For these countries, the growth for 2009 of 3.9 per cent will still be negative, while for 2010 the predicted growth is 0.6 per cent. Such poor growth rates are unprecedented in post-Second World War economic history.

The US government’s decision to print more money accelerated inflation [EPA]

A crisis usually becomes visible – in simplified terms – when the country is using up its foreign reserves due to poor economic performance.

Often the next step is to first borrow money from abroad, then to borrow domestically. If that is not enough to cushion the economic downtown, governments often resort to printing money.

This results in inflation. One of the measures the US undertook was to print more dollars causing an acceleration of US inflation.

Avoiding the mistakes by the developed world, emerging markets have a great opportunity to come out of the crisis stronger.

Take the example of Indonesia, one of the biggest economies in southeast Asia. It is also considered one of the world’s emerging markets – a term used for countries with rapid industrial and economic growth.

Indonesia has a market-based economy with the government owning a large number of enterprises, acquired after the 1997 Asian Financial Crisis.

The government also sets the price for several basic good such as fuel, electricity and rice. Indonesia’s economy is dominated by oil and gas.

Avoiding past mistakes

During the last decade, the country has been successful in restructuring debts. Coupled with attracting foreign investment, a steady economic growth in the area of five per cent was achieved during recent years.

It is important for Indonesia to avoid what Thailand did during the 1990s when the Thai government allowed too much foreign borrowing, fuelling an unprecedented property boom. The country was effectively bankrupt even before it let the national currency, the Thai baht, float, which triggered the Asian Financial Crisis.

“As Africa is facing challenges like developing [its] economy and dealing with global issues, it eagerly wants to strengthen cooperation with China in various fields”

Jean Ping, chair of the African Union Commission

In Africa, the global financial crisis appeared at first to have a less severe impact than in the developed world.

Historically, African economies were rather disconnected from the global economy, which was widely regarded as a disadvantage. This has now turned into an advantage, with the ripples of collapsing businesses all over the world not fully hitting Africa.

Between 2002 and 2007, Africa experienced an average growth of more than six per cent, partly due to the increased global demand in natural resources – historically unique for the continent.

With decreased commodity prices, falling demand for African exports and investments, the growth decreased. But there is no reason why the prices of commodities will not pick up again, at the latest by 2010, once the leading global economies have recovered.

Looking at China-Africa relations, the trade between the Asian giant and African continent has dropped by 30.3 per cent during the first six months of 2009 compared to the same period in 2008 – which can be attributed to the global financial crisis.

By comparison, global trade volume in the first half of 2009 is down by 12.2 per cent. During the same period, Chinese investment to Africa increased by 81 per cent.

Jean Ping, the chairman of the African Union (AU) Commission, underscored the value of the China-Africa partnership during a visit to China in early September: “As Africa is facing challenges like developing [its] economy and dealing with global issues, it eagerly wants to strengthen cooperation with China in various fields.”

The African business plan – foreign investment in return for natural resources – may therefore turn into a success story.

African bargaining power

The majority of African countries are rich in natural resources. They have something which the major economies in the world need.

Hence, natural resources give African countries more bargaining power. They are also not so dependant on credit from abroad.

Based on the latest IMF Global Economic Outlook numbers one gets the impression that African countries are, in fact, not doing so poorly.

In 2008, Africa still grew by 5.2 per cent. In 2009 that growth was reduced to 1.8 per cent, but it is noteworthy that so far no negative growth – unlike in developed countries – has been recorded.

For 2010, the IMF predicts a growth for Africa of 4.1 per cent which is significantly higher than the global average of 2.5 per cent, and way above the anticipated growth rate for the advanced countries, set by the IMF at a weak 0.6 per cent.

Most African economies are relatively small and therefore easier to kick-start again.

One thing the global crisis has shown is that countries which have borrowed a lot of money are not doing well, since they have trouble repaying their debts.

There is still a lot of infrastructure to be built in Africa, and consumer markets are just developing.

But sustained growth in Africa will largely depend on the continent’s leaders committing to use investments wisely, including those from China.

It will be important to continue reducing corruption and mismanagement and to strengthen governance structures, so securing the confidence of investors who see Africa as a continent of great economic opportunities.

Frank Sieren is the author of The China Code: What’s left for us. He has lived in Beijing for the past 15 years and is regarded as one of the leading German experts on China.

Andreas Sieren is a specialist in international relations and development aid. He worked for many years for the UN in Asia and Africa.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial policy.

Source : Al Jazeera

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