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Was It All ´Nirvana´? Why The Emerging-Country Gloom Is Mistaken

Many emerging markets submerged in 2013: the currency, stock and bond price reaction to a cautious statement (´taper talk´) by US Fed Chairman Ben Bernanke (22-3-2013) in some emerging markets had been swift. But the pain was not shared equally. Those countries hit hardest by taper-talk were those with large current-account deficits-Turkey, India, Indonesia, and Brazil. They were also large beneficiaries of ´taper-talk interruptus´ mid-September 2013, when the US Fed backed away from the March taper talk. These events clearly indicate that holding down portfolio inflows and imports is what emerging countries need during boom periods. Mainstream advice against portfolio capital inflow controls, in the face of fresh 2013 evidence, should be taken with a grain of salt.

As swift as the market reaction to taper talk was the commentary of some economists who declared the ´BRICs party over`, joint with the recommendation that emerging countries should say farewell to state capitalism. Other authors have recently declared the end of the emerging market miracle, too. One example among others was a former finance minister of Chile, Andres Velasco, who recalled the former Yale development economist Carlos Diaz-Alejandro. The latter used to say during the 1970s that the combination of high commodity prices, low world interest rates, and abundant international liquidity would amount to economic nirvana for developing countries. While in the 1970s nobody expected such a state of grace to realize, the combination of ultralight US monetary policy and Asia´s rise have during the last decade brought about those conditions so favorable to most developing countries.

Clearly, the convergence process in favor of emerging countries has not only been based on monetary factors. It has been closely linked with China´s long rise. Before the year 2000, China´s growth was only significantly correlated with countries that were either net exporters or net importers of raw materials while its growth was not yet significant for the broad low-income, resp. middle- income country groups. After 2000, by contrast, correlation coefficients turned significant with a positive sign. Since then, every percentage point of China´s growth has translated by two thirds into growth in both developing-country income Groups.

While Velasco focused on Latin America, the lasting benefits of China´s rise have been obtained by Asian countries embedded in an increasingly China centric manufacturing value chain. New data from the OECD Latin American Economic Outlook 2014 Show where there has been fundamental catch-up in terms of total factor productivity. While the productivity gap between most Latin American and Caribbean countries and the more developed countries is still increasing, Asia's productivity gap has closed. So the Velasco perspective seems to boil down to Latin navel-gazing.

As for the future fortunes of emerging countries, much will depend on China´s future growth path. The recent decisions of the Third Plenary Session of the 18th CPC Central Committee seem to have identified crucial reform policies that will feed growth going forward. Urbanization and financial reform will help further exploit productivity gains embedded in China´s rural-urban and firm-size duality. Easing finance constraints for SMEs will advance de facto privatization and shift resources to entrepreneurial firms obviating the need for part of corporate savings. Reforming land rights will help farmers through improved property rights and lower corruption. Household savings will come down as a result of loosening the decades-long one-child policy. There is still life in China´s convergence; do not bet on its imminent collapse. And as long as China flourishes, so will most emerging countries.