Joseph Mariathasan: The changing face of emerging markets
Extreme political risk is usually seen as a characteristic of emerging markets rather than developed.
The experience of countries just in Latin America seems proof of this with Argentina swinging violently from extreme left to extreme right governments, Brazil’s president under investigation, and Venezuela in chaos and repression.
Yet that view is more prejudice than reality: emerging markets are seeing changes of government for the better across the globe. Economic growth in developing markets is significantly higher and likely to remain so for years, if not decades, to come.
On a purchasing power basis, emerging markets economies accounted for 36% of global economic output during the 1980s. This figure is now 59% and still growing, according to Vincent Reinhart, chief economist at Standish Mellon. As he pointed out in a recent IPE 360 seminar, in the 1980s, GDP in developed markets was expected to double within 21 years. That was within a person’s working life, so workers could envisage their children seeing a much higher standard of living. Today, it would take closer to 50 years for GDP to double – way beyond a working lifetime.
Political risk is increasing in the developed world and the underlying drivers need to be addressed. Developed markets are experiencing anti-establishment political movements evidenced by the Brexit vote, the US’s Donald Trump, and France’s Emmanuel Macron.
The world is experiencing a seismic change as emerging markets rapidly grow their economies, and the relative cost base of their educated labour creates a powerful arbitrage to switch manufacturing away from the developed world. A consequence of that swing has been the loss of large numbers of middle-class, well-paying jobs in developed markets.
Automation may increase productivity in developed markets to make them more competitive relative to emerging markets, but it does not create large numbers of well-paying jobs. Unemployment may be low in the US, but wage growth has been non-existent. This has given rise to discontent as the ‘service economy’ has failed to deliver high paying jobs.
General Motors at its height employed 300,000 people in the US. Apple, now the world’s most valuable company, directly employs only around 80,000 in the US. The story seems to be the same throughout Europe – with the exception of Germany. Speaking to a 55-year old fund manager in Frankfurt recently, he declared that he had never seen Germany in such a good position in his lifetime as today. It has high employment and stable politics with Angela Merkel in power since 2005. The problem for Europe is that it is impossible for all countries to be like Germany – and it benefits tremendously from a currency that is dragged down by weaker economies than its own.
A corollary of the loss of manufacturing jobs and the rise of the service economy has been the creation of ‘winner takes all’ businesses. The FANGs in the US – Facebook, Amazon, Netflix, and Google – exemplify the phenomenon. They dominate their respective marketplaces and are crushing ‘bricks and mortar’ companies that compete with them. Shareholders and employees of these companies do extremely well. Those in the companies that are crushed to oblivion fare badly.
It is a good example of Joseph Schumpeter’s idea of “creative destruction” that drives development. That is the nature of capitalism. The real problem for the developed world is that the new industries that are being created in the developed world are just not paying as much as the old. Conversely, emerging markets are seeing an explosion in the size of urban middle-class jobs paying far more than the agricultural jobs that employed the mass of labour a generation ago.
Populist politicians in the developed world may be able to put sand in the machinery to slow down these seismic changes, but they cannot prevent them. They must cope with both an economic arbitrage driving middle class jobs to emerging markets, and the rise of ‘winner takes all’ in developed markets. It is a challenge few politicians seem equipped handle. It is possible, but it takes vision and very long-term thinking – including radical ideas such as Finland’s experimentation with universal basic incomes. Until more politicians find a means to think so radically, political risk will only increase in the developed world.