LatinFinance - March/April 2014 - 72

parting
shot
Emerging markets are facing a growth crisis which will
have huge implications for financial stability. Latin
America is far from immune. By George Magnus

Crisis of confidence
emerging markets have had a tough start to 2014. the US federal
Reserve's decision in December to start tapering triggered capital
outflows, instability in currency markets, and higher interest rates.
in latin america, argentina and Brazil were affected particularly
severely, but the turbulence also engulfed turkey, South africa and
indonesia, among others.
financial turbulence then seemed to fuse quickly with an
outbreak of anxiety as investors took stock of political turmoil in
turkey and thailand, and then in Ukraine and Venezuela. china
caused a stir by engineering a small but unexpected depreciation
of the yuan against the US dollar, breaking a long trend of managed
appreciation. it is probably not the start of a new currency war, but
china's economic prospects are shrouded in uncertainty.
the turmoil in emerging markets should not be considered simply
through the lens of foreign exchange markets. Something else is
happening.
emerging markets are unlikely to face a re-run of the 1990s
external debt crises. By and large, external debt ratios, and levels
of currency reserves are considerably more robust. But a different
sort of crisis is playing out: one that is slower and less obvious, but
nonetheless of huge significance. it is, in effect, a growth crisis,
which carries major political implications, and which will also have
an impact on financial stability.
to a large extent, this is not yet appreciated properly. the
financial crisis of 2007 to 2008 marked a structural break not just for
advanced economies, but for emerging countries too. the benign
global conditions of the 1990s and 2000s, especially marked by the
eruption of china into the global economy, ended.
the development model, based on selling goods to western
consumers, has become flawed, and the model based on selling
raw materials to china is now faltering as china's own rebalancing
proceeds towards an economy less centered on investment, credit,
and commodities. countries that have moved along the relatively
easy development path from low income per head into the middleto-upper reaches of the middle income range now find they have to
embrace political and economic reform all over again. this presents
a significant challenge, as argentina, Brazil and mexico know from
their long experience as middle-income nations.
latin america offers an interesting illustration of this crisis. Some
countries, including argentina, Brazil and Venezuela experienced

72 l atinfina nce.com - March/April 2014

high growth in the run-up to
the financial crisis of 2007
to 2008 and immediately
afterwards, but since then,
economic momentum as
largely evaporated. meanwhile,
inflation and political unrest
have taken root. Brazil, a
poster child for latin growth
in 2010 to 2011, appears to
be experiencing a growth
recession.
By contrast, mexico and
smaller economies, such as
chile, colombia and Peru, have
clung on to most of their postcrisis growth performance,
and sustained lower inflation,
even though they have external
deficits equivalent to or larger
than Brazil's. this is partly
explained by these countries'
higher investment rates, lower
state involvement, greater
openness to non-commodity
trade and fDi, and lesser
reliance on credit creation.
the broader lesson
for emerging markets is
that development models decay, sometimes because external
circumstances change, as in the last few years, but usually because
no model is fit for purpose at all levels of economic and social
development. the growth crisis, to which china is also succumbing,
is one that can only be addressed by nurturing inclusive and solid
institutions equipped to deal with the aspirations of a rising middle
class, and by fulfilling the need for higher levels of education, health,
employment and income equality. LF

"ThE broAdEr
LEsson for
EmErging
mArkETs
is ThAT
dEvELopmEnT
modELs dEcAy"

George Magnus is a London-based economist and independent
economic adviser to UBS.

http://www.LATINFINANCE.COM

LatinFinance - March/April 2014

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