Developing economies – 57% of world GDP but lag behind on GDP per Capita

The growth and stability concerns about China and emerging economies have been well documented in the media of late. So why have these economies grabbed the attention?

According to the IMF emerging and developing economies (E&DE) have grown at more than twice the pace of advanced economies since 2000. The chart below shows that E&DE overtook Advanced Economies in terms of total output in 2008, and at the end of 2014 accounted for about 57% of global output. Advanced economies were the remaining 43%. Back in 1997, when Asia had its currency crisis, E&DE accounted for a lesser 42% of global output.

Devel Econ share of global econ

However concerns in E&D economies have been observed and they include:

1. Their economies have more government intervention and are less driven by the market

Although market forces don’t always result in good outcomes – GFC being a prime example – history suggests that markets are better at allocating factors of production like labour. The IMF and the Federal Reserve are of the belief that a significant amount of capital has been misallocated in emerging economies e.g. an underperforming State Owned Enterprises and a overvalued housing market in China

2. There is less transparency in government policy in that the exact reasons for actions are not obvious. The recent devaluation of the Renminbi caused a lot of uncertainty in markets. Was it a genuine devaluation to try and boost exports?

3. There are concerns over financial stability. If the US Federal Reserve hike interest rates the cost of funding for some countries will rise – Brazil, Turkey, Malaysia, and Indonesia to name a few.

A Positive Outlook – Continued Growth for Decades.

China continues to embrace market reforms; market reform has been a priority since the ruling Communist Party’s “Third Plenum” meeting in late 2013.

Many emerging economies have good support structures for their financial systems
Many have large amounts of FX Reserves – although the likes of Russia and Malaysia have already spent a good portion of their reserves in recent months supporting their exchange rates. China also retains considerable monetary and fiscal flexibility – although less than was the case during the 2008 financial crisis;

A final reason to be hopeful is that Emerging and Developing Economies “potentially” have a long way to run in terms of their development. The chart below shows that in 2014 the IMF calculates E&DE GDP per person was just 22% of those in advanced countries. If E&DE continue to evolve positively – not assured as the “middle income trap” experiences detail – then growth rates in these countries should broadly remain strong in the decades ahead.

Devel Econ GDP per Capita

Source: National Australia Bank – Australian Markets Weekly – 31st August 2015

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