Emerging Markets in a World of Chaos

One of the most interesting phenomena of our times has been the rise of emerging markets. With the ascent of countries such as China and India, the early twenty-first century witnessed a shift in economic power across the globe. Latin American countries, such as Mexico, Argentina, and Brazil, developed their economies in the earlier part of the twentieth century, but they experienced a lost decade in the 1990s. The post-2000 era has seen the rise of dynamic economies such as Türkiye, Saudi Arabia, and Indonesia. Emerging markets are heterogeneous, not well understood, volatile, and impacting global labor and capital markets. Many of them were growing faster than advanced economies, but the combined shocks of the pandemic, rising interest rates, inflation, debt, and geopolitics have lowered their growth and adversely impacted their finances. Nevertheless, emerging markets are a growing part of the world economy now.

This book relies on a new analytical framework for understanding and measuring economic development. The approach is based on a composite indicator that merges six elements of the development performance of a country: growth and macroeconomic policy; equity, human capital, gender, and demography; money and finance; institutions, governance, and state capacity; national competitiveness, global integration, and productivity; infrastructure and sustainable energy. The framework provides a useful analytical tool to advise countries to try to escape the middle-income trap, referring to difficulties that emerging markets face in competing with either poorer low-wage economies or high-skilled advanced economies.

China has had a meteoric rise in the last three decades to become the second largest economy in the world, but the growth model is being rethought. India has emerged as a large services sector economy after years of low growth. The Latin American trifecta of Brazil, Argentina, and Mexico built industrial capability in the earlier part of the century, but they are now adversely impacted by institutional and microeconomic challenges. Russia and Saudi Arabia continue to be impacted by the vagaries of the oil market and geopolitics linked to Ukraine and other crises. Türkiye has changed but has faced setbacks. Indonesia has stabilized and is growing. South Africa faces a difficult post-apartheid transition.

The framework comparing the top 10 emerging markets across a range of indicators yields several insights. An analysis of growth, equity, money, institutions, national competitiveness, and infrastructure shows the heterogeneity of countries and the diverse political economies, macroeconomic policies, and microeconomic environment. Many factors influence growth. China, India, and Indonesia do better, while Russia, Argentina, Mexico, and South Africa are lagging. Not all things go together. Success in one area may be offset by difficulties in another.

The world in the next 25 years is unpredictable, of course, but a few trends may be identifiable and relevant. The world economy until 2050 and beyond will face a series of structural shifts that will affect both advanced and developing economies. Six tailwinds and six headwinds are identified. The tailwinds are: good macroeconomic fundamentals; improving health and education coupled with young demography; rise of capital market and fintech with growing private sector; growing state capacity; regional trade and skills upgrading; and the rise of renewables. Headwinds are: macro uncertainties, including low global growth, inflation and high debt; growing inequality and gender discrimination; end of an era of cheap money; authoritarian populism, institutional weakening, and corruption; selective deglobalization and productivity shortfalls; and accelerating climate change that represents an existential threat to the planet.

There are many reform options for emerging markets to move forward in a world of chaos. There is good macroeconomic management, including fiscal, monetary, and debt policy, but there is an urgency of having a new model that includes the best parts of the Washington consensus and state capitalism. Continued focus on human development and financial sector expansion, including small and medium enterprises, while creating a strong regulatory framework, are key. Selective capital controls can help insulate countries from volatility. Building state capacity and having a well-managed industrial policy can help jumpstart growth. Reforms that invest in human capital and enhance productivity are important. Finally, it is key to manage climate change through increased climate finance, including from the private sector, and support renewables to steer the long-term energy transition away from fossil fuels. The role of China, India, South Africa, Russia, Saudi Arabia, and Indonesia will be especially important in the years to come to work with advanced economies to address both climate change mitigation and adaptation.

The path forward among emerging markets is long, and many challenges await. In 2023, the population of the 10 emerging market economies (EM10) was several times higher than Western populations. By 2050, 8 out of the 10 largest economies are projected to be emerging markets and the middle classes will be mostly concentrated in these countries. There is a changing world order and an evolving global monetary and financial system, with a changing role of the dollar, and there is uncertainty regarding geopolitics and climate. The EM10 will be major drivers of global growth and consumption. China will continue to rise despite challenges, while India will continue to be a strong economy, though it will not be the next China. Indonesia is promising. The growth and development prospects for Saudi Arabia, Brazil, Turkey, and Mexico are positive with some obstacles. Russia may remain somewhat resilient but decline as sanctions continue. South Africa and Argentina can continue to face governance and macro pressures but have the potential for change. Success will be contingent on reforms and the right policy mix to avoid the middle-income trap. Emerging markets should also contribute to global public goods and to multilateralism more generally even though they are not a homogenous bloc with a mix of converging and diverging interests. There is a case for a more optimistic reading of the future than many pessimistic scenarios. Humanity has overcome challenges in the past and can do so in the future.