Uprising: Will Emerging Markets Shape or Shake the World Economy?
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Emerging markets are big news. But after the financial crisis, what does the future really hold for them? And what does this future mean for global business?
George Magnus, one of the world's most respected economic analysts, is your guide through the challenges and opportunities for emerging markets and those doing business in them.
This magisterial book looks in detail at China and India – the big players – and also less hyped but crucial markets, including Eastern European countries and Turkey. Magnus takes in his sweep everything from commodity prices to climate change, and from comparative advantage to demographic to provide a compelling analysis of what the future might look like – not just for emerging markets, but for investors, businesses and economies everywhere.
Uprising is a must-read for anyone who cares about the future of the global economy.
Exclusive Q&A with Author George Magnus
How did you first become interested in the impact that emerging markets are having on the global economy in the wake of the financial crisis?
I took the view early in 2007 that the West was headed for a serious and protracted debt crisis, the sort that's typically associated with emerging markets, and unprecedented in scale in richer economies since the 1930s.
I was thinking about writing a book on the meltdown and who and what was to blame, but became attracted to more forward looking global implications of the crisis. If we in the West were going to be shocked for a decade, would emerging markets keep the global economy afloat? Would they be able to sustain a model of development that relied on the hedonism of Western consumers?
So I decided to ask whether the pre-crisis assumptions about emerging countries were still valid in a more fractious and unpredictable global economy, where linear extrapolations had become meaningless. Would emerging markets, especially China, be able to embrace extensive economic and political reform to deal with key structural issues, for example, unbalanced global trade which was - and remains - at the heart of our weakened global system. Then I found a lot of people and authors arguing that the world was reverting to a system that had existed before the birth of Christ and until about 1800 when China really did rule the world. So I decided to investigate and assess the credentials of this statement.
Uprising is quite an interesting title for the book -- do you think that what we’re seeing an ‘uprising’ of emerging markets?
Yes. The Western model of capitalism, especially financial capitalism, has been punctured. The so-called Washington Consensus is seen by many as yielding now to a Beijing Consensus. China and other emerging nations are vocal about ending the US dollar-centric financial system. Emerging markets, while a disparate group, have some common interests in lining up against the West over economic policies, technology transfer, and climate change. Those infamous tectonic plates of power are certainly shifting towards emerging countries, but the questions are how far, and so what? Since China is the only major rival to the US as a global power and leader, can it exercise a global leadership role? Does it want to? And what if it can't or won't?
Your argument in the book, that China in particular is over-hyped at the moment, is quite controversial. Why do you think it’s an issue that provokes such strong feelings?
Basically because a lot of people think we may be at some sort of tipping point where vested interests and beliefs play a big role. China, unlike other major emerging markets, isn't just big and populous. It really can shake things up in Asia and the world. So Sino-philes and Sino-phobes both have loud drums to bang.
More specifically, I'd suggest three reasons. First, there are many people who claim self-servingly, often for blatantly commercial reasons, that this is now the Chinese century. Second, there are those who think the Western globalization model is now so flawed, that there's no way back. The future has to belong to someone else. And third, there are many who see China's achievements with such awe - not without cause - that they can't imagine weakness or failure, especially when the West is in such difficulties.
Your last book, The Age of Aging was about the problems caused for the economy by an aging population. Is demographics a big part of the story about emerging markets too?
Very much so. Most emerging markets are going to enjoy reaping the 'demographic dividend' for another 20 years or so. This captures the economic benefits of the fall in child dependency on the working age population, and before rising old age dependency really kicks in. But by the 2030s, most emerging markets will be where the West is today. Will they be able to grow rich too before they grow old, to coin a cliché? It's by no means certain. Further, I'm not sure how well understood it is that China is the fastest aging country on Earth and faces an imminent and protracted fall in its youth and working age populations. Or what the unintended social and economic consequences of the one child policy are. How will India generate jobs for the teeming millions of children now aged under 15? And could the younger, poorer and more populous emerging world come into more frequent conflict with the older, richer world over water, food, resources, for example?
What’s the most interesting thing that you’ve learned about emerging markets while researching the book?
I was no stranger to the economics and demographics of emerging markets though new material crops up all the time. But I think what fascinated me most was the history lesson of Chinese civilization and its role in the global system for two millennia, and of why the Industrial Revolution happened in a two-horse town in northern England, and not on the Yangtse Delta. This steered me towards the quality of institutions, both political and legal, as one of the great unsung heroes and determinants of economic development and success, rather than GDP or a raft of other economic variables. And in turn, why this is as relevant as ever.
What do you think is the future for emerging markets in the medium term?
I don't doubt that emerging markets have strong economic fundamentals that will enable them to catch up economically vis -a-vis the West. But I think this hangs on some important assumptions. We need to maintain an open trading system, sound international institutions and high levels of co-operation and co-ordination. These are the core characteristics of the kind of globalization in which emerging markets have already made great progress. My worry is that it's all too easy for this to fall apart, and for emerging markets to suffer more - because they are poorer - if the biggest emerging markets fail to offer good leadership and governance at home and on the global stage. This is not to let the US and the West off the hook at all. It is to recognize, though, that a system works because all participants contribute to its smooth functioning, and that goes for emerging markets too.
more important, perhaps, than in Taiwan, a mere 100 miles from the Chinese coast. Keeping the US Navy in distant waters is certainly one way of trying to exert subtle dominance over the island. If ever Taiwan became an integral part of mainland China, it would send the strongest of geopolitical signals. It would signify to Japan, India, Australia, South Korea and the whole of Southeast Asia that the United States was in retreat. The Pacific Rim would belong to China and, as noted in Chapter 2,
innovate new products to gather the savings of households and companies, and to channel them efficiently into both financial and physical assets – the creation of capital and equity – that drive future growth. It is no accident that economic development is marked by the development of sophisticated capital markets that do just this, if sometimes — as recently – with a Wild West abandon. If the doors to foreign investment are open, arriving companies need to have confidence they will get paid, not
the US Congress finally repealed the Glass-Steagall Act of 1933, which had been introduced 60 years earlier amid a banking crisis to prevent bank-holding companies from owning other financial institutions, and in effect drawing a line between commercial and investment banking within the same institution. The reasons for this Act, and the folly of its repeal, were exposed by the crisis. When the restraints over the functions of financial institutions are abandoned, conflicts of interest and
money, they would amount to between 150-600% of GDP6. Emerging markets should take note, because they are liable to face the onset of rapid ageing with lower levels of income than Western countries have today. Most emerging markets fall in to what the World Bank calls ‘middle income’ countries, where the average 2008 per capita income was $3260. In the 1950s, when the US and Europe had a median age of 29, slightly older than emerging markets today, per capita income was roughly $10,000 and
characteristics are or are likely to be present in emerging countries and, ultimately, whether or not they can catch up with their Western rivals. We are not talking specifically about the diffusion of technological products and processes, either through trade or as a result of high-tech Western companies setting up manufacturing or service-producing companies in lower wage economies in Asia, Eastern Europe or Latin America. A number of technological achievement criteria, such as patents and