There's been little cheer in the global economic news since the subprime-mortgage meltdown started last spring, and now, it seems, we're entering a winter of discontent. Credit problems have spread like a virus throughout the American and European financial systems. Holiday sales at U.S. malls and British high-street shops are tepid. Sky-high food and oil prices are crimping household budgets and furrowing the brows of inflation-phobic central bankers. The dollar has entered a Britney Spears-like downward spiral. And banks are engaged in a race to notch the biggest write-downs on bad debt, with the implied promise of more to come. Dismal politics, from the growing pains of Gordon Brown to the singularly downlifting pageant of the U.S. presidential primaries, only adds to the malaise. To aggravate matters, the Hollywood writers' strike has deprived many television viewers of their comic relief.
It seems things are as bad as they've been in recent memory. Except that if you look beyond temporal market fluctuations to how the real global economy is doing, things have never been better. For the past four years, the world has grown at a 5.2 percent annual rate—a full 2 percentage points higher than in the '80s and '90s—thanks in large part to booming emerging markets. While the United States and many parts of Europe are lagging, most of the rest of the planet is soaring. Consider that between 1980 and 2000, the number of countries growing at 5 percent or more hovered around 50. In 2006, 104 nations grew at that rate. When asked to think of a few countries besides China and India that have shown strong growth, World Bank economist Andrew Burns replies: "It's hard to think of somebody who hasn't." In fact, this year the economies of only three countries—Zimbabwe, Fiji and Tonga—are contracting. Two are highly isolated archipelagoes and the former is a hugely dysfunctional dictatorship. Harvard's Ken Rogoff, a former chief economist at the IMF, sums it up simply: "We're in a boom."
Who knew? The ranks of fast growers go way beyond the usual suspects. Cambodia, still recovering from a generation of genocide, civil war and political turmoil, is completing its ninth straight year of growth above 6 percent (one of 27 such countries on a similar streak). Slovakia, which got mostly jobless masses and entrenched communists when it was severed from Czechoslovakia in 1992, hit 9 percent growth in 2007. Unemployment—a formerly intractable problem for this nation of 5 million—has plunged to record lows, thanks to tax and business reforms that have made the country an export dynamo. Turkey is another pleasant surprise. Growth has averaged 6.9 percent for six years, despite a restive Kurdish population and a war raging just beyond its 331-kilometer border with Iraq. The tide is lifting even the long-moored boats of Africa, where growth has topped 5 percent since 2004, driven by oil states but also by expanding agricultural economies like Tanzania. This broad boom is reflected in emerging-market stock indexes, up 40 percent this year, versus a measly 5 percent for the S&P 500.
It's the polar opposite of the 1990s, when rolling economic crises caused serious problems in emerging economies like Malaysia, Turkey and Russia—countries with fragile political and monetary institutions. Prior to that, the 1980s had become known as Latin America's "lost decade," a period when countries like Mexico, Brazil and Argentina tanked after years of excessive borrowing and a sudden spike in interest rates. Ironically, financial instability today seems to be a phenomenon largely confined to the developed world. Even as Western consumers have fudged on retirement savings in favor of flat-screen TVs, and Western governments have skimped on education and infrastructure, emerging nations have been paying back debt, taming inflation, strengthening their institutions, diversifying their economies and generally behaving like responsible global citizens. The result has been a huge range of benefits: fewer hungry children in Tanzania, increased political stability in Brazil and a more balanced global financial system, in which nations previously labeled unstable debtors are now extending credit to richer countries.
There's no denying that a large chunk of the good news is commodity-driven. The exploding demand from China has driven up prices for everything from oil to corn to platinum. But while past commodity booms have done little to spread the wealth, this time many countries have taken advantage of the chance to build up cash reserves and pay down once crippling debt. "They've done exactly the opposite of American homeowners," says the World Bank's Burns. In 2006, Russia paid back $22 billion to the Paris Club, a group of rich-country lenders. Algeria, Indonesia and Argentina each paid back more than $8 billion to various aid groups. The retiring loans provoked something of an existential crisis for the IMF, which saw more than 82 percent of its outstanding loans paid back between 2003 and March 2007. Free of debts, developing nations have been able to invest more in health, education and infrastructure, boosting economic growth. And this time growth has not unleashed inflation, for a simple reason. "Central banks around the world are much more professionally run than they used to be," says Harvard's Rogoff.
For all the scared talk about how nations like Russia, Iran and Venezuela are growing fast under authoritarian regimes, they are the political exceptions, not the rule. "Africa has gone from having three democracies to 23 democracies over the last 10 years," says Homi Kharas, the former World Bank chief economist for Asia, now at the Wolfensohn Center for Development. "That's one of the reasons why people feel much more optimistic about fundamentals today. They're not just economic fundamentals, they're also institutional fundamentals." While these new democracies are far from perfect, leaders are now more accountable for their actions—and nothing makes voters angrier than seeing their savings wiped out through political incompetence.
Smarter policy has led to growth-building moves like export diversification (copper went from roughly 80 to 40 percent of Chilean export value between 1980 and 2000) and the taming of inflation. The latter is particularly essential, says Lawrence Goodman, Bank of America's head of emerging-markets strategy, as it "provides a backdrop for these economies to deepen their capital markets and have more certainty around planning." Brazil, for example, suffered years of hyperinflation: in 1994, prices climbed more than 2,000 percent. Today inflation is below 4 percent, a key factor in encouraging a tenfold jump in foreign direct investment since 1994. Likewise, global foreign direct investment more than doubled from 2003 to 2006, to $1.3 trillion, largely reflecting a new trust in emerging economies.
Competition has been a huge growth catalyst, too. Eastern European nations jockeying for EU accession have done much to clean up their balance sheets. And the success of China has been a motivator for numerous would-be emerging-market giants, most notably India. "There's no question that India has been influenced by China," says Rogoff. "When India was telling its people that 5 percent growth would be great, and Indian businessmen took tours of China and saw that growth could be much higher, that had a big influence." The specter of China has forced others, like the Vietnamese, to improve productivity, bolster infrastructure, and encourage entrepreneurship. The result is that the economy has grown by more than 8 percent for the last three years.
Among economists, of course, no narrative would be complete without a series of "buts." Perhaps the biggest question: is 5 percent enough? Some say yes—former Mexican foreign minister Jorge Castañeda, now a professor at New York University, believes that 5 to 6 percent growth in Mexico could solve the U.S.-Mexican immigration problems. Still, it's no accident that countries like China and India get the most ink—after all, their trend growth (11 and 9 percent, respectively) and size put them in a different league, even from other emerging markets. Countries like Cambodia are starting from such a low level that it will take a few decades of really supercharged growth to raise living standards significantly. In some places, problems like unemployment and low productivity are severe enough that a few years of 5 percent growth won't make much of a dent. In the Middle East and North Africa, for example, high fertility rates have created a cascade of young people who will be joining the work force over the next decade or so, requiring 4.5 million new jobs a year—but recent growth has been capable of generating only 3 million new jobs annually, according to the World Bank. Income inequality is another problem. If an economy grows at 8 percent annually, but the gains flow disproportionately to the elite, the lot of the typical citizen won't improve much.
Meanwhile, many emerging economies are about to hit some speed bumps. In China, the impact of the breakneck pursuit of profits and development—pollution, rising food prices—is spurring a backlash. In places like Vietnam and India, where the buildup of factories or call centers hasn't been matched by investment in ports and roads, poor infrastructure is a clear impediment to future growth. In sub-Saharan Africa, things viewed as essential for business—streets, Internet access, telecommunications networks, functioning railways—are still on the drawing board.
Yet there's still plenty of cause for optimism. Emerging nations are no longer just extracting resources and supplying cheap labor, but growing their own massive middle classes, breeding world-beating companies and becoming players on the global financial stage. Such developments—the prospect of China suddenly being a major source of investment capital, cash-rich Latin American countries banding together to lend to one another, Russia emerging as the top luxury-car market—have defied the predictions of the world's collective economic wisdom. And that's not surprising. Back in the post-dotcom-bubble days of 2001 and 2002, few economists predicted that the global economy would enjoy the expansion it has. Several years into this new phase of growth, it's still somewhat unclear what it all means. Could emerging markets really carry the global economy through a massive downturn in the United States? Have rich and poor nations really "decoupled"? Will multinational firms leave New York and London for Mumbai en masse? Whatever happens, the dismal scientists and the rest of us will have to learn to cope with the truth—things, for now anyway, are really pretty good.