Heady Days

What are the major trends we should watch in 2008?
I think the single biggest risk to the emerging-market boom would be a generalized pickup in inflation. There are some signs of that happening, particularly in China.

But central banks have become a lot more professional in recent decades. Will they be able to address this threat properly?
I don't mean hyperinflation, or that these central banks would let loose completely and let inflation soar to even double digits. But to see a cyclical pickup in inflation? That's possible.

With the credit crunch roiling Western markets, is there a bit of schadenfreude in developing countries these days?
Yes. What's happening in the U.S. brings about both some fear, just because the U.S. is still the largest economy, and also some amount of schadenfreude. All these emerging markets, particularly in Asia, remember the lectures that they used to get from U.S. policymakers during the Asian deflation of 1997-1998, and now they think it's basically the pot calling the kettle black, so to speak.

Do you think that sentiment is misdirected?
The real disappointments in the global economy are Japan and Europe. When the U.S. grows well, like it did between 2003 and 2006, they underperform the U.S., and when the U.S. declines, those economies merely follow. If you look at world shares of GDP, emerging markets have gone up substantially over the last 10 to 15 years, but the U.S. has remained steady around the 25 percent level. The real big declines have taken place in Japan and Europe. Japan's share has gone from 15 percent 10 to 12 years ago to 8 percent currently. In purchasing-power parity terms, the European economies, too, have declined considerably.

It almost sounds like you're describing a world in which Europe and Japan are more coupled to the U.S. than the emerging markets now.
Absolutely. That is a central point.

© 2007