Here’s The Good News

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.

© 2007