The emerging markets make up 90 percent of the world’s population, yet the world is still not convinced of their importance. But the emerging markets could be key to preventing a global depression, said Dr. Dambisa Moyo, economist and author, at the Schwab IMPACT conference in Denver Thursday morning.
The growth outlook for the emerging markets is incredibly poor, Moyo said. And to put a dent in poverty, these nations need to grow at 7 percent per year. But right now, the BRICs (Brazil, Russia, India and China) and other developing nations are growing at sub 6 percent, with many of them growing at 1 to 2 percent. South Africa, for example, is expected to grow at 1.7 percent this year. The two developing countries that are getting to 6 percent growth are Nigeria and China.
There’s been talk of a global depression before, but this time is different. Moyo pointed to four headwinds that the world hasn’t dealt with previously. And many policy makers don’t have the fiscal or monetary tools to deal with these.
The first headwind is technological advancement. There are about 100 million young people across the globe that are out of work, Moyo said. Many of their jobs are being replaced by robots due to technological advancements.
Change in the demographic profile is another headwind. In the U.S., we’re dealing with an aging population, making younger workers scarce. But the issue is not with the quantity of workers, but the quality of workers, she said. Moyo pointed to statistics from the OECD that shows that American students are declining in performance in mathematics and science.
Meanwhile, the emerging markets skew towards young people. Sixty to 70 percent of those populations are under the age of 25.
Income inequality is another global issue that needs to be addressed. While the U.S. is ahead of China as the largest global economy, with $16 trillion in GDP, China’s income inequality is improving, and the U.S. is not. And this is in a country that is run by state capitalism, not Democracy.
Democracy is not, in fact, a prerequisite for success, Moyo added. Take China, Chile and Taiwan as examples. For Democracy to be sustainable long term in a certain nation, per capita income needs to be at $10,000, she said. There are currently 65 countries with a high risk of political uncertainty and unrest, many of which are in North Africa and the Middle East. But Moyo, who has travelled to many of these countries, says it’s not Democracy that these people want; they simply care about their wellbeing.
The last headwind is natural resource scarcity, including water, minerals, oil and energy. The amount of arable land in the world is shrinking, and this could seriously impede countries’ ability to provide food.
Because of some of the dynamics facing the emerging market countries, many of their policy makers are becoming desperate, grasping for straws, Moyo said. And in her opinion, they are putting in place inferior political and economic models. Many of these countries are putting in place more capital controls and becoming more protectionist. The European Union has found 130 instances in developed and emerging market countries that are instituting tariffs and quotas. Global trade is down over the past decade, and it’s unlikely to recover. In fact, projected global trade for 2013/2014 is only 2.5 percent.
We’re living in a world where it’s every country for itself. Sixty percent of why one country grows over another country is productivity. And productivity in the U.S. and Europe is either flat or declining. Moyo said the job growth in the U.S. is simply smoke and mirrors. No one is focused on the quality of jobs, she said. But there are structural problems in this country and other developed nations that are not being addressed.
They are pretty dire words, but what does this mean for investors? If you’re thinking short term, Moyo believes the U.S. is a good trade. Quantitative easing and the other short-term fixes that policy makers put in place have supported the economy. The U.S., however, is weighed down by its election process. Because there are so many elections, politicians aren’t thinking about longer-term solutions.
But longer term, she recommends investing in the emerging markets. Trades such as food and access to transportation are less crowded and less problematic.