The “Emerging” Economies Today

An Interview with Jayati Ghosh | May/June 2016

The terms “emerging markets” and “emerging economies” have come into fashion, especially to refer to countries supposedly poised to make the leap from “developing” to “developed” economies. There’s no definitive list, but Brazil, India, Indonesia, Mexico, Russia, South Africa, Turkey, and China are among the large countries that often headline articles on “emerging economies.” Economic growth rates vary widely among countries typically placed in this group, as do the drop-off rates in growth during the global Great Recession and the recovery since. China is by far the most prominent of the emerging economies—the most populous country in the world, with an extraordinary period of industrial growth since the 1980s, and with an enormous impact (not only as an exporter of manufactured goods but also as an importer of raw-material and intermediate inputs to manufacturing) on the world economy. The “secular stagnation” of the high-income capitalist economies and resulting growth slowdown in China, therefore, has much wider implications for the developing world. Economist Jayati Ghosh spoke with D&S editor Alejandro Reuss about the current challenges for China and other countries and possible paths toward inclusive and sustainable development. This interview appeared originally at Triple Crisis blog (triplecrisis.com); this version is lightly edited for clarity, and includes additional material. —Eds.

Dollars & Sense: You’ve written about the “retreat” of emerging-market economies, which until recently had been held up as examples of robust growth, in contrast to the stagnant economies of the so-called capitalist “core.” What’s driving the slowdown of economic growth in the emerging economies today?

Jayati Ghosh: The emerging economies are really those that have integrated much more into the global financial system, not just the global trade system. And I think what happened during the period of the economic boom is that many people forgot that their growth was still ultimately driven by what was happening in the North. That is, the engine of demand was still the northern economies. So whether you’re talking about China in particular or the range of emerging economies that was seen as more prominent in the first half of the 2000s, all of them depended on exports to the North and particularly to the United States.

It was the U.S. boom that drew in more and more of the exports from developing countries. When it came to an end—as it inevitably had to—these economies had to look for other sources of demand. There are two ways of doing this. One is to try and do a domestic demand-driven expansion based on higher domestic incomes because of wage and employment growth. And the other is the model which unfortunately seems to be the more popular one, which is to have a debt-driven kind of growth, based on both consumption and accumulation that is essentially led by taking on more and more debt. This is, of course, also what the U.S. did in the 2000s, which unraveled in 2007 and 2008. But it’s also what a number of European economies did, and they’re paying the price now.

Remarkably, developing countries that don’t need to take this path, and can see all the problems associated with it, also took this path in the wake of the global financial crisis. In China there was a doubling of the debt-to-GDP ratio between 2007 and 2014. This reflected increases in debt to every single sector, but it was dominantly for investment. In a range of other important developing countries, from Mexico to Indonesia, Malaysia, South Korea, etc., there was a dramatic expansion of household debt, particularly real estate and housing debt. We all know that these real-estate and housing bubbles that are led by taking on more debt, these end in tears. And that’s really what has been happening.

In these “emerging” economies, financial integration allowed them to break the link between productive investment and growth. It fueled a debt-driven pattern of expansion, which inevitably has to end. It’s ending now. The problem is that it’s ending at a time when demand from the North is slowing dramatically. So there is a double whammy for these emerging economies. The slowdown in northern markets means that China—which had become the major driver of expansion—can no longer continue to export at the same rate. That means its imports have also come down. In the past year, China’s exports fell by 5%, but its imports fell by 20%. That has affected all the other developing countries. And that’s in combination with this end of the debt-driven expansion model.

D&S: A number of economists have argued for quite some time that China’s export-oriented growth model would inevitably reach its limits. Are we seeing it finally reach an impasse now, and if so, is there a prospect for China to make a transition from a low-wage export-oriented model to a domestic demand-driven model that would necessarily require higher wages?

JG: I think it’s indisputable that the export-driven model is over for the time being, for sure, certainly for the next five years, probably the next decade. That’s not a bad thing, because one of the problems with that export-driven model is that it persists in seeing wages as costs rather than as a source of internal demand that you can use to your benefit. It encourages massive degradation of nature and taking on environmental costs that are now recognized to be completely unsustainable and socially undesirable. And, overall, we know that these can’t last—these export-driven models can’t last.

So, yes, it has ended. It does mean that the Chinese government and authorities have to look for an alternative. Many of us have been arguing that the alternative necessarily requires much more emphasis on increasing consumption, not through debt, but by increasing real incomes. And that means encouraging more employment of a desirable type—“decent work” as it’s been called—and increasing wages. Now, this doesn’t mean that the rates of growth will continue as high as they have been, but that doesn’t matter.

In fact, the obsession with GDP growth is becoming a real negative now in the search for alternatives. The Chinese authorities, like all the financial analysts across the world who are constantly looking at China, are obsessed with GDP: Is it going to be 6.5% annual growth? Is it going to be 6.1%? Is it going to fall below 6%? As if that’s all that matters. What they should really be looking at is the incomes of, let us say, the bottom 50 or 60%. Are these growing? If these are growing at about 4 or 5%, that’s fantastic. That’s wonderful. And that’s really what the economy needs in a sustainable way. If these are growing in combination with patterns of production and consumption that are more sustainable, that are environmentally friendly, that are less carbon-emitting, then that is of course even more desirable.

But that means the focus has to shift away from GDP growth, and away from just pushing up GDP by any means whatsoever—to one which looks at how to improve the real incomes and the quality of life of the majority of the citizens. Unfortunately, the Chinese government doesn’t seem to be choosing that path just yet. There have been some moves—in terms of increasing health spending, in terms of some attempts to increase wages and social protection for some workers—but overall the focus is still once again on more accumulation, on more investment, usually driven by more debt.

D&S: When you say the export-oriented model is “over,” does that mean you think sticking to this approach will no longer deliver what policymakers and elites are aiming for, in terms of growth and accumulation? (And perhaps that this will lead to an elite-driven restructuring in the near term?) Or is it that this approach just cannot plausibly deliver in terms of inclusive development—the improvement in the quality of life for the majority?

JG: Both, really. The conditions of the global economy at present are such that an economy as large as that of China (and many other smaller economies as well) cannot expect much stimulus from external demand. Significant increases in exports would only be possible by increasing market share; that is, eating into some other country’s exports. So the past pattern of accumulation based on external demand is unlikely to work in the near future.

But in addition, this approach has not delivered in terms of inclusive growth over the past decade except to some extent in China, which has been able to use it to generate a “Lewisian” process [theorized by economist Arthur Lewis in the 1950s —Eds.] of shifting labor out of lower productivity activities. Even in China it was successful because wages increased much less than productivity and so export prices could fall or remain low. In many other countries, export-led expansion has actually been associated with stagnant or lower wages and greater fragility of incomes, along with very substantial environmental costs that are typically not factored in.

D&S: Is it possible that the needed kind of transition is not going to happen in China until we see the development of a robust labor movement that’s capable of winning a higher share of the national income in the form of wages, and pushing up mass consumption in that way?

JG: There is probably much greater public concern about all this in China than is often depicted in the media, certainly in the Chinese media, but even abroad. We know that there are thousands, literally, tens of thousands of protests in China—often about land grabs and so on in the peasantry, but also many, many workers’ protests, and many other protests by citizens about environmental conditions. They have mostly been suppressed, but I don’t think you can keep on suppressing these.

I do believe the Chinese elite has recognized that there are a couple of things that are becoming very important for them to maintain their political legitimacy. One issue is, of course, inequality and, associated with that, corruption. That is why the anti-corruption drive of President Xi Jinping retains a lot of popularity. Then there is the fact of the environmental unsustainability. Both India and China have created monstrosities in urban areas, in terms of the pollution, congestion, degradation, which are really making many of our cities and towns unlivable. There is widespread protest about that, and about the pollution of water sources, of the atmosphere, of land quality. And there is real concern that ordinary Chinese citizens are not continuously experiencing the better life that they have grown accustomed to expect.

So I think, even without a very large-scale social mobilization, there is growing awareness in China—among officialdom, as well—that they can’t carry on as before. It is likely that there’s a tussle at the very higher echelons of the leadership and in the Communist Party, between those who are arguing for the slower but more sustainable and more wage-led path, and those who just want to keep propping up growth by more financial liberalization, by encouraging investors to jump in and invest even in projects that are unlikely to continue, and somehow keep that GDP growth going. It’s a political tussle but of course that will determine the direction of the economy as well.

D&S: In the midst of this period of stagnation of the very high-income capitalist economies, and a resulting slowdown of growth in the so-called emerging economies, we also have an effect on countries that had primarily remained raw-material (or “primary-product”) exporters. Is that boom in commodities exports now also over for the foreseeable future, and do you see those countries as now reinventing their economic development models?

JG: I think that the period of the boom was really a bit of an aberration. Since the early 20th century, these periods of relatively high commodity prices have always been outliers, and they don’t last very long. They last for about five, six, maybe eight years at most, and then they you come back to this more depressed situation relative to other prices. I have a feeling this is now going to continue, and that boom is, for the time being, over. It definitely means that the manna from heaven that many countries experienced has reduced, and therefore you have to think of other ways of diversifying your economies.

Many countries actually tried to do this but, you know, when you’re getting so much income from the primary product exports it’s very hard to diversify. It’s actually easier to diversify when primary product prices are lower. So, once again, I think it’s important for these countries to stop thinking of this as a huge loss, and start thinking of it as an opportunity—as an opportunity to use cheap primary commodities as a means of industrializing for domestic and regional markets. So it means a different strategy. The export-led obsession has to end. Without that, we’re not going to get viable and sustainable strategies.

I’d like to make one other point, though, about the slowdown in China and the impact on developing countries, which is that it’s also going to affect manufacturing exporters. China had become the center of a global production chain that was heavily exporting to the North but was drawing in more and more raw material and intermediate products from other developing countries. So almost every country had China become their main trade partner in both imports and exports. Many of these manufacturing economies are now going to face, once again, a double whammy. They will face a reduction, from China, in terms of lower Chinese imports of raw materials and intermediate goods for final export, and they’re going to face greater competition from China in terms of their own export markets and their own domestic markets. Because China is now devaluing its currency, even though thus far it has been minor. It is looking to cheapen its exports even further, and this will definitely impact on both export markets and internal markets in developing countries.

So I think both primary exporters and manufacturing exporters are in for a bit of a bad time. They need to think of creative ways of dealing with the situation. It is not helped by believing that integration into global value chains is the only option, because these global value chains basically reduce the incomes of the actual producers. If you look at it, the emergence of global value chains and the associated trade treaties—not just the World Trade Organization (WTO) but the proliferation of regional trading agreements and things like the Trans-Pacific Partnership (TPP)—increase competition and reduce the value of the actual production stage of all commodities and goods. And they simultaneously increase the pre-production and post-production value. That is, all of the aspects that are driven by intellectual property monopolies—their values increase. So whether it is design elements or it is the marketing and branding and all of that—the intellectual property rights over which are retained by companies in the North—all of those are getting more and more value. And the actual production is getting less value because of the greater competitive pressure unleashed by these various trade agreements.

Developing countries that are seeking to get out of this really have to think of alternative arrangements—possibly regional arrangements, more reliance on domestic demand and South-South trade, which is more possible today than it has ever been—and moving away from a system that allows global and northern-led multinationals to capture all the rents and most of the profits of production everywhere.

D&S: So, in the course of this discussion, I think two major questions emerge about the way forward in so-called developing economies. One is how to square economic development—in terms of raising the quality of life for the majority—with environmental sustainability. The other is how to ensure the economic development of some countries isn’t at odds with development in others. Are there ways of mutually fostering development—and in particular sustainable development—across the developing economies?

JG: Yes, I think we need to really move away from the traditional way of looking at growth and development, which is ultimately still based on GDP. As long as we keep doing that, we’re going to be caught in this trap. We have to be focusing much more on quality of life and ensuring what we would call the basic needs or minimum requirements for a civilized life among all the citizenry. If we do that, then we’re less in competition with one another and we’re less obsessed with having to be the cheapest show in town. We then see wages and employment growth as a means of expansion of economic activity. We will see social policies as delivering not just better welfare for the people but also more employment, and therefore a better quality of life.

If we look for regional trading arrangements that recognize this, if we look to increase the value of domestic economic activity by encouraging the things that matter for ordinary people (especially, let’s say, the bottom half of the population), if we focus on new technologies that are adapted to specific local requirements—in terms of being more green, more environmentally sustainable, as well as recognizing the specific availability of labor in these economies—I think we can do a lot more. It may be slower in terms of GDP growth, but really that doesn’t mean anything. So we have to move away from GDP growth as the basic indicator of what is desirable. I think that’s the ultimate and most essential issue.

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