The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘Ten Rules of Successful Nations’
As rich countries debate how to “go big” on stimulus during the pandemic, emerging nations are having a different conversation. It’s about how hard to push reform — and they are likely to come out better for it.
Emerging countries will never have the financial resources to match the stimulus spending of richer nations. But during the financial crisis of 2008, emerging nations offered stimulus that was almost as generous as the far richer countries. They could afford to because, after years of blockbuster growth, they had money to burn. Yet all that spending produced only a brief flash of growth, and during the 2010s these nations struggled to pay down debt as growth slowed.
When the pandemic struck last year, many emerging nations were still struggling. Now, lacking the money to revive their economies through stimulus, they have little choice but to push productivity-enhancing reform.
My research found that the typical emerging nation did increase total stimulus — including fiscal and monetary stimulus as well as credit guarantees — from 6 per cent of gross domestic product in 2008 to 9 per cent in 2020. But that was spare change compared to developed nations, which more than tripled outlays from 10 per cent to 33 per cent of GDP in the same period. In effect, developed nations spent nearly four times more on stimulus in 2020 than emerging nations did.
Instead of debating bigger stimulus packages, emerging nations are advancing a range of reforms to raise productivity and boost growth. India is drawing headlines for its farmer protests against an end to agricultural protections, but that is just one part of a broad effort to promote private competition and shift government spending away from giveaways and towards infrastructure. Indonesia last year cut taxes and regulation, and eased labour rules; now it is moving to open up the financial sector. The Philippines just cut its relatively high corporate taxes to more competitive levels.
Egypt, Saudi Arabia and the United Arab Emirates are imposing new constraints on government spending; the latter two are allowing foreigners to buy local businesses and homes for the first time. Even big-spending Brazil is moving to regain control of its budget by, among other things, downsizing pensions and making it easier to fire public workers and cut their benefits.
The biggest shift has come in China. Though its 2008 stimulus spending was widely praised for “saving” the global economy, the resulting debts contributed to a sharp growth slowdown. Now Beijing is responding very differently. While all the major developed countries rolled out much more stimulus in 2020 than in 2008, China committed less: about 9 per cent of GDP, down from 13.5 per cent in 2008.
Rather than promising endless rounds of easy money, China’s central bank is beginning to pare back its monetary stimulus, citing the dangers of rising debt and financial bubbles. Meanwhile, Beijing is proposing ambitious new economic reforms, including a further opening of its financial markets to the outside world.
This tale of two pandemic responses is a reminder that emerging nations have their own ideas about economic survival. Back in the 1990s, when financial crises battered emerging nations from Russia to Turkey and Thailand, the IMF, that pillar of western consensus thinking, urged emerging nations to maintain spending restraint and high real interest rates, coupled with structural reform to promote growth. Emerging world leaders bridled at these brutal austerity programmes.
Now the tables have turned. Reflecting the neo-Keynesian consensus that prevails across western capitals, the IMF today is advising nations rich and poor to care less about deficits and to spend generously. Only none of the big emerging nations are seeking IMF help, and many are embarking on campaigns of structural reform very similar to what the fund would have proposed in the 1990s. Financial markets are cheering their progress. After a lost decade, emerging stock markets have of late been outperforming developed stock markets. Reform is not the only reason, but it is one of them.
When the pandemic passes, and the sugar rush of stimulus fades, the effect will not be felt equally. Emerging nations are likely to see their growth prospects continue to improve. Developed nations, by spending massively and putting off reform, are poised for slower growth weighed down by debt. They are likely to confront the same harsh lesson that emerging nations faced after the 2008 crisis: stimulate in haste, and you will repent at leisure.