Emerging Markets in a World of Chaos: Pathways for Economic Growth and Development 3031299485, 9783031299483

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Emerging Markets in a World of Chaos Pathways for Economic Growth and Development

Ali Zafar

Emerging Markets in a World of Chaos “Ali Zafar’s Emerging Markets in a World of Chaos offers a much-needed novel approach to the understanding of the workings of the world’s main emerging economies. The book takes the reader through a grand tour of major emerging economies, deriving new insights from their economic histories and drawing key lessons from their policy experiments—both successes and failures. Written in a concise, clear, accessible, and engaging style, this book will be an invaluable resource to policy makers, professional economists, and researchers alike. It is an excellent new addition to the burgeoning development macroeconomics literature. I highly recommend it.” —Jorge Thompson Araujo, International Development Expert, Former Macroeconomics Manager at the World Bank, and Senior Research Fellow, Department of Economics, University of Brasilia, Brazil “The uniqueness of this book hinges on the role of emerging markets in the context of a chaotic world. Unlike previous writings, Ali Zafar’s book provides analytic comparisons of emerging markets and their future. The use of GEMINI analytical framework allows the book to examine factors that set emerging markets from other developing market economies. The book concludes that there are no polar extremes on the drivers of growth and development that make emerging markets in a chaotic world unique—functional administration and strong private sector make these emerging markets thick. The future of emerging markets depends on how fast they can learn from each other while innovating on public administration and corporate governance.” —Ayodele Odusola, UNDP Resident Representative, South Africa “Emerging market (EM) countries have outgrown developed ones in recent decades and, as Ali Zafar argues, they will likely continue to do so despite their challenges. This book is a comprehensive and rich exploration of the specific strengths, weaknesses, and economic trajectories of the world’s 10 largest EMs. It is unprejudiced, balanced, and refreshingly accessible.” —Louis Kuijs, Chief Economist, Chief Asia Economist · S&P Global Ratings

“The post-oil momentum is at our door. In 2021, we sold more bikes than cars in France. With a sale of more than 4 million electric vehicles in 2022, China has the highest global increase in electric cars. Green technologies and electrification are reshaping our world. The manufacturing industry is reinventing itself, and global trade patterns are shifting. This intriguing book gives a clear and methodical view on the factors influencing the success and failure of emerging markets to adapt to a world of change. Managing macroeconomic policy in an era of shocks, leading the renewables revolution, and mitigating climate change are some of the key themes presented in this original study.” —Rachel Ruamps, Macroeconomist (Renewable Energy), French Wind Energy Association

Ali Zafar

Emerging Markets in a World of Chaos Pathways for Economic Growth and Development

Ali Zafar Falls Church, VA, USA

ISBN 978-3-031-29948-3    ISBN 978-3-031-29949-0 (eBook) https://doi.org/10.1007/978-3-031-29949-0 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Pattern © John Rawsterne/patternhead.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Paper in this product is recyclable.

Foreword

This book is a product of a long period of travel and reflection. As a macroeconomist advising governments across the world and working with several international organizations and foundations, I have been fortunate to travel widely through richer and poorer countries. I have always been fascinated by several questions. Why are some nations rich and why do others stay poor? What is the future of emerging markets? How did a poor country like China become one of the leading global economies? What explains the Indonesian boom—how an archipelago far from markets took off economically? How did countries such as Mexico, Argentina, and Brazil, much stronger earlier in their history, lose momentum? What explains the rise of India and where is it headed? How will these emerging markets reshape the world’s economic and political order? This book is based on travels through emerging markets over the last two decades. Of the ten emerging markets discussed in this book—Brazil, Mexico, Argentina, India, Indonesia, China, Türkiye, South Africa, Saudi Arabia, and the Russian Federation, I visited all of them, excluding Argentina and India, though my South Asian ancestry helped me understand the Indian subcontinent. I interviewed policymakers and talked to taxi drivers, shopkeepers, and academics, and I listened to people’s stories. A Chinese button manufacturer shared the secrets of how a small town in the middle of nowhere started producing 50 percent of the world’s buttons. In Soweto, South Africa, visiting Nelson Mandela’s home, the African tour guide told me how far South Africa had come from such a dark past. Russia changed a lot between the 1980s when I first visited it to v

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2018, when I returned. Taxi drivers lamented economic challenges, but not many wanted to return to the 1990s or the Soviet era. Traveling through São Paulo and Rio de Janeiro and watching the World Cup soccer final in 2014 at the Maracana Stadium, I got a sense of a nation on the move, with a rising middle class. In Istanbul, traveling on a boat in the Bosporus, I was sitting between two women, one in hijab and the other in tank top, reflecting the multifaceted Turkish national character. Navigating the complex maze of Jakarta traffic, my taxi driver showed a lot of patience. A Chinese zipper manufacturer told me that his success was because he and his family had only one meal a day to eat in the 1970s. The women I spoke to in Riyadh after delivering a lecture on the world economy at an institute there told me that things are changing for women. Unfortunately, emerging markets are not well understood in the popular imagination. China is perceived as an authoritarian country with sweatshop labor, Türkiye as a tourist destination, India as an information technology (IT) hub with a lot of poor people, Mexico as a country of the North American Free Trade Agreement (NAFTA) and cartels, Argentina as a country in perpetual default, Indonesia as a collection of remote islands, Saudi Arabia as a super conservative oil power, South Africa as a victim of apartheid and as a dangerous place, Russia as a complex state as well as an oil and gas station, and Brazil as a land of samba and sun. But the realities are more complex as usual. Countries are like people. They have zillions of idiosyncrasies and nuances. Even within countries, such as Russia, India, and Brazil, there are competing narratives and stories and perceptions. I have been privileged to be a witness to the boom in money, ideas, and competitiveness that had been happening since the early 2000s. And then I like everyone else on the planet saw the world economy implode in 2020. First, there was the pandemic which killed more than 6.9 million people and still counting, then the Ukraine war and unprecedented global inflation. The tightening monetary policy by the Fed. Everyone was talking about the breakdown in supply chains. The world of 2023 feels totally different from the world of 2019. Emerging markets, which had been slowing down even before the pandemic, started to fall further and for the first time in decades, the rates of growth of the emerging and advanced economies appeared to converge. Many predicted a doomsday scenario. China, which was supposed to take over as the leading economy in the world after the United States, started looking weak with its lockdowns, growth slowdowns, and abrupt policy reversals. The European energy

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crisis in the aftermath of the Russian war was more bad news. Nouriel Roubini, Dr. Doom, who had famously predicted the 2008 financial crisis, was talking about a new normal. A depressed world economy with not many growth engines. Everywhere people downgraded their economic forecasts. Media reports seemed catastrophic. The emerging countries had lost their mojo. The China–United States trade war seemed to be the conflict of our times until Ukraine came along. In the aftermath of the pandemic, there are signs of recovery. China and India will drive a significant part of global growth in 2023 and beyond. Asia, South Asia, the Middle East, and Latin America all have points of vibrancy and resilience. I decided to write this book to compare these economies using data and empirics. To go beyond the anecdotes and sensationalism. There were excellent books and studies about individual economies, including a cottage industry of China and India analysis, many books on Russian political economy, and dozens of academic studies. But there was little in the way of analytics comparing countries. Many researchers do not want to sacrifice breadth for depth. In this book, I wanted to give a balanced and comparative perspective on emerging markets, something beyond the media hype, something that relied on empirical evidence. The book is unique in three ways: it compares emerging markets; it uses a novel framework; and it provides granular and country-specific policy recommendations to spur growth and development. And I felt that much of the discussion on emerging markets suffered from the lack of a systematic approach. I developed a framework to compare countries and to try to understand their growth paths. What is the future of China? Will Russia survive economically after the war? Why cannot India replace China? What ails Mexico, South Africa, and Argentina? Why is Türkiye up and down? What is happening in the desert kingdom of Saudi Arabia? Is Indonesia the new boom town? Where is Brazil headed? I tried to avoid the doom and gloom scenarios and explore nuances. I also have tried to look for tectonic shifts beneath the surface data and try to separate the noise from the signal. I researched the histories of these countries and tried to understand these societies from the perspective of political economy and of macroeconomics. However, this is not a political book and refrains from judgments on a country’s political choices or types of governments. But it looks at the intersection of politics and economics. I do not see history as bending in a progressive historical arc and I see the emergence of alternative forms of

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government interesting in terms of impact on economic and social outcomes. First, I tried to study the economies in an integrated manner using a new holistic approach and avoid the disciplinary fragmentation so common in the academy and international institutions. Second, I sought to understand and measure the similarities and differences between the countries. Third, I tried to bring to a more popular understanding some of the academic literature on the topic. Fourth, I tried to shed light on their future paths. This book is meant to provide insights into our rapidly changing and complex world. It represents my humble contribution to understanding the rise of emerging markets and their future. They will be a central part of the world to come. Finally, the views expressed herein are those of the author and do not necessarily reflect the views of the United Nations Development Programme (UNDP).

Contents

1 Introduction  1 1.1 Emerging Markets: The Rise  3 1.2 What Happened?  4 1.3 The Characteristics of Emerging Markets  5 1.4 Emerging Market Growth: Four Phases  7 1.4.1 Phase 1  7 1.4.2 Phase 2  7 1.4.3 Phase 3  8 1.4.4 Phase 4  8 1.5 Plan of the Book 10 References 11 2 The GEMINI Model 13 2.1 Why GEMINI? 15 2.2 GEMINI and the Middle-Income Trap 17 2.3 What Is the Growth Story? 18 References 22 3 Emerging  Markets: Anatomy, Characteristics, and History 23 3.1 The Dramatic Rise of China 23 3.1.1 COVID Hits China 26 3.1.2 Chinese Economic History 101  27 3.1.3 Unique China 29 ix

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3.1.4 Macroeconomic Management 30 3.1.5 The Rise of Chinese Manufacturing 31 3.1.6 Local Government and Debt 33 3.1.7 China’s Disputes with the United States 35 3.1.8 What Does the Future Hold for China? 37 3.2 The Emergence of India 38 3.2.1 From Partition to Modi 41 3.2.2 The 1991 Crisis 43 3.2.3 Food Security and Agriculture 45 3.2.4 Services 46 3.2.5 The Manufacturing Dilemma 47 3.2.6 Assessment 48 3.2.7 India’s Future 49 3.3 The Latin American Trifecta: Brazil, Argentina, and Mexico  50 3.3.1 Brazil 50 3.3.2 Mexico 59 3.3.3 Argentina 65 3.4 The Oil Powers: Russia and Saudi Arabia 70 3.4.1 Russia 70 3.4.2 Saudi Arabia 77 3.5 Other Emerging Economies: Indonesia, South Africa, and Türkiye 82 3.5.1 Türkiye 82 3.5.2 Indonesia 88 3.5.3 South Africa 91 References101 4 A GEMINI Assessment111 4.1 Overall111 4.1.1 The Methodology112 4.1.2 The Findings112 4.2 Growth and Macropolicy115 4.2.1 Macroeconomic Management115 4.2.2 Fiscal Policy116 4.2.3 Debt118 4.2.4 Oil Economies and the Current Account119 4.2.5 Managing Inflation119 4.3 Equity, Human Development, Gender, and Demography121

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4.4 Money: Banking, Capital Markets, SMEs, and Fintech122 4.5 Institutions, Governance, and State Capacity125 4.6 National Competitiveness, Global Integration, and Productivity128 4.6.1 Global Integration and Trade128 4.6.2 Productivity130 4.7 Infrastructure, Facilitation, and Sustainable Energy131 4.7.1 China’s Belt and Road Initiative132 4.7.2 Public–Private Partnerships132 4.7.3 Climate and Environment134 References137 5 Medium  Term: Where Are Emerging Markets Headed?141 5.1 Country Trends142 5.1.1 Tier 1143 5.1.2 Tier 2147 5.1.3 Tier 3149 5.2 Future Headwinds and Tailwinds153 5.2.1 Tailwinds153 5.2.2 Headwinds156 References160 6 GEMINI  Policy Reform to Get the Mojo Back163 6.1 Washington Consensus Versus New Model165 6.2 Good Macro, But Not Exclusively the Washington Consensus166 6.3 Human Development, Fiscal Redistribution, Minimum Wages, and Safety Nets167 6.4 Promoting Sufficient Finance169 6.4.1 Banking and Capital Markets169 6.4.2 SME Finance171 6.4.3 Fintech172 6.4.4 Capital Controls172 6.5 State Capacity and Effective Institutions174 6.6 Competitiveness, Industrial Policy, and Productivity176 6.6.1 The Role of the State176 6.6.2 Productivity177 6.7 Infrastructure Development and Climate Change179 References183

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7 Conclusion:  What Can Emerging Markets Do to Favor the Future?187 References192 Annex193 References195 Index213

Abbreviations and Acronyms

ASEAN BNDES BRICS EM10 EU FDI fintech GDP GVC HDI IMF IT JET NAFTA OPEC PPP SDG SMEs SOE TFP WEF WTO

Association of Southeast Asian Nations Brazilian Economic and Social Development Bank Brazil, the Russian Federation, India, China, and South Africa 10 Emerging Market Economies European Union Foreign Direct Investment Financial Technology Gross Domestic Product Global Value Chain Human Development Index International Monetary Fund Information Technology Just Energy Transition North American Free Trade Agreement Organization of the Petroleum Exporting Countries Public–Private Partnership Sustainable Development Goal Small and Medium Enterprises State-Owned Enterprise Total Factor Productivity World Economic Forum World Trade Organization

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List of Figures

Fig. 2.1 Fig. 2.2

Fig. 2.3

Fig. 4.1

Fig. 4.2

The GEMINI analytical framework 14 Growth in advanced economies and emerging economies, 1980–2022 (%). (Source: Real GDP Growth (dashboard), International Monetary Fund, Washington, DC, https:// www.imf.org/external/datamapper/NGDP_RPCH@WEO/ OEMDC/ADVEC/WEOWORLD)19 Emerging markets: Real GDP growth (%). (a) Brazil and others. (b) Argentina and others. (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/ en/Publications/SPROLLS/world-­economic-­outlook-­ databases#sort=%40imfdate%20descending)20 EM10 real GDP growth, by economy, 2011–2020 (%). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/ world-­economic-­outlook-­databases#sort=%40imfdate%20 descending)113 GII and HDI rankings, by economy, 2021. (Sources: GII (Gender Inequality Index) (dashboard), United Nations Development Programme, New York, http://hdr.undp.org/ en/content/gender-­inequality-­index-­gii; HDI (Human Development Index) (dashboard), United Nations Development Programme, New York, https://hdr.undp.org/ data-­center/human-­development-­index#/indicies/HDI) 114

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List of Figures

Fig. 4.3

Fig. 4.4

Fig. 4.5

Fig. 4.6

Fig. 4.7

Fig. 4.8

Fig. 4.9

Fig. 4.10

Credit to the private sector, by economy, 2017 and 2021 (% of GDP). (Source: Credit to the Non-financial Sector (dashboard), Bank for International Settlements, Basel, Switzerland, https://www.bis.org/statistics/totcredit. htm?m=2669114 EM10 comparisons: Infrastructure, institutions, and competitiveness. (Sources: LPI (Logistics Performance Index) (dashboard), World Bank, Washington, DC, https://lpi. worldbank.org/; Schwab 2019. Lower rank indicates better performance; institutions and national competitiveness are from World Economic Forum rankings) 115 Comparison: GDP growth and HDI. (Sources: HDI (Human Development Index) (dashboard), United Nations Development Programme, New York, https://hdr.undp.org/ data-­center/human-­development-­index#/indicies/HDI; WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https:// www.imf.org/en/Publications/SPROLLS/world-­economic-­ outlook-­databases#sort=%40imfdate%20descending) 116 Comparison: Institutions and GDP growth.(Sources: Schwab 2019; WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/ world-­economic-­outlook-­databases#sort=%40imfdate%20 descending)116 Emerging markets: Fiscal balance (% of GDP).(Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https:// www.imf.org/en/Publications/SPROLLS/world-­economic-­ outlook-­databases#sort=%40imfdate%20descending) 117 Emerging market debt (% of GDP). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/ en/Publications/SPROLLS/world-­economic-­outlook-­ databases#sort=%40imfdate%20descending)118 Current account balance, 2010–2022 (% of GDP). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https:// www.imf.org/en/Publications/SPROLLS/world-­economic-­ outlook-­databases#sort=%40imfdate%20descending 119 Inflation trends, 2010–2022 (%). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/

  List of Figures 

Fig. 4.11 Fig. 4.12 Fig. 4.13

Fig. 4.14 Fig. 4.15

Fig. 5.1

Fig. 6.1

Fig. 6.2

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en/Publications/SPROLLS/world-­economic-­outlook-­ databases#sort=%40imfdate%20descending)120 Central bank inflation and the policy interest rate, June 2022 (%). (Note: Policy rate is on vertical axis and inflation is on horizontal axis) 121 Inequality and poverty headcount, EM10, 2020 (%). (Source: PovcalNet: Data (database), World Bank, Washington, DC, http://iresearch.worldbank.org/PovcalNet/data.aspx)122 Inequality: Share of pre-tax national income of top 10 percent (%). (a) South Africa and others. (b) Türkiye and others. (Source: WID (World Inequality Database) (dashboard), Paris School of Economics, Paris, https://wid.world/)123 TFP in emerging markets relative to the United States (index). (Source: Feenstra et al. (2015)) 131 Energy sources, by economy, 2020 (% of total). (Sources: Based on industry analysis; Data and Statistics (dashboard), International Energy Agency, Paris, https://www.iea.org/ data-­and-­statistics; Statistical Review of World Energy (dashboard), BP, London, https://www.bp.com/en/global/ corporate/energy-­economics/statistical-­review-­of-­world-­ energy.html)135 Share of Asian exports (%). (Sources: CEIC Data (database), CEIC, New York, https://www.ceicdata.com/en; S&P Capital IQ, S&P Global Market Intelligence, New York, https://www.spglobal.com/marketintelligence/en/ solutions/sp-­capital-­iq-­platform) 158 Investment and median age, 2022 (% and years). (Note: The figure refers to the latest year for which data are available. Sources: Average age in global comparison (dashboard), WorldData.info, eglitis-media, Oldenburg, Germany, https:// www.worlddata.info/average-­age.php; WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/ en/Publications/SPROLLS/world-­economic-­outlook-­ databases#sort=%40imfdate%20descending)178 Research and development expenditure (% of GDP). (Source: WDI (World Development Indicators) (dashboard), World Bank, Washington, DC, https://datatopics.worldbank.org/ world-­development-­indicators/) 178

List of Tables

Table 5.1 Table 1

Current tailwinds and headwinds, emerging market economies Emerging markets comparison 2022

152 193

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CHAPTER 1

Introduction

Abstract  One of the most interesting phenomena of our times has been the rise of emerging markets. With the ascent of countries such as China and India, the early twenty-first century witnessed a shift in economic power across the globe. Latin American countries, such as Mexico, Argentina, and Brazil, developed their economies in the earlier part of the twentieth century, but they experienced a lost decade in the 1990s. The post-2000 era has seen the rise of dynamic economies such as Türkiye, Saudi Arabia, and Indonesia. Emerging markets are heterogeneous, not well understood, volatile, and impacting global labor and capital markets. Many of them were growing faster than advanced economies, but the combined shocks of the pandemic, rising interest rates, inflation, debt, and geopolitics have lowered their growth and adversely impacted their finances. Nevertheless, emerging markets are a growing part of the world economy now. Keywords  Globalization • Growth • Volatility • BRICS • Macroeconomic management • Natural resources • Food security • Climate change An interesting phenomenon of our times is the rise of emerging markets. With the ascent of countries such as China and India, the late twentieth century witnessed a shift in economic power across the globe. This represents a challenge to the economic dominance of the advanced industrialized countries, the United States, Western Europe, and Japan. A wave of © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0_1

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economic powers in East Asia—Hong Kong SAR, China; the Republic of Korea; Singapore; and Taiwan, China—managed to achieve the rise earlier in the century, but they did not disrupt the global system. The new emerging economies are a heterogeneous set of countries, with unique political histories, cultural traditions, and economic philosophies. Emerging markets, despite all the political ups and downs and the vicissitudes of history, are mostly moving in a forward trajectory. Not all of them. Perhaps not at the pace of two decades ago in the more idyllic pre-­ pandemic world, perhaps not in a fashion that is leading to an equitable distribution of income or in a way that promotes global order. They are not all emerging equally; some are growing more quickly than others. This applies not only to China and India, but also to most of the others. A rising middle class is demanding its share of global wealth and its place in society. Entrepreneurs of all shades and stripes are setting up businesses and mobilizing capital from family, friends, and informal financial institutions. There are now close to 700 million middle-class people in emerging markets, accounting for an increasing share of global consumption growth. This number is projected to reach more than a billion people by 2030. Millions of migrants have left rural areas to seek better lives in the big metropolitan centers of Istanbul, Jakarta, Johannesburg, Mexico City, Mumbai, São Paulo, and Shanghai. Many have emigrated overseas. Traveling through many emerging markets, one notes a strong entrepreneurial drive and the hunger for a better tomorrow. Consider the following. One person in three on the planet is Chinese or Indian. The BRICS (Brazil, the Russian Federation, India, China, and South Africa) share of global gross domestic product (GDP) increased from 10 percent in 1990 to more than 25 percent in 2022. China is expected to overtake the United States in nominal GDP sometime in the 2030s. The top 20 emerging market countries account for 34 percent of the world’s nominal GDP in US dollars and 46 percent in purchasing-­ power-­parity terms.1 The top 10 emerging market economies had reserves of over US$1 trillion in 1990. They had reserves of more than US$5.5 trillion in 2022, a more than fivefold increase. China is at more than US$3 trillion, while India, Brazil, Mexico, Russia, and Saudi Arabia all have reserves of above US$200 billion. Emerging market multinational companies now make up close to one-third of the Fortune Global 500, a new and unexpected phenomenon.

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1.1   Emerging Markets: The Rise Which are the emerging markets? How did they emerge? Emerging markets were first identified in the 1980s by Antoine van Agtmael, an economist at the International Financial Corporation. He was trying to seek ways to attract foreign capital to developing countries and had set up an equity fund. The label was an astute way to spice up and market a part of the world that was not well-known to overseas investors. The term acquired a certain cachet and became the new way to describe economies on the move, countries with significant growth potential. There has never been an official definition. Conceptually, emerging markets are those in the middle, stuck between the rich advanced economies and the poor developing economies.2 They account for close to 75 percent of the world’s population and more than 60 percent of the world’s poor. For the International Monetary Fund (IMF), these are neither one of the 39 advanced economies nor poor developing economies. Italy, Japan, Korea, and the United States are out. In are Bangladesh, Chile, Costa Rica, the Philippines, Poland, and Vietnam. There are many typologies of emerging markets. One of the best indexes of emerging markets is the Morgan Stanley Capital International (MSCI) emerging markets index, a composite benchmark used by many international equity investors and meant to guide investor allocation. It relies on a selection among a broadly representative sample of stocks from leading countries to measure the financial performance of key companies. It was launched in 1988, when it covered 10 countries, and has since been expanded to 24 countries, representing more than 10 percent of global market capitalization. The index is solid, professional, and reliable. It includes a heterogeneous range of countries in many parts of the world. There are the Americas (Brazil, Chile, Colombia, Mexico, and Peru), the Asian economies (China; India; Indonesia; Korea; Malaysia; the Philippines; Taiwan, China; and Thailand), and the others (the Czech Republic, Egypt, Greece, Hungary, Kuwait, Poland, Qatar, Saudi Arabia, South Africa, Türkiye, and the United Arab Emirates). There is now an alphabet soup of groupings, each representing a new configuration of countries. There are the BRICS (Brazil, Russia, India, China, and South Africa). This label was coined by Goldman Sachs economist Jim O’Neill in 2001 to describe the range of countries that were rising rapidly.3 There are the newly discovered MINTs, encompassing Mexico, Indonesia, Nigeria, and Türkiye. There are the powers of the

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Association of Southeast Asian Nations (ASEAN), consisting of Indonesia, Malaysia, the Philippines, Thailand, and Singapore. Then there is the Asian tiger, the Chinese dragon, and the Indian tiger. The typologies are many, but the animating spirit behind the classification is the same: countries with potential and possibility.

1.2   What Happened? The globalization of business and trade, lower transport costs, and the reduction in trade barriers have led to expansions of the trade in goods and services and the rise of lower-cost producers, such as China and India, over the years. The advanced economies started trading with the new economies. Many women from southwest China migrated to the coastal areas of the country in the 1990s to work in start-up factories, which became the center of world manufacturing. Indian tech gurus launched an information technology (IT) revolution and made India a prominent center for outsourcing. Through sensible macroeconomic management and progressive social policies, emerging market governments were able to reform their economies and help lift millions out of poverty. They did it in their own way, sometimes using established formulas and sometimes inventing heterodox solutions to exit poverty traps. There was a slowdown in the richer economies, which had been impacted by demographic and structural shifts. Talent migrated from developed to emerging markets, as many professionals returned to emerging markets to help develop their own countries. Looser monetary policy in the United States and Europe, with interest rates close to zero, gave the world a lot of cheap credit and led some investors to move to emerging markets in search of higher returns. In 2007–2009, when the rich economies were caught by surprise by the mortgage meltdown during the global financial crisis, leading to the greatest recession since the Great Depression of 1929, the emerging markets proved resilient. China delivered a US$575 billion stimulus that represented close to 13 percent of its GDP, and this helped pull the world economy out of the slump. The rise of the emerging markets has not been smooth. There has been some friction between the leading high-income countries and some of the emerging markets. The loss of manufacturing jobs in the West propelled the rise of Donald Trump in the United States, Brexit in the United Kingdom, Marine Le Pen in France, and Matteo Salvini in Italy. Friction between China and the United States over trade rules and intellectual

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property has led to resurgent protectionism. The Russian invasion of Ukraine has caused a humanitarian crisis, sanctions on Russia, and significant geopolitical realignment. New models of political governance and new economic models involving mixed economies and state capitalism are now being increasingly debated. These events have spawned definitions, commentary, and predictions by pundits across the globe. Ian Bremmer says that an emerging market is a country in which politics matters at least as much as economics to the market.4 Billionaire English entrepreneur James Dyson says that the way the world is going, the phenomenon is driven by technology, and, rather than among the old superpowers, the engine is among new emerging economies and in the Far East.5 Then you have Harvard economist Dani Rodrik, who, in discussing some of the crises among the emerging markets in the mid-2020s, stated that emerging markets are not hapless, undeserving victims, but, for the most part, are reaping what they sowed, and, he added, the troubles among emerging economies are domestically generated and not the fault of foreigners.6 Former PIMCO executive Mohammed El-Erian has argued that the global realignment is accelerating the migration of growth and wealth dynamics from the industrial world to the larger emerging economies.7

1.3  The Characteristics of Emerging Markets What is special about the emerging markets? What makes them tick? What do a Brazilian, a Chinese, an Indian, an Indonesian, and a Turk have in common? The emerging label implies a transition from one model to another. It encapsulates many possible different stories and experiences within one narrative. There is a heterogeneity of models and country experiences, and the various countries involved ebb and peak at different intervals. But there are also unifying characteristics. First, these countries are growing rapidly, usually at annual rates greater than 3 percent. Large populations make their per capita incomes lower than the incomes in developed countries. Benefiting from cheap labor, favorable demographics in terms of younger populations, and the availability of foreign and domestic capital, these economies have surged in recent decades. Structural transformation, whereby agriculture became more productive, and the rise of manufacturing and high-end services helped absorb many people into the labor market. Growth potential remains significant given the large pools of unused labor and capital.

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Second, these countries are quite volatile, subject to the vagaries of commodity price swings, supply shocks, domestic politics, and monetary policy shifts at the Federal Reserve Board or the European Central Bank. They are definitely more volatile than the advanced industrialized countries. As they become more tightly integrated into the global trading and financial system and benefit from increasing flows of ideas, capital, and technology, they are also highly prone to swings in external terms of trade, leading to greater macroeconomic risks relative to advanced countries. Oil economies, such as Russia and Saudi Arabia, and, to a lesser extent, Indonesia and Mexico, are vulnerable to oil price shifts. Many of them are affected by whatever happens in Washington, or London, or Tokyo. There is always some truth to the witticism that when America sneezes, the world—including the emerging markets—catches the flu. Third, many emerging countries are in the midst of deep transformations, especially in terms of political economy. Some of the shifts are related to economics, but others are political and societal. Some are democratizing, while others are authoritarian. The fall of the Berlin Wall led to changes in Russia, while democratization was established as a trend in much of Latin America and South Asia. East Asia retained its unique style of political governance. A wide variety of leadership styles and personalities have appeared. Fourth, many of these economies have significant natural resources, especially energy and minerals,  and are  players in global food systems. Saudi Arabia and Russia are the world’s top two oil exporters and have a large control over the global price. China, India, South Africa, and Indonesia are largely dependent on coal for energy. China and Indonesia have  rare earth minerals, and Argentina and Mexico  have  lithium reserves.  China and India are the world’s largest producers of rice, and Russia is the largest producer of wheat and a major exporter of nitrogen fertilizer. Argentina and Brazil are agribusiness powers with high-quality beef, soybeans, and much more. The 10 emerging market economies (EM10) are not marginal in research and development in agriculture or movement in international food prices either. In terms of fuel and food, the global economy is dependent on these emerging markets.  Emerging countries differ from more developed countries because they are not so rich and not so well organized. They are characterized by less information transparency, weaker corporate governance standards, institutional imperfections, the greater role of household businesses, less welldefined property rights, imperfect judicial systems, and, sometimes, large bureaucracies governing wide territories and difficult land spaces.

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1.4   Emerging Market Growth: Four Phases 1.4.1   Phase 1 Between 1945 and 1990, the current emerging markets were lightweights in the world economy. China was still under communist rule and was a closed society. India was trapped in a low-growth equilibrium and had not reached global scale. Although Argentina, Brazil, and Mexico were established economic powers, supported by import substitution industrialization, they were neither democratic nor outward-looking. Türkiye was in chronic difficulties with the IMF, and Indonesia was too remote from centers of global commerce. South Africa was governed by apartheid, and Russia by Communism. The emerging markets were starting their journey. 1.4.2   Phase 2 Between 1990 and 2015, emerging markets reached the limelight. This was the golden age. The ascent was fueled by the rise of globalization, the growing integration of the world economy, the commodity boom associated with China’s growth, and the era of cheap money. Millions escaped poverty.  Macroeconomic policy, including fiscal and exchange rate management, in emerging markets became more solid, and inflation targeting was adopted by many central banks. Supported by a youthful population, a growing technocratic class, and a catch-up in productivity, these economies achieved scale and significance. Annual labor productivity growth in countries like India, China, and Turkey was high. Productive firms became more integrated in the global market. Structural transformation was happening as labor was shifting from agriculture to manufacturing and services. Seeking high returns, investors and fund managers in Europe and North America became interested in Chinese banks, South African gold, and Indian corporates. Frontier markets were risky but rewarding. China, which was relatively poor in 1980, became the second-largest economy in the world, while India ascended the ranks of leading economies. Defying expectations, the ASEAN countries—Indonesia, Malaysia, the Philippines, Singapore, and Thailand—became a powerful and stable bloc. In Latin America, Brazil and Mexico had been transformed into more outwardlooking economies. Argentina and Türkiye, although volatile, were beginning to leave a global footprint, while Saudi Arabia, fueled by high oil prices, continued to be a kingmaker in the world oil market. South Africa transitioned from apartheid to become sub-Saharan Africa’s largest

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economy, while Russia consolidated a postcommunist transition, although this was accompanied by political turbulence.  Though there were some major macroeconomic crises during this era—Mexico in 1994, Indonesia in 1997, Russia in 1998, Argentina in 2001, and Turkey in 2000 and 2001 —the general trajectory of the EM10 was upward.  1.4.3   Phase 3 From around 2010 to 2020, economic growth slowed as countries dealt with the fallout of the global financial crisis  and the subsequent global recession.  Led by China, the  EM10 were able to implement fiscal and monetary stimulus in the aftermath of the crisis. Governments became mired in challenging domestic reforms and a lukewarm world economy. Reform momentum faltered. There had been little anticipation that the external global environment could go awry. After the US Federal Reserve raised interest rates in the mid-2010s, capital fled from the emerging markets. The growth models of some of these economies, especially in Latin America and South Asia, generated chronic fiscal and current account deficits and high inflation. China failed to tackle local government debt and issues in the property sector. India suffered from demonetization and other reforms that did not give a good bang for the buck. However, not all was negative as there were many positive reforms in public finance, banking, environmental policy, infrastructure, and macroeconomic management during this time, but some reforms take time to see results.  Convergence and catch-up growth stalled. Since the global financial crisis, global labor productivity growth had slackened from 2.3 percent in 2003–2008 to 1.8 percent in 2013–2018.8 The postcrisis productivity growth slowdown affected all emerging markets and developing countries. Labor productivity growth stumbled to 3.5 percent in 2013–2018 from 5.3 percent in 2003–2008, and the average output per worker in these markets and countries was less than one-fifth of the output in the average advanced economy. Three factors were responsible: a deceleration in public and private investment, a brake on growth in total factor productivity (TFP), and a general reduction in reform momentum. 1.4.4   Phase 4 Since 2020, the emerging markets have faced three new shocks. First, in February 2020, came COVID-19. Emanating from China, it affected emerging markets significantly by destroying lives and families,

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interrupting supply chains, reducing employment, and exacerbating poverty. By September 2023, more than 6.9 million people globally had died of the disease. China, India, Indonesia, and Russia were among the countries with the most deaths. All emerging market economies experienced stress, though to varying degrees. Emergency bailouts valued at more than US$250 billion were approved by the IMF for more than 70 developing and emerging economies. After the world began to recover from the pandemic, came, second, the Ukraine–Russia conflict. An emerging market, Russia, invaded Ukraine. This was a black swan event.9 The effects on the world economy were catastrophic. Food and fuel prices skyrocketed. Because Russia and Ukraine are significant producers of wheat and maize for the global market and because food represents between 20 percent and 50 percent of the consumer price index basket in most emerging market countries, food prices shot up in many countries. The associated oil shocks—the oil price exceeded US$100 a barrel—worsened the situation among oil importers. Commodity exporters, such as Indonesia, Saudi Arabia, and even Russia (prior to the war), faced fewer related difficulties. Third was the decision by the US Federal Reserve Board to raise interest rates because of rising inflation. Monetary tightening in advanced economies led to the withdrawal of capital from emerging markets. Inflation in the United States, which had averaged 2 percent a year in 2010–2020, reached close to 8 percent, prompting the world’s most powerful central bank, the Federal Reserve, to increase the federal funds rate from 3.75 percent to 4.00 percent in November 2022. This rate had not been seen since 2008. Similarly, the Governing Council of the European Central Bank raised interest rates in December 2022 to 2.5 percent to combat an inflation that had reached close to 10 percent, in contrast to the 2 percent medium-term inflation target. Unprecedented times required central banks to rethink their models. Emerging markets bore some of the brunt of these decisions. Rampant inflation, capital flight, and investor uncertainty increased in Indonesia, South Africa, Türkiye, and many other countries. Average government debt in emerging markets has risen by more than 10 percent since 2019, and borrowing costs are surging, forcing many developing countries to turn to the IMF.  By early 2023, it appeared that there had been some deceleration in inflation that allowed some emerging markets to reduce interest rates. Preliminary data on freight rates suggest that some supply chains are becoming stronger, but it is too early to be sure. Economic recovery, driven by China and India and other parts of Asia, is helping the world emerge from the pandemic.

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1.5  Plan of the Book This book will explore the rise of emerging markets and assess the future of emerging markets. It seeks to answer several questions, as follows: • How have emerging markets fared in terms of growth, macroeconomic management, human development, and gender equality? • How has China grown so quickly, and where might it be headed? • How might India’s rise be explained, and why can India not yet become another China? • Why have the economies of Latin American countries such as Argentina, Brazil, and Mexico, which have promising histories, stagnated in recent years? • What has been the impact of the war in Ukraine on the Russian economy? • Can the mysteries of Indonesia, South Africa, and Türkiye be clarified? • How did Saudi Arabia become the most rapidly growing economy in the world in 2022? • What is the future of emerging markets beyond the immediate short-­ term crises of the pandemic, inflation, and global slowdown in 2023? • Can emerging markets expect future booms? Busts? Something in the middle? What are the major tailwinds and headwinds along the path of each? Chapter 2 applies a novel analytical framework, the GEMINI approach, that involves the analysis of growth and macroeconomic policy; equity, human capital, gender, and demography; money and finance; institutions and governance; national competitiveness; and infrastructure and sustainable energy. Much of it is based on empirical literature that seeks to capture the factors behind inclusive growth in countries. The framework is built on cross-country empirics, academic literature, and observation. Chapter 3 tells the story of emerging markets by focusing on the top ones, which are also members of the G20. The analysis centers on the EM10: Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and Türkiye. It takes a snapshot of each country, not encyclopedic, but illustrative, including history, macroeconomic evolution and current policies, leadership vision, human development, and

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idiosyncrasies. It seeks to clarify how these countries are similar and how they are different. Chapter 4 assesses the record of the 10 emerging markets using the GEMINI approach. This offers a way to understand how ups and downs, the nature of macroeconomic policy responses to shocks, institutional caliber, successes or failures in leaving no one behind, the competitiveness and business climate, and the quality of infrastructure and sustainable energy have contributed to the position of each country in the world today. Chapter 5 analyzes the path forward. Chapter 6 examines the future of emerging markets more generally. Chapter 7 concludes.

Notes 1. Duttagupta and Pazarbasioglu (2021). 2. As of 2021, the World Bank has defined lower-middle-income countries as those with a gross national income per capita between US$1036 and US$4045 and upper-middle-income economies as those with a gross national income per capita between US$4046 and US$12,535. See Serajuddin and Hamadeh (2020). 3. O’Neil (2001, 2021). 4. Bremmer (2020). 5. BrainyQuote.com (2023). 6. Rodrik and Subramanian (2014). 7. Primorac (2010). 8. World Bank (2020). 9. A black swan event is unexpected, has enormous consequences, and can be explained only after the fact with the benefit of hindsight. Black swans were once thought not to exist, and the term was taken to represent an impossible occurrence. After the discovery of black swans in Australia, the term came to be applied to any system of thought that is undone when a fundamental element is contradicted in fact. The unraveling would also affect any conclusions based on the underlying system of thought.

References BrainyQuote.com. 2023. James Dyson Quotes. Mercer Island, WA: BrainyMedia Inc. https://www.brainyquote.com/quotes/james_dyson_509663. Bremmer, Ian. 2020. An Emerging Market Is a Country Where Politics Matters at Least as Much as Economics to the Markets. Tweet, November 2. https://twitter.com/ianbremmer/status/1323278733105631232?lang=en.

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Duttagupta, Rupa, and Ceyla Pazarbasioglu. 2021. Miles to Go. Finance and Development 58 (2): 4–9. O’Neill, Jim. 2001. Building Better Global Economic BRICs. Global Economics Paper 66, November 30. London: Goldman Sachs Research. ———. 2021. Is the Emerging World Still Emerging? Two Decades On, the BRICs Promise Lingers. Finance and Development 58 (2): 10–11. Primorac, Marina. 2010. IMF Survey: Industrial Countries ‘Need to Adjust to New Reality’. In the News, October 10. https://www.imf.org/en/News/ Articles/2015/09/28/04/53/sonew101010a. Rodrik, Dani, and Arvind Subramanian. 2014. Emerging Markets Victimhood Narrative. Opinion: Economics, January 31. https://www.bloomberg.com/ opinion/articles/2014-­01-­31/emerging-­markets-­victimhood-­narrative#xj4y7 vzkg. Serajuddin, Umar, and Nada Hamadeh. 2020. New World Bank Country Classifications by Income Level: 2020–2021. Data Blog (blog), July 1. https:// blogs.worldbank.org/opendata/new-­w orld-­b ank-­c ountry-­c lassifications-­ income-­level-­2020-­2021. World Bank. 2020. Global Economic Prospects, June 2020. Washington, DC: World Bank.

CHAPTER 2

The GEMINI Model

Abstract  This book relies on a new analytical framework for understanding and measuring economic development. The approach is based on a composite indicator that merges six elements of the development performance of a country: growth and macroeconomic policy; equity, human capital, gender, and demography; money and finance; institutions, governance, and state capacity; national competitiveness, global integration, and productivity; infrastructure and sustainable energy. The framework provides a useful analytical tool to advise countries to try to escape the middle-income trap, referring to difficulties that emerging markets face in competing with either poorer low-wage economies or high-skilled advanced economies. Keywords  Growth • Macroeconomic policy • Equity • Human capital • Gender • Money • Finance • Institutions • Governance • State capacity • National competitiveness • Integration • Trade • Infrastructure • Sustainable energy • Climate change This book relies on a new analytical framework for understanding and measuring economic development.1 The approach is based on a composite indicator that merges six elements of the growth and development performance of a country, as follows (Fig. 2.1):

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0_2

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Equity, Human Capital, Gender, and Demography

Growth and Macroeconomic Policy

Money and Finance

Economic Development

Institutions, Governance, and State Capacity

Infrastructure and Sustainable Energy

National Competitiveness, Global Integration, and Productivity

Fig. 2.1  The GEMINI analytical framework

• Growth and macroeconomic policy relates to a country’s macroeconomic management, that is, fiscal and monetary management, exchange rate policy, management of reserves, the control of inflation, and debt management. The assessment relies on macrodata from the IMF, which is considered the apex organization for macrodata.2 • Equity, human capital, gender, and demography involve the measurement of a country’s success in advancing human development,

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­ ringing new people into the labor force, facilitating the climb up b the economic ladder, improving female labor force participation, and fostering social inclusion. The analysis relies on the conceptually clear and methodologically robust human development index (HDI), which is the gold standard in measuring human development.3 • Money and finance refer to finance and the way credit is allocated, particularly in the private sector. This covers banking, financial technology (fintech), and capital markets, including bond and equity development. It also considers entrepreneurship and the private sector’s demand for credit. The indicators are difficult to measure, but one way to judge the effectiveness of credit is to use a metric of the credit going to the private sector.4 Alternative measures, such as indicators on bond market development and equity finance, are typically correlated with these sorts of data. • Institutions, governance, and state capacity measure the quality of a country’s institutions and governance, any shifts to rule-based systems, the control of corruption, and the development of state capacity. The World Economic Forum (WEF) produces a relevant composite index that ranks countries based on multiple criteria, including institutional development and governance.5 • National competitiveness, global integration, and productivity are linked to a country’s productivity, its integration into the global economy, and the strength of its supply chains. • Infrastructure and sustainable energy examine the quality of a country’s transport network, the way in which goods and services are moved, the sustainability of energy policy, and the vulnerability to climate change. The World Bank logistics performance index is a powerful benchmarking tool that looks at six variables: customs, infrastructure, ease of arranging shipments, quality of logistics services, tracing and tracking, and timeliness.6

2.1   Why GEMINI? There are a plethora of analytical tools and frameworks in the market. Many are models and approaches developed by international financial institutions, international organizations, academics, and private research entities. Meanwhile, seven distinct benefits are associated with the development of GEMINI, as follows:

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• It is a novel approach that provides a growth recipe for middle-income emerging markets to escape the middle-income trap and facilitates a comparison across economies. • It fills a significant gap in areas of business in which there is disciplinary fragmentation in academic research and the assessments of international organizations, which study many of the key variables in isolation. Many of the indicators are too narrow. Macro assessments rarely consider competitiveness. The now-discontinued World Bank Doing Business indicators did not include human capital and equity.7 Poverty is usually studied independently of macrovariables. Governance indicators do not incorporate poverty or competitiveness. • GEMINI provides an integrative, holistic framework that combines many features, including the macro, micro, governance, and human development characteristics of economies. It does not exclude any major indicators used in the standard literature on development economics. • The model criteria are objective and nonpolitical, and each dimension may be applied not only to the emerging market economies but also to other economies. • The approach is based on the empirical literature on socioeconomic development and growth, and each of the six indicators applied within the framework is grounded on robust empirical research and documentation on the relationship among the variables, growth, and development. • The approach is simple and easy to understand. It involves six variables that may be described on a single spreadsheet. It is also affordable because it does not rely on costly data collection. • The model is robust to alternative indexes that are not used. While the ways the indicators are measured are particular to each indicator, the differences are not substantial. Using the World Bank human capital index versus the HDI of the United Nations Development Programme or the WEF ranking of country institutional quality versus more traditional governance indicators does not have a great impact on the analysis. One may use alternative indexes or data as needed.

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2.2   GEMINI and the Middle-Income Trap One focus of this book is the application of the GEMINI framework to explain the middle-income trap. What is this trap? The term was popularized by Indermit Gill and Homi Kharas of the World Bank.8 It refers to the difficulties that emerging markets face in competing with either poorer, low-wage economies or high-skilled advanced economies. They note that growth in countries that once grew rapidly has begun to slow. Comparing divergent growth experiences, they found that East Asian countries performed better than five economies in Latin America—Argentina, Brazil, Chile, Colombia, and Mexico—that had grown reasonably rapidly from 1950 to the mid-1970s but then stagnated. According to their analysis, these latter economies are “squeezed between the low-wage poor-country competitors that dominate in mature industries and the rich-country innovators that dominate in industries undergoing rapid technological change.”9 An econometric review of the evidence identifies two ranges in the dispersion in the per capita income at which growth slowdowns occur.10 One, between US$10,000 and US$11,000, represents a decline of at least 2 percentage points a year. The other, between US$15,000 and US$16,000, represents a seven-year moving average. Growth slowdowns are deemed productivity slowdowns. An analysis of growth slowdowns between 1960 and 2005, for example, suggests that they are more likely to occur in middle-income countries than in low- or high-income countries.11 The Economist challenges the idea of the middle-income trap by plotting decadal growth rates against initial incomes among 160 countries (except oil exporters) between 1950 and 2010.12 It finds that per capita income growth in middle-income economies was higher than in other countries during the period. Larry Summers and Lant Pritchett propose that a regression to the mean explains why high growth rates often do not persist in the medium and long term.13 Another study notes that the data are not consistent with the idea that middle-income economies show either a high absolute probability or a higher relative probability of remaining stuck where they are than low- or high-income countries.14 The study argues that it is the combination of favorable demographics, macroeconomic stability, a sound global economic environment, and openness to foreign direct investment (FDI) that accounts for the key discriminatory variables affecting growth transitions among middle-income countries.

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However, there are some dissenting voices. A recent paper argues that a reinterpretation of global growth in the past 50 years through the lens of growth theory demonstrates that convergence has occurred more quickly and began earlier than widely believed and that there is no evidence of a middle-income trap, which the authors define in two ways according to whether growth and convergence appear easier at lower- rather than middle-­income levels.15 In fact, they argue that the last 20–30 years have been a golden age of convergence. Kharas and Gill identify some empirical patterns.16 Many countries do not graduate no matter how one parses the data, although it does depend on the income thresholds used. Few economies graduate from middle-­ income to upper-middle-income status. Korea is one of the few. In 2008, the Growth Commission published a review of the ingredients that, if used in the appropriate country-specific recipe, can deliver growth.17 It found that, since 1950, only 13 economies have grown at an average rate of 7 percent a year or more for 25 years or longer. These are Equatorial Guinea; Greece; Hong Kong SAR, China; Ireland; Israel; Japan; Mauritius; Portugal; Puerto Rico; Korea; Singapore; Spain; and Taiwan, China. Most economies became stuck in the middle-income category for years. What does all this mean? It means that the growth strategies in many emerging markets aimed at recovering lost luster are unclear. There is a search among policymakers and researchers alike for the miracle growth elixir that will transport emerging markets to the land of milk and honey.

2.3   What Is the Growth Story? Emerging markets are not homogeneous. They have different geographies, demographics, histories, and economies. China and India are massive, with populations of well more than one billion. The rest are large, each with populations of more than 100 million. India alone has 29 states and hundreds of living languages. Indonesia, Mexico, Russia, and Saudi Arabia are oil exporters. Brazil is an energy giant. Argentina is well endowed with shale gas. China, India, South Africa, and Türkiye are oil importers. The political systems of China and Russia are characterized by strong state dominance. The rest have a relatively larger mix of public and private sectors. Political economy is complex in all of these economies, and the degrees of state legitimacy and authority vary. Between 2000 and 2018, the emerging and developing economies outpaced the advanced economies in growth performance and boosted their share in global GDP (Fig. 2.2). This was a reversal of the situation in the

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10 8 6 4 2 0 -2 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 -4 -6 Advanced economies

Emerging market and developing economies

EM 10

Fig. 2.2  Growth in advanced economies and emerging economies, 1980–2022 (%). (Source: Real GDP Growth (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/external/datamapper/NGDP_RPCH@ WEO/OEMDC/ADVEC/WEOWORLD)

1990s, when the difference between the growth rates of the rich economies and the rest of world was not so big. Between 2000 and 2018 emerging markets experienced boom years. The success was generated by a combination of favorable reforms and positive external macroeconomic conditions. Countries liberalized trade and offered incentives to both foreign and domestic investors. Central banks learned how to improve the management of inflation. Everyone loved the commodity supercycle as the prices of oil, gold, copper, soybeans, and other goods and products boomed. The ascent of China had a ripple effect on the world economy, especially through aid and trade links, including in sub-Saharan Africa.18 The rise of China created upward pressure on world commodity prices. Emerging markets became the new promised land for investors. A constellation of factors coincided to the benefit of these markets. The second decade of the 2000s was worse than the first. Although volatility was still substantial, the mean declined. A high of 7 percent growth at the beginning of the decade reached a much lower growth rate, below 5 percent, by the end of the decade. The taper tantrum in the United States meant that a stronger dollar led to a decline in the risk appetite among US investors for emerging market stocks and bonds.19 When America sneezes, the rest of the world gets the flu; when the dollar becomes strong, emerging markets suffer. In the last few years, there has been a reconvergence in growth rates between the advanced economies and the emerging markets, partly because of COVID-19 and the Ukraine crisis and partly because of domestic policy challenges in the emerging economies. Growth in the latter has

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suffered. The boom years led to a slump. The pandemic decimated the informal sectors in India and Mexico, bruised Chinese exports and manufacturing, worsened Argentina’s macroeconomic imbalances, and rendered Türkiye even more susceptible to money inflows and outflows. In recent years, some bubbles have been burst in the emerging markets, which are no longer enjoying the high returns they enjoyed in the past (Fig. 2.3). Recession and stagnation have become features in some emerging markets, from Argentina and Türkiye to Mexico and South Africa. Nonetheless, the emerging markets continue to account for more than 70 percent of global growth. Growth in several emerging markets, especially

a

15 10 5

-5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

0

-10 -15 Brazil

Russia

China

India

South Africa

b 16 11 6

-4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

1

-9 -14 Argenna

Indonesia

Mexico

Saudi Arabia

Turkey

Fig. 2.3  Emerging markets: Real GDP growth (%). (a) Brazil and others. (b) Argentina and others. (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf. o r g / e n / P u b l i c a t i o n s / S P R O L L S / w o r l d -­e c o n o m i c -­o u t l o o k -­ databases#sort=%40imfdate%20descending)

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China and India, is rebounding. Many of the leading emerging markets had entered the pandemic with strong banking systems and greater fiscal discipline and were more cautious on the  stimulus than the advanced economies. 

Notes 1. Zafar (2023). 2. IMF Data: Access to Macroeconomic and Financial Data (portal), International Monetary Fund, Washington, DC, https://data.imf.org/. 3. HDI (Human Development Index) (dashboard), United Nations Development Programme, New  York, https://hdr.undp.org/data-­ center/human-­development-­index#/indicies/HDI. 4. See, for example. Credit to the Non-financial Sector (dashboard), Bank for International Settlements, Basel, Switzerland, https://www.bis.org/statistics/totcredit.htm?m=2669. 5. Schwab (2019). 6. LPI (Logistics Performance Index) (dashboard), World Bank, Washington, DC, https://lpi.worldbank.org/. 7. BEE (Business Enabling Environment): Doing Business Legacy (dashboard), World Bank, Washington, DC, https://www.worldbank.org/en/ programs/business-­enabling-­environment/doing-­business-­legacy. 8. See Gill and Kharas (2007). There is also a follow-up paper, Gill and Kharas (2015). 9. Gill and Kharas (2007, 5). 10. Eichengreen et al. (2014). 11. Aiyar et al. (2013). 12. Economist (2013). 13. Pritchett and Summers (2013). 14. Han and Wei (2015). 15. Sinha Roy et al. (2016). 16. Gill and Kharas (2007, 2015). 17. Commission on Growth and Development (2008). 18. Zafar (2007). 19. If investors sell bonds in reaction to news that the central bank has curtailed or stopped bond purchases, bond prices may tumble, thereby raising the yield. Such a jump in bond yields after the central bank announcement is known as a taper tantrum.

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References Aiyar, Shekhar S., Romain A. Duval, Damien Puy, Yiqun Wu, and Longmei Zhang. 2013. Growth Slowdowns and the Middle-Income Trap. IMF Working Paper WP/13/71. Washington, DC: March, International Monetary Fund. Commission on Growth and Development. 2008. The Growth Report: Strategies for Sustained Growth and Inclusive Development. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/6507. Economist. 2013. Middle-Income Claptrap: Do Countries Get ‘Trapped’ Between Poverty and Prosperity? Finance and Economics: Free Exchange (blog), February 16. https://www.economist.com/finance-­and-­economics/2013/02/16/ middle-­income-­claptrap. Eichengreen, Barry Julian, Donghyung Park, and Kwanho Shin. 2014. Growth Slowdowns Redux. Japan and the World Economy 32 (November): 65–84. Gill, Indermit Singh, and Homi Kharas. 2007. An East Asian Renaissance: Ideas for Economic Growth. With Deepak Bhattasali, Milan Brahmbhatt, Gaurav Datt, Mona Haddad, Edward Mountfield, Radu Tatucu, and Ekaterina Vostroknutova. Washington, DC: World Bank. ———. 2015. The Middle-Income Trap Turns Ten. Policy Research Working Paper 7403. Washington, DC: World Bank. Han, Xuehui, and Shang-Jin Wei. 2015. Re-Examining the Middle-Income Trap Hypothesis: What to Reject and What to Revive? ADB Economics Working Paper 436, July. Manila: Asian Development Bank. Pritchett, Lant H., and Lawrence H. Summers. 2013. Asiaphoria Meets Regression to the Mean. NBER Working Paper 20573, October. Cambridge, MA: National Bureau of Economic Research. Schwab, Klaus, ed. 2019. Insight Report: The Global Competitiveness Report 2019. Geneva: World Economic Forum. http://www3.weforum.org/docs/WEF_ TheGlobalCompetitivenessReport2019.pdf. Sinha Roy, Sutirtha, Martin Kessler, and Arvind Subramanian. 2016. Glimpsing the End of Economic History? Unconditional Convergence and the Missing Middle Income Trap. CGD Working Paper 438, October. Washington, DC: Center for Global Development. Zafar, Ali. 2007. The Growing Relationship between China and Sub-Saharan Africa: Macroeconomic, Trade, Investment, and Aid Links. World Bank Research Observer 22 (1): 103–130. ———. 2023. GEMINI: A New Analytical Framework for Understanding Economic Development. Working Paper, April 9. Falls Church, VA: GEMECON. https://ali-­zafar.com/research-­papers.

CHAPTER 3

Emerging Markets: Anatomy, Characteristics, and History

Abstract  China has had a meteoric rise in the last three decades to become the second largest economy in the world, but the growth model is being rethought. India has emerged as a large services sector economy after years of low growth. The Latin American trifecta of Brazil, Argentina, and Mexico built industrial capability in the earlier part of the century, but they are now adversely impacted by institutional and microeconomic challenges. Russia and Saudi Arabia continue to be impacted by the vagaries of the oil market and geopolitics linked to Ukraine and other crises. Türkiye has changed but has faced setbacks. Indonesia has stabilized and is growing. South Africa faces a difficult post-apartheid transition. Keywords  China • India • Indonesia • Turkey • Russia • Brazil • Mexico • South Africa • Saudi Arabia • Argentina • macroeconomic policy growth • Poverty • Industry • Agriculture • Women • Credit • Money • Safety nets • Private sector • Conglomerates • Inequality

3.1   The Dramatic Rise of China China first became a successful emerging market in the 1980s. In the 1970s, few predicted the rise of China. On October 1, 1949, few imagined that the People’s Republic of China, inward-looking and communist, would one day become an economic superpower. The Chinese © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0_3

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development model, not well understood by most analysts and policymakers outside China, has consisted of a combination of an authoritarian communist political system and market incentives. It might be called state capitalism, capitalism in overdrive, or capitalism written in Chinese characters. The central government is a strong one, but the local and provincial governments competing for resources and foreign investment are also powerful. The Chinese state plays a key role in certain strategic sectors—finance, energy, defense, telecommunication, and infrastructure. These are the commanding heights. The state manages the associated enterprises by imposing a mix of commercial, social, and political goals. It is present and powerful in sectors such as oil and gas, coal, and banking. The magnitudes are huge even though the state firms appear less profitable than their international competitors, although there is heterogeneity among government enterprises. The State-Owned Assets Supervision and Administration Commission of the State Council, the special agency that oversees 97 leading enterprises, has combined assets of US$30 trillion. In the 2022 Fortune Global 500 list, 136 of the world’s top 500 companies are based in China, including more than 90 state-owned enterprises (SOEs).1 The United States is second with 124, and Japan is third with 47. It is the battle at the top between the world’s established power and the world’s emerging power. Here are the top 10 companies: Walmart (United States), Amazon (United States), State Grid (China), China National Petroleum (China), Sinopec Group (China), Saudi Aramco (Saudi Arabia), Apple (United States), Volkswagen (Germany), China State Construction Engineering (China), and CVS Health (United States). But then, in China, there is a dynamic and entrepreneurial private sector, which dominates the manufacturing world and the technology space. The Ant Alipay Group owns the world’s largest mobile payment platform, Alipay, serving more than 80 million merchants across China. Fintech is mushrooming within a dramatically rapid private and innovative ecosystem. And it is all privately run. Alipay and WeChat Pay each have around one billion active users who organize their daily lives around payment ecosystems, from making doctor appointments to purchasing air tickets and from paying electricity bills to investing in financial products. Many of the online banks in China each extend at least 10 million loans annually to individuals and small and medium enterprises (SMEs). There are now world-renowned enterprises such as Tencent, a large multimedia company.

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Chinese manufacturing continues to boom. Despite reports of decoupling from China, it is dominated by the Chinese private sector, which controls many of the world’s supply chains. It accounted for exports of more than a staggering US$3 trillion in 2021, much of which was private sector manufacturing. The top global exports include electrical machinery, computers, furniture, plastics, garments, and vehicles. Visits to 10 major manufacturing cities—Beijing, Shanghai, Chengdu, Guangdong, Shenzen, Nanchang, Hangzhou, Wenzhou, Qiaotou, and Ganzhou—would show that most of the manufacturing involves private enterprise, which has flourished in the aftermath of the liberalization under Deng Xiaoping. For example, the city of Qiaotou makes more than 50 percent of the world’s buttons, mostly in small operations. Foreign firms, joint ventures, state companies, and private firms are also part of the landscape, though state firms enjoy preferential access to capital and markets. A series of magic numbers explains the Chinese economy. The numbers 60, 70, 80, and 90 highlight the role of the private sector, which contributes 60 percent of China’s GDP, 70 percent of innovation, 80 percent of urban employment, and 90 percent of new jobs. A recent report published by the Peterson Institute for International Economics finds that, of China’s top 100 companies by market capitalization at the end of 2021, 49 were privately owned, down from 53 the previous year.2 Some of the decline derived from Beijing’s crackdown on the technology, education, and real estate sectors, which cut away the colossal sum of US$1.5 trillion from Chinese stocks. The private sector accounted for 54 percent of the total market value of the 100 largest listed Chinese companies in 2020, up from 10 percent in 2010. This is not chump change. It is an indication of the importance of the private sector, which coexists with a strong state sector. China is a complex economy. It does not fit into conventional typologies because it consists of many layers that mix a lot of elements that seem incompatible: SOEs, special economic zones, dynamic entrepreneurialism, diaspora finance, special-purpose vehicles, communism, asset management companies, trust companies, shadow banking, informal finance, technology-­ driven manufacturing, sophisticated supply networks, low-­ wage labor, and good machines. The list goes on and on. Books have been written on each of these areas, illustrating the complex Chinese model. Martin Raiser argues that China conforms to multiple economic models at once and that growth is being driven by investment rates and capital accumulation, human capital, the reallocation of labor from

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low-productivity to high-productivity sectors, innovation, and increases in TFP.3 Some have argued that China’s authoritarian model supports growth because it allows policymakers to make quick decisions without going through the complexities of the democratic process. For the last several decades, many pundits have been predicting the demise of China, but the economy has remained resilient. In 2001, Gordon Chang, a lawyer, wrote that the poor financial condition of the four Chinese state banks would lead to a meltdown and Chinese collapse.4 Similarly, the theorist Francis Fukuyama has argued that China would not be able to sustain the pressures exerted by the middle class.5 China has emerged as a serious geopolitical rival to the United States and is facing external challenges and domestic problems, and the debate continues as the geopolitics has intensified in the wake of the pandemic. 3.1.1   COVID Hits China The Chinese model has encountered a significant test because of the pandemic. Like any government, the Chinese government has struggled to find appropriate measures to control the pandemic and minimize its economic impact. Though the economy was doing relatively well until the pandemic, China has been subjected to a series of shocks since 2020 that have led to the sharpest economic slowdown in the country in the last four decades. Real GDP growth in China fell from 6.0 percent in 2019 to 2.2 percent in 2020 and then rose to 8.1 percent in 2021, before dropping to 2.7 percent in 2022.6 After more than three decades of average annual growth close to 10 percent, China’s economy had been transitioning to a new normal of slower, more well-balanced growth until the sharp and volatile economic downturn associated with COVID-19. The pandemic damaged exports and supply chains, and consumption narrowed significantly. But China’s was the only major economy that grew in 2020. To manage the pandemic, the country went through a rigid zero-­ COVID policy for close to three years. In practical terms, this meant total lockdowns, mass testing, and border restrictions. The severity of the controversial measures led to public protests across China. In December 2022, the government did a sharp U-turn, scrapping the restrictions and opening the country. Some epidemiologists have concluded that death rates have been high since then because of the country’s substantial urban population density and elderly unvaccinated population. Finding accurate

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data has been difficult, however, and the World Health Organization has raised concerns. At this stage, the epidemiological models are every which way. There is hope that the Chinese economy will rebound in 2023 and introduce some oxygen into the global economy by restoring supply chains and reducing shortages. This has prompted a global debate on the Chinese political and economic model and of the future role of China in global supply chains. Will China continue to dominate global manufacturing? Will there be reshoring away from China? Did China lose its way? The jury is still out on the longer-term consequences. The Chinese future is now much more uncertain than one might have thought in the halcyon pre-pandemic days. 3.1.2   Chinese Economic History 101 In the early 1800s, China was the largest economy in the world. A strong state and a meritocratic civil service were recognized features of its history. By the mid-1800s, China was faced by the Opium Wars with Britain, and the Qing dynasty, which had ruled since the capture of Beijing in 1644, was beginning to experience serious decline. The 1900s was a tumultuous century. The Qing dynasty ended in early 1912, and Sun Yat-sen became the first provisional president of the Republic of China that year. After a protracted civil war with Chiang Kai-Shek, Mao acceded to power in 1949. There followed the Great Leap Forward, the Cultural Revolution, and much more. Modernization and social repression went hand in hand. Deng Xiaoping rose to power in 1978 and ruled until 1992. He set in motion a powerful economic reform that marked a clear departure from Mao’s planning perspective and that succeeded in unleashing the private sector. Eager for China to develop economically and catch up with the West technologically, his reform program had a dramatic impact. Agriculture was decollectivized, and farmers in several provinces were allowed to sell surplus production to the market, rather than the commune. Then, private commerce was progressively encouraged and liberalized. Township and village enterprises became the most vibrant elements in the economy during this period. Trade which had been quite controlled was opened. In 1979, Deng inaugurated four special economic zones: three (Shenzhen, in the Pearl River Delta region, and Zhuhai and Shantou) were in Guangdong Province and one (Xiamen) was in Fujian Province.

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These zones were located in the southeastern coastal areas and were laboratories for attracting foreign investment—especially diaspora capital from Hong Kong SAR, China and Taiwan, China—and linking China to the world economy. In the 1980s, the government continued to gamble on special economic zones, and it was soon evident that the gamble was paying off significantly. More zones were established in the 1990s. In 2001, after many years of negotiation, China joined the World Trade Organization (WTO). At the time, no one envisaged that the terms of accession would still be contentious two decades later. The government undertook some tariff liberalization, reduction in barriers, and multiple other reforms in return for access to global markets and low tariffs on its products. China became the center of labor-intensive manufacturing. During this time, the state-owned sector was reformed by privatizing hundreds of SOEs. By 2009, in the wake of the global financial crisis of 2007–09, China began an ambitious program of rebalancing by shifting from export-led development to greater consumption and the expansion of domestic demand. What has been the result of these trends? GDP growth was high, at more than 7 percent a year, for more than three decades, but has started to slow in the wake of the pandemic. GDP per capita jumped from US$195  in 1980 to US$10,500  in 2020. In purchasing-power-parity terms, the Chinese economy has already been the world’s largest since 2014 and is projected to overtake the United States, probably by 2030–35, in real terms. From its beginnings as an insignificant exporter, China has taken advantage of its explosive mixture of low wages and evolving technological sophistication to become the manufacturing warehouse of the world. It currently accounts for close to 30 percent of global manufacturing output. With a population of more than 1.4 billion, the country has urbanized rapidly. Close to 60 percent of the population are urban residents, and there are now more than 100 cities with at least one million people. The size of the middle class is expanding quickly, reaching 400 million in 2022. Many of these people travel, consume, and participate in the global economy. In a span of less than 30 years, the equivalent of the population of the United States has been lifted out of poverty in China. Between 1980 and 2020, more than 50 percent of global poverty reduction occurred in China. Positive trends between 1950 and 1982 in life expectancy, which rose from 44 to 67 years, and in infant mortality, which declined from

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approximately 140 to about 35 per 1000 live births, have been maintained to the present.7 China has become an FDI and global trade powerhouse. Companies such as Apple, Starbucks, and Volkswagen have entered the Chinese market. One study finds that, by the end of the 1990s, the total stock of FDI in China accounted for almost a third of the cumulative FDI in all developing countries.8 Chinese firms have also become major investors abroad, and China has raised significant capital on international bond and equity markets. China’s leading exports were once limited to crude oil, refined petroleum products, and apparel, but, by the early 2000s, the country had become a major producer and exporter of electronics and IT products, such as consumer electronics, office equipment, computers, and communication equipment.9 No country has transitioned from major importer to major exporter with the speed of China. “Made in China” became ubiquitous in the early years of the twenty-first century. In 2019, Apple produced more than 200 million iPhones, all assembled in China. In 2020, China exported garments for a value close to US$170 billion. 3.1.3   Unique China Unique among its competitors, China is led by a Communist Party with significant power over the economy. Yet, significant economic power is clearly available to local governments. Many decisions and processes remain hidden from the public and from outside observers. Some of the most important investors in the Chinese boom are found among the Chinese diaspora, including the special diaspora in Hong Kong SAR, China and Taiwan, China, that has links with ancestral lands in the south of China. Guanxi, the Chinese word for interlocking business relationships or networks, seems to be unique even among global diasporas. The investment-led export model unique to China combines low wages, good technology, and supportive infrastructure. More than 50 percent of the country’s GDP is represented by investments in roads, airports, power plants, and other infrastructure. The government has followed a gradual reform path. This is in stark contrast to the economies of Eastern Europe and the former Soviet Union, which, in the 1990s, favored a radical, big-bang approach that involved dismantling the planned economic structures of the communist era. To keep the country’s exports competitive, the authorities in China had maintained an undervalued exchange

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rate for many years. No one has been able to replicate Chinese supply chains or the ability of the Chinese to move goods smoothly across borders. In parallel, private companies are mushrooming in China. The private sector has grown not only in absolute terms but also relative to the country’s largest companies, as measured by revenue or (for listed companies) by market value, from a low level in 2010 to a significant share today. SOEs still dominate among the largest companies by revenue, but their preeminence by some metrics is being eroded.10 Not all is rosy. The pandemic and the abrupt COVID policy reversals have become tied to a sharp slowdown in growth, and new questions are being raised about the efficacy of the Chinese model. The coal pollution released by the manufacturing sector has made China the largest emitter in the world. Economic inequality has also increased. The Gini index rose from below 30 to almost 50 during the first 30 years of reform. The country is aging more quickly than it is growing rich. The financial system does not provide depositors with interest at a market rate, but at a much lower rate, penalizing savers. Average household consumption is low. The stable environment necessary for a vibrant private sector is being shaken by the crackdown on private enterprises, especially Alibaba and Tencent, because of the government’s concern that they are becoming too powerful. Billionaire Jack Ma’s conflict with Chinese regulators is the subject of much discussion. 3.1.4   Macroeconomic Management Macroeconomic management has been relatively successful in China since the launch of the reforms. The methods have been sound: a focus on rapid growth, which averaged more than 7 percent until recently; the accumulation of more than US$3 trillion in reserves to cushion the economy from shocks; export-led development, accompanied by substantial current surpluses; prudent fiscal management and significant fiscal decentralization; a monetary policy run by an independent central bank that has prevented inflation from reaching double digits; and low levels of external borrowing. The fact that the central government raises about 50 percent of government revenue but accounts for only 20 percent of expenditure means that fiscal risk is being transferred to the provinces, creating the potential for macroeconomic instability. Rapid growth has been combined with moderate price stability.

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In an analysis of China’s macroeconomic performance during the 1980s and 1990s, one study identifies four factors responsible for the pace of economic expansion and the periodic fluctuations: administrative decentralization, high levels of fixed capital investment, the elastic supply and the quality of the labor force, and the increasing volume of savings that has been supplemented by a large inflow of FDI in recent years.11 The authorities have been moderately successful in containing inflation. Inflation was low early on following the post-1978 reforms but had accelerated by the mid-to-late 1980s. It had fallen by the 2000s. One study finds that, by 2013, the People’s Bank of China, the country’s central bank, had missed its inflation target by an average of 1.8 percentage points.12 The target inflation rate has been at around 3 percent since 2015. 3.1.5   The Rise of Chinese Manufacturing More than a decade ago, the Office of the Chief Economist of the World Bank established a team to investigate the story behind the Chinese manufacturing miracle. Visiting factory floors across China and talking to local government officials and private entrepreneurs provided the team with a rich perspective that was not to be gleaned from the traditional analysis of the Washington Consensus.13 The story was complex and full of nuances. The team sought to understand the genesis of China’s export model and industrial policy. The focus was on light manufacturing, which, in this case, meant garments and apparel, leather and footwear, light industrial goods, and agribusiness. The team tours and interviews highlighted the contribution of underappreciated policy tools, such as industrial parks, industrial clusters, and trading companies, and emphasized cooperation between the public and private sectors in promoting the remarkable expansion of light manufacturing in China. The relevant development had begun with the emergence of small private businesses that were able to grow despite the overall economic conditions, which were far from ideal. Once new clusters started to emerge, the government responded by supporting market-tested winners: an approach that is different from seeking to identify winners from the outset.14 In its analytical model, the team examined six factors that team members thought might explain the success of Chinese manufacturing: entrepreneurial skills, worker skills, access to inputs, access to land, access to finance, and customs and trade logistics. This was the basis of the Chinese supply chain, a model that is difficult to replicate.

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The team discovered a narrative about human capital. The tale of the migration of millions, especially women, from western China to the coast was the genesis of the success in manufacturing. The government undertook the reforms when literacy and life expectancy had been improving for decades. By 1982, two Chinese in three were literate and average life expectancy had reached more than 65 years. Capital accumulation accounted for 3.2 percentage points of the 7.3 percent growth in output per worker in 1979–2004, while TFP accounted for 3.6 percentage points. Indeed, since the early 1990s, capital accumulation has accounted for 4.2 percentage points of the average 8.5 percent growth in China and outweighs the contribution of TFP (3.9 percentage points).15 China is regionally heterogeneous, although it is ethnically homogeneous. The Han Chinese is the dominant ethnic group in China and the largest ethnic group in the world. China is centralized politically, but economically decentralized. Heavy industry is centered in the north. Shanxi Province in the North China region is the heartland of the coal industry. The outward-looking coastal cities in the southeast have benefited from enormous amounts of FDI. The central coastal cities are the birthplace of Chinese private entrepreneurial activity and home to many of China’s vibrant SMEs. In the vast areas to the west, cities such as Chengdu, the capital of Sichuan Province in the southwest, have managed to achieve economic vibrancy. The Hu line is not well known, and it is not visible on most maps. It is a diagonal line more than 2000 miles long made by Hu Huanyong, a Chinese demographer, to show a feature of the distribution of the country’s population. West of the line, the western part of China accounts for less than 6 percent of the country’s population but more than 55 percent of the territory, while east of the line, the eastern part of China accounts for the remaining 94 percent of the population and less than 45 percent of the territory. The Hu line demonstrates clearly that the distribution of the population of China is imbalanced, with a strong tilt toward the coast. This has implications for development, growth, and poverty. In the early years, the diasporas in Hong Kong SAR, China, and Taiwan, China, were the main investors in the plug-and-play industrial parks that began popping up in coastal areas. The parks are built according to a model whereby areas are set aside and furnished with infrastructure. Incentives, including an attractive fiscal regime, are provided to encourage manufacturing enterprises to become established in the parks. Workers,

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many of whom are women, are offered free room and board. Cheap land meets cheap labor. The approach has been more effective than many expected. Firms of all sizes moved into the parks. They obtain good-quality infrastructure, factory space, business services, utilities, support for customs and administrative formalities, and guidance from park officials. Because of the facilities, businesses may start producing quickly and more cheaply, and they can readily expand and take advantage of scale economies. Many enterprises quickly grew from small to medium, and some grew from medium to large. Gradually, the wages went up. The workers, who were typically paid US$100 a month in the mid-2000s, were earning four times that a decade later. 3.1.6   Local Government and Debt A poorly understood factor about China is the role of local governments, which are usually financially more powerful in China than in most other parts of the world. By institutional arrangement and design, they have significant freedom in economic management. Although Beijing exercises political control over the regions, the situation is different in the case of the local economy. In 1994, in a complex fiscal and tax reform, the Chinese authorities created a rule-based system for revenue sharing between the central government and provincial governments. Before the reform, the government in Beijing would hold complex discussions with local governments over tax revenue. That system had led to underfunding of basic services financed by central government revenues. The aim of the reform was to ensure that central taxes went to the national government, while local taxes were to be used to finance local budgets, and shared tax receipts would be shared according to a formula. In practice, the longer-term impact of the reform was to force local governments to seek other sources of financing for growth and development. Local governments in China make money from four sources: land sales, corporate income tax, fiscal transfers from the central government, and local government financing vehicles. Land sales are a major source of revenue for local governments and cover key parts of their spending. Since local governments in China do not receive revenue from property taxes, they control the land supply for public finance and operate a two-tier system: subsidized land for industry and significantly more expensive land for

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property developers. The local government’s financing of vehicles represents an innovation. They involve the creation of funding mechanisms by these government entities, whereby investment companies sell bonds in the local market to finance real estate development. A main advantage is that they provide local governments with cash. However, they also contribute to rising local government debt. This debt reached 50 percent of GDP in 2021, higher than official central government debt. Much of the local debt is hidden. According to an assessment by Goldman Sachs, which conducted an analysis of more than 2000 financial statements on interest-bearing debt, including bonds and bank loans, the liabilities of local government financing vehicles are concentrated mainly in construction, transportation, and industrial conglomerates.16 These three sectors account for close to 40 percent of the total financing of vehicle debt. The provincial government of Jiangsu tops the list, followed by the governments of Tianjin, Beijing, Sichuan, Guizhou, and Gansu as the most leveraged provinces by share of local economic output. Some commentators, such as Michael Pettis, argue that China’s excessive reliance on surging debt in recent years has made the country’s growth model unsustainable.17 Meanwhile, on the other side of the debate, David Li, a former member of the Monetary Policy Committee of the People’s Bank of China, finds that it is manageable and is a consequence of a growth-oriented development strategy.18 The state-owned commercial banks, which dominated the financial system, lent mostly to enterprises, and there was a parallel financial system of informal lending and shadow banking for private firms. This shadow banking includes loans and leases by trust companies and has had less regulatory oversight. It has grown steadily since the 2008 crisis and now accounts for a large portion of credit to the economy. Enter Evergrande. The real estate giant is a microcosm of the challenges of the Chinese model. Founded in southern China in 1996, the heyday of the boom years, it became one of the largest property developers in China. Over the years, it became powerful and, at some stage, was valued at US$40 billion. As local governments leased land to Evergrande, it promised to build and grow. It capitalized on Chinese families interested in buying apartments. Real estate investment, which is about 13 percent of China’s GDP compared with 5 percent in most advanced countries, became a lucrative investment. Real estate investment had acquired an association with glamour. Real estate in China soon became publicly traded in foreign countries. But, as with all booms, there was a bust.

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Because the company was funded by substantial borrowing, it became the world’s most heavily indebted property company, owing US$300 billion by the summer of 2022. It overpromised, and investors were left without returns. The company defaulted on more than US$1 billion in debt, with potentially more to come. Eventually, the situation became unsustainable, and the company headed toward collapse. In a parallel with the US mortgage crisis, Evergrande typified the rags to riches story of property developers aligned with local governments. A Financial Times article in 2021, aptly titled “Evergrande and the End of China’s ‘Build, Build, Build’ Model,” puts the matter upfront: The crisis at the company, which, as recently as two years ago, ranked as the world’s most valuable property stock, highlights both the speed at which corporate fortunes can unravel and the deep flaws in China’s growth model. Evergrande, for all of the high drama of its meltdown, is merely the symptom of a much bigger problem. China’s vast real estate sector, which contributes 29 percent of the country’s gross domestic product, is so overbuilt that it threatens to relinquish its long-standing role as a prime driver of Chinese economic growth and, instead, become a drag on it.19

Some experts fear that Evergrande’s implosion may have a ripple effect, both across the Chinese real estate sector and the broader economy. Real estate represents 30 percent of China’s GDP. There is some overcapacity in housing, especially in smaller cities. The Federal Reserve has warned that Evergrande, which has been stressed by Chinese regulators, can derail the entire Chinese economy.20 The company faced increasing problems as Chinese regulators tightened its access to credit.  In August 2023, Evergrande, which had previously defaulted on more than US$300 billion of debt, filed for bankruptcy protection in the United States. Given the size of China’s economy and financial system as well as China’s extensive trade links with the rest of the world, financial stresses in China could strain global financial markets through a deterioration in risk sentiment, thereby posing risks to global economic growth and affecting the United States. 3.1.7   China’s Disputes with the United States China has become embroiled in disputes with the United States over trade protectionism, state subsidies, and the theft of intellectual property. Washington has accused Beijing of discrimination against foreign firms, especially in regulation and market access. The debate is also an element in

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the contest over the hegemony over the world economic system. Some of the fights has been about trade. US policymakers believe China is violating the international trade rules with which China agreed when it joined the WTO.  Moreover, China is partly associated with job losses in the United States. A widely quoted paper analyzing how labor markets adjust to shocks posits that China’s emergence in the aftermath of the WTO accession had a significant effect on US job growth and wages.21 It notes that employment has fallen in US industries that are more highly exposed to import competition. The authors describe an “epochal shift in patterns of world trade” linked to China’s ascent and find that China’s entry into the global trading system led to a decline of 1 million US manufacturing jobs and 2.4 million lost jobs.22 Would the jobs have migrated to other countries, such as Mexico and Vietnam, if China had not been there? Could US industrial policy have helped prevent some of the job losses? In any case, it is difficult to assign such causality because automation was leading to some of the same effects at the time. Another major issue is intellectual property. Forced technology transfers, by which foreign companies that want to operate in China are required to form joint ventures with local companies and share private technology, have long been an area of concern. A conflict over the future of semiconductors is the new reality. Western governments, particularly the United States, have been accusing the Chinese government of stealing intellectual property through economic espionage. According to the Commission for the Theft of Intellectual Property, the theft of intellectual property is pervasive and the annual cost to the US economy is estimated at between US$225 billion and US$600 billion in counterfeit goods, pirated software, the theft of trade secrets, and other problems.23 Recently, the United States adopted export controls because almost all the chips used in China are designed by US semiconductor companies. In the midst of this, China is trying to reduce its dependence on US semiconductors and develop its own industrial capability. The battle over semiconductors will be a defining feature of the China–United States trade conflict in the years to come. The Chinese government’s dual circulation strategy— which is focused on insulating the Chinese market in resources and technology from the rest of the world, though the country would still have to rely on exports—is about innovation and vertically integrated production. And it is about capitalizing on China’s huge domestic market.

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3.1.8   What Does the Future Hold for China? The future is unclear. China’s old drivers of growth—a growing labor force, the migration from rural areas to cities, high levels of investment, and expanding exports—are losing power. The country’s policymakers are aware that they need new drivers of growth and are trying to accelerate innovation. President Xi, who took over for a third term as leader in 2022, has established the contours of a new economic model. The combined shocks of a real estate crisis, supply chain management in a COVID and post-COVID world, economic conflict and decoupling with the West, an aging population, and a two-tier hukou system in cities will all demand policy responses if China’s growth miracle is to continue.24 The quest is for a sustainable and strong growth rate at 4 or 5 percent. The first element of Xi’s plan is a reassertion of state control over the economy, with a consolidation of power among state enterprises and a leading role for the state in promoting technology upgrading and chip development. The second element involves a crackdown on private industry, especially the tech and real estate sectors. The 10 biggest tech firms may have lost close to US$2 trillion in market capitalization over a recent 12-month period. The power of Jack Ma and other tech entrepreneurs has been curtailed. In 2021, the Chinese government initiated regulatory changes for the tech giant Ant Group and ordered it to break off its loan businesses and restructure the company. In parallel, there has been a crackdown on real estate speculation and reckless spending and a curb on the power of property developers. Because more than 70 percent of household wealth is tied to housing, the decline in property values in major cities is a concern. The third element is the policy of common prosperity or prosperity sharing to tackle inequality. Some measures have been adopted to redistribute income. There are complexities and nuances. The future of the Chinese political system is uncertain. David Dollar has argued that state intervention in property rights in an ad hoc way may undermine incentives to innovate and that no authoritarian country has ever reached above about 50 percent of US per capita GDP in real terms without political liberalization, freedom of speech, and the strengthening of property rights.25 China can boost household incomes and consumption. It should be rectifying imbalances and remedying inequality. One view is that the consumption share of

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GDP can be raised by forcing e-banks to increase consumer lending, which the government did for many years, but is now trying to rein in. Another way might be to expand the household share of GDP either directly, for example, through higher wages, or indirectly, through currency appreciation, stronger social safety nets, or more state services.26 The surge in consumer spending once the COVID-related lockdowns ended has been promising. The reform of the hukou system, a household registration system whereby the population is divided into two classes, urban and rural, to determine eligibility for public services, will be important to create a uniform and fair system, reduce social inequalities, and be based on both political and fiscal considerations. It will be important for local government officials to take seriously the centrally directed hukou reforms. In the past, China’s reforms were about gradualism, experimentation, and decentralization. This allowed institutions to emerge that delivered high growth, which, by and large, benefited all, and there were strong incentives for local governments to deliver growth and competition across jurisdictions.27 However, this model does not seem to be fully working in the current context. Aging, pollution, and debt are important preoccupations. The country seems to have partly lost some of its economic luster, and the confidence of the private sector is not what it once was. There is evidence of low private sector demand for credit. Urban unemployment is increasing, especially for graduates. The increasing assertion of the state has raised concerns. But China’s combination of large market size, sophisticated infrastructure, certain corporatized state enterprises, resilient private sector, and large capital markets of more than US$20 trillion (with the Shanghai Stock Exchange having a capitalization of more than US$7 trillion at the end of 2022) means that China is a market others cannot afford to miss. The Government has pledged to support smaller firms. It is a country with close to 150 cities with more than a million people, and it dominates many global supply chains. China still has advantages, and the world is watching.

3.2   The Emergence of India With the second-largest population after China, a relatively young demographic, with two-thirds of the population in working age, and the fifth-­ largest economy in the world in 2020, India has grown since the 1990s. Sitting in New Delhi in the late 1980s, one would not have imagined that India would take off economically one day. It seemed destined for low

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growth and social division. But, defying the historical pattern, India has been on the rise. Growth is up, and poverty is down. Five companies in the Global Fortune 500 are in India, which is also home to more than 100 unicorns, that is, privately held start-up companies valued at over US$1 billion each. The country was massively affected by the pandemic, but it has now rebounded. It has become a recognized global player, and some pundits think India may replace China at the apex of the emerging market world during the twenty-first century. What has changed? There were many answers. A reformist government in the 1990s, a corporate private sector abounding in energy and talent, a demographic dividend, and a significant policy reform to dismantle a control regime. The country is vast, spread over 28 states and 8 union territories. The government has managed to maintain democratic rule despite substantial ethnic and religious diversity and lower income per capita relative to Western powers. It has invested heavily in tertiary education. The country is now receiving more than US$100 billion in FDI post-pandemic. India is not a typical economy by any stretch of the imagination. It remains one of the few countries that has transitioned from agriculture to services without achieving great success in manufacturing. It seems to have followed an idiosyncratic pattern of development, certainly compared with other rapidly growing Asian economies.28 The government has emphasized skill-intensive rather than labor-intensive manufacturing and focused on industries with a typically higher average scale. Some of these distinctive patterns stem from the policies adopted soon after India’s independence, and it appears unlikely that the country will revert to the pattern followed by other countries. It is also the least highly integrated with regional neighbors in South Asia and maintains significant economic protections. Historically, India has been wary of foreign investment and the benefits of global trade, and it has been cautious of financial liberalization. India has been described by pundits in various ways. Billionaire Ratan Tata considers India a great country with great potential. Ramachandra Guha, author of many books on India, feels that India is no longer a constitutional democracy but a populist one. V. S. Naipaul, the man of letters, said that, for him, India is a difficult country; it was not his home and could not be his home, despite repeated visits and his Indian ancestry. Shashi Tharoor finds in India a celebration of the commonality of major differences, while writer Arundhati Roy considers India an experiment that is failing.

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One of the more fascinating elements of the Indian economy has been the growth of the private sector since the 1990s. This has been accelerating in recent years as Indian policymakers try to woo successful sectors away from China. Accounting for more than 80 percent of the GDP growth during the last two decades and two-thirds of India’s total investment of 31 percent, the private sector has been a key player in the country’s transformation. More than 90 percent of India’s one million companies are private, and more than 90 percent of jobs are in the private sector. Private business groups and conglomerates dominate in automotives, consumer products, energy, IT, pharmaceuticals, and transport. Indian entrepreneurs, such as Mukesh Ambani and Ratan Tata, are recognized globally. The growth of Bangalore, the India IT sector, and world-class companies, such as Infosys and Wipro, leaders in digital services and IT business processing in India’s market, is projected to reach tens of billions of dollars by 2025. Bharti Airtel, a telecom giant, has become the second-­ largest mobile network operator in the world and is active in broad swathes of Africa and South Asia, where it provides 4G and 5G services. India also has prestigious institutes of technology, which continue to supply quality engineers to the domestic and global labor markets. Tata is the country’s largest business group, with a market capitalization of more than US$250 billion, employment of more than one million workers, products sold in more than 150 countries, and a presence in sectors ranging from automotives to aviation, steel, and telecommunication. The firm’s scale, reputation, and record make it one of the world’s most important companies, with more than 800 million customers across 10 business lines and capital returns at more than 20 percent. It has now undertaken a US$90 billion investment surge to create electronics factories, solar panels, and semiconductor fabs in India.29 South Asia has a different industrial texture relative to other emerging regions. Bangladesh’s pre-pandemic offers an example. It was a world of conglomerates that relied on a myriad of ways to establish a stake in the economy.30 Similar was the case of India. Emerging as family firms filling in the gaps left by the retreat of the state in the aftermath of liberalization and the reluctance of foreign companies to invest in India, conglomerates exercised a major role. They had a first-mover’s advantage, avoided single industry focus by diversifying into many sectors (that were frequently not related), benefited from cheap capital, and established a global network to build on knowledge and ideas. India’s conglomerates and private sector

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will continue to support economic recovery as the country progresses beyond the pandemic shocks. India also has a mixed human capital record, and performance also varies by region. Southern India, especially Kerala, is a better performer than Bihar and Uttar Pradesh. Because of policy reform and widespread economic growth, poverty has been declining, but there has been a great debate among poverty experts and statisticians on the magnitude of the decline.31 Indeed, the decrease over the last decade has not been as extensive as once thought. The poverty headcount ratio is estimated to have fallen by 12.3 percentage points between 2011 and 2019, from 22.5 percent to 10.2 percent, with greater reductions in rural areas compared with urban areas.32 In the 2020 World Bank human capital index, which benchmarks key components of education and health across countries, India is ranked 116 out of 174.33 Public health is a challenge, with gaps between health infrastructure and the disease burden, and government health clinics are low in quality. Nonetheless, the infant mortality rate fell from 57 per 1000 live births to less than 30 between 2005 and 2021. More than three-fourths of Indians are literate, though there are concerns about the quality of schooling. Three-fourths of Indians attend government schools, which have been generally poor in quality, leading to a rush by affluent parents to put their children in private schools. Teacher absenteeism is prevalent and difficult to manage.34 There are challenges in covering the gaps in social safety nets. Gender inequality remains a key problem; most adults see violence against women as a problem. India has had a caste system based on social stratification. Many lower castes remain stuck in unskilled, low-wage jobs. Despite continuing discrimination in the labor market, evidence from surveys of nationally representative samples indicates that there has been some convergence between the upper castes and the lower castes in educational and professional attainment in recent decades, partly because of affirmative action.35 3.2.1   From Partition to Modi India became independent on August 15, 1947, amid much fanfare. Clement Atlee, the postwar prime minister of the United Kingdom who wanted to dismantle the British Empire after World War II, presided over the 1947 Partition Plan between India and Pakistan. Atlee understood that the United Kingdom could no longer maintain the empire because of

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both fiscal pressures and the Indian demand for independence. Under Mahatma Gandhi, a celebrated lawyer and anticolonial nationalist, India craved freedom. Replacing the successful war Prime Minister Winston Churchill, who had wanted to maintain the empire, Atlee favored a retreat from India. He chose Lord Mountbatten as viceroy to handle the transition. Under the leadership of Nehru, the Indian Congress Party sought independence from Britain, while Muhammad Ali Jinnah, the architect of Pakistan and the two-nation theory, asked for independence for the Moslem majority areas of East and West Pakistan. An English barrister, Cyril Radcliffe, was asked to chair the two boundary commissions for the two provinces of Punjab and Bengal and demarcate the borders of the respective countries within a span of a few months. The plan was implemented, and the two nations became independent, with estimates of about 14.5 million crossing borders over the next few years—Moslems moving to Pakistan from India, and Hindus and Sikhs moving to India from Pakistan (both West and East). Many millions died in a fervor of ethnic hostility among Hindus, Moslems, and Sikhs. At independence, India had a functioning administration but a weak economy. As the first prime minister of India, Nehru had a vision for an independent and self-reliant country and set out to build the modern Indian state. Into this world entered Prasanta Chandra Mahalanobis, a name not well known outside India but a key figure in Indian postwar planning. A statistician by training—he had pioneered sampling techniques—and a policymaker in practice, he was central in helping postwar India develop the country’s five-year plans, especially the Second Plan (1956–61). Mahalanobis articulated an economic model that emphasized the development of a capital goods sector. Rather than focusing on agriculture or small-scale cottage industries, the idea was to orient the economy toward heavy industry. From the late 1960s to the early 1980s, India pursued the same strategy under the leadership of Nehru’s daughter, Indira Gandhi. Fiscal problems grew worse, including a war with Pakistan in 1965. Droughts and food crises affected the country. The central government nationalized the banking sector in 1969 and continued complex licensing regimes.36 In 1972, a government attempt to take over the wholesale trade in wheat and rice (paddy) failed. From the 1950s to the 1980s, India exhibited low and volatile growth, averaging 3 percent, as the controlled economy failed to deliver. A review of macroeconomic developments between 1964 and 1991 noted that, compared with the other 18 countries under study, India had avoided

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a debt crisis and a recession during the 1980s because of sensile macroeconomic management in the wake of the oil shocks of 1973–74 associated with the policies of the Organization of the Petroleum Exporting Countries (OPEC).37 Although it was dependent on oil imports, India adjusted to the shocks by not borrowing commercially, keeping inflation low, and building up reserves of food and foreign exchange. However, this changed during the 1980s, when the country began experiencing unsustainable fiscal deficits, which led to the 1991 balance of payments and debt crisis. 3.2.2   The 1991 Crisis A major balance of payments crisis occurred in India in 1991. The causes were both immediate and long term. The immediate cause was the rising price of oil after the start of the Iraq–Kuwait War in August 1990. In parallel, remittance inflows to India from the Gulf and other locations declined. The widening current account created pressure on foreign exchange reserves. At some point in the summer of 1991, India had only sufficient reserves to maintain imports for two weeks. The story is told that, at this point, India had to airlift 20 tons of gold to Zurich to raise US$240 million and pledge an additional gold transfer to the Bank of England to stave off bankruptcy. In this difficult environment, Indian policymakers had to make quick decisions. The government decided overnight to dismantle the license raj, the regime that required multilayered approval from the central government for the establishment of an industrial enterprise. The cumbersome import licensing system was also reformed through the removal of restrictions and quotas on imports of most machinery and manufactured intermediate goods. Overnight, the peak tariff rate was reduced from 300 percent to 150 percent, and the peak duty on capital goods was cut to 80 percent. Foreign investment was liberalized and encouraged in the infrastructure sector. The exchange rate was devalued. The streamlining of regulations led to a surge in private investment. The balance of payments deficit was supported by increases in overseas remittances. India’s growth rose from the 3 percent common in the 1950–80 era to more than 5 percent. In many individual states, such as Gujarat and Tamil Nadu, the pace of growth was more rapid. Foreign exchange reserves increased, while inflation became more manageable. Some economists have noted that the trigger for this growth was an attitudinal shift in 1980 in favor of private business by the national government.38

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After a period in the 2000s when income per capita grew at more than 6 percent annually, growth started fizzling out in the aftermath of the financial crisis in 2007–09. There were two controversial corruption cases involving 2G spectrum allocation and the allocation of coal blocks. The former involved alleged collusion between public officials and private representatives in the awarding of telecom licenses, while the latter involved the Indian Supreme Court’s cancellation of 214 of a total of 218 coal mining licenses awarded by the government between 1993 and 2010 because of perceptions of illegality and the sale of state coalfield rights at cheap prices, with estimated losses of over US$30 billion. Under Raghuram Rajan, the governor of the Reserve Bank of India, inflation fell from more than 10 percent in 2010 to less than 3 percent by 2018.39 In parallel, the Reserve Bank of India has been effective in capital market development and the liberalization of external commercial borrowing, making it easier for Indian corporates to borrow overseas.  One major positive development launched in 2008 was the establishment of digital ID system Aadhaar (the largest biometric identification system in the world with more than 1 billion registered) and a digital payments system, which have helped to anchor government service delivery.  Under Narendra Modi, reforms were introduced in 2014. The goods and services tax reform is an indirect consumption-based tax that was instituted in July 2017 to streamline revenue collection, while the Insolvency and Bankruptcy Code 2016 (IBC) has created a single regime for insolvency and bankruptcy and provides an orderly resolution for distressed assets. Demonetization, which proved the least successful of the three and which had negative effects on small businesses, was a surprise decision by the government in November 2016 to combat black market activity and counterfeit bills by rendering the Rs 500 and Rs 1000 notes invalid. The last few years have been difficult. A growth slowdown has continued because of a combination of COVID-19, the Ukraine crisis, and the global economic slowdown. The pandemic decimated the Indian labor market and exerted an impact on all sectors, from tourism to retail to manufacturing. Factories were shut and businesses were closed. The lockdowns were severe. The informal sectors of the economy were damaged. During the lockdowns, more than 140 million people lost their jobs, and India’s SMEs were impacted. GDP contracted by more than 7 percent in 2021. By 2022, as COVID receded, there was a significant post-pandemic recovery despite a fuel price increase and the inflationary impact of the Ukraine war, given that India imports more than 30 percent of its fuel.

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3.2.3   Food Security and Agriculture Agriculture helped the country move from dependence on food imports to foodgrain self-sufficiency. The public distribution system created during World War II was successful in helping address food shortages and the distribution of food to poor people at subsidized prices. Despite some leakages and fiscal costs, the system has supported efforts to protect the poor from food shocks. Despite initial disruptions in supply lines, the authorities have managed to feed the country’s large population of 1.4 billion. A second success was the Green Revolution in the 1960s, when high-­ yielding varieties of wheat, developed in Mexico by the International Maize and Wheat Improvement Center, were introduced. With the guidance of Norman Borlaug, who later received the Nobel Peace Prize, and the support of the Ford Foundation, the government imported 18,000 tons of hybrid wheat seeds in 1967 and developed its own variety of rice. Punjab was selected as the laboratory because of its favorable agroclimatic endowment and reliable water supply. By the late 1980s, India had become a foodgrain exporter. A third historical success was the development of Amul, Anand Milk Union Limited, a government-owned dairy-based cooperative society, in a process dubbed the White Revolution. The initiative was launched as Operation Flood in 1970 as the brainchild of Varghese Kurien and a landmark project of India’s National Dairy Development Board. In essence, India was transformed from a milk importer to a country with a well-­ organized network of dairy cooperatives, whereby a national milk grid connected producers with consumers throughout India. A three-tier structure was developed that gave decisive power to dairy cooperatives and reduced the role of middlemen. However, Indian agriculture was not managed through a policy regime that was favorable to farmers. Despite 25 years of agricultural reform, agriculture, trade, and marketing policies remain restrictive and antifarmer.40 Between 2000–01 and 2016–17, Indian agriculture was implicitly taxed to the tune of almost 14 percent of its value.41 The country’s overvalued exchange rate and the high import duties on industrial commodities had created an anti-agriculture bias. Farmer protests in India were sporadic but serious. A widely cited statistic is chilling. An average of 30 farmers commit suicide every day. This is appreciably higher than the incidence in any other EM10.

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The minimum support price has remained below international levels. The laws and protections under the Essential Commodities Act and the Agriculture Produce Market Committee, whereby the marketing of agricultural commodities must pass through a mandi (market) and middlemen and comply with state regulations, have the effect of widening the gap between farmgate prices and retail prices. Some products—such as milk, poultry, and fish—do not go through the mandi system and have had significant market success. Recent reforms by the Modi government are starting to tackle the problem but the challenge is substantial. Among farmers, capital formation is low, and farm size is diminishing.42 The foundations of Indian agriculture could be stronger. 3.2.4  Services India is known as a center of global IT software, the crown jewel of the Indian economy, and a display of Indian entrepreneurial magic and brainpower. The Indian IT industry has been driven by private sector entrepreneurs who were able to capitalize on the country’s post-1991 economic liberalization. Bangalore—known as the Silicon Valley of India—and Hyderabad have emerged as major IT hubs. Indian companies, such as Infosys, TCS, and Wipro, are global players. Accounting for close to 8 percent of India’s GDP in early 2020 (pre-pandemic), the IT industry has created more than 10 million jobs in the last three decades. The industry has evolved a dedicated ecosystem, from back-office support to more creative and dynamic solutions. Indian IT firms now have development centers in over 80 countries. As former Prime Minister Vajpayee used to say, IT stands for India’s Tomorrow.43 The industry emerged almost by accident. A group of nascent entrepreneurs, clustered first in Mumbai and then in Bangalore, came to scale in the 1990s. Benefiting from government policies, these entrepreneurs first established software parks and then leveraged their networks and skills to lower their costs. Their businesses grew rapidly. Kaushik Basu argues that the success of the Indian software industry resulted from three policies commonly viewed as defective.44 First, it was a consequence of Indian “overinvestment” in higher education, which had created a glut of engineers. Second, the “drain” of human resources to Silicon Valley allowed ideas and networks to flow back to Bangalore. Third, India closed the economy. Thus, in 1977, the government asked

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IBM to leave India because the company refused to dilute its 100 percent ownership share of its subsidiaries there. The existence of the Indian institutes of technology and the use of English in the higher education system also contributed to India’s software success. The National Association of Software and Service Companies—the Indian industry’s leading body—projected that India’s IT and back-office sectors would grow 7.7 percent in fiscal 2020, to US$191 billion, with exports touching US$147 billion.45 The domestic revenue of the IT industry was estimated at US$44 billion in fiscal year 2019/20, and the IT export revenue was estimated at US$147 billion. The IT workforce is four million strong, and many millions more have jobs indirectly associated with the sector. The outsourcing to India of key IT and business processes is only going to increase. 3.2.5   The Manufacturing Dilemma India has lagged in manufacturing. In 2020, it accounted for less than 2 percent of the more than US$19 billion in global merchandise trade, compared with China’s at more than 13 percent. One explanation is that the country’s stringent labor laws, which make it almost impossible for firms with 100 or more workers to respond to changing market conditions through layoffs, have inhibited the growth of labor-intensive industries. Infrastructure is also lacking, and logistics are costly. Poor-quality power and transportation infrastructure consistently pull down India’s rankings in the global competitiveness index. Infrastructure-related deals are reckoned to account for around 10 percent of the nearly US$200 billion in nonperforming loans that currently bog down the financial system. Only 3 percent of roads are national highways, and, of 61 roads that the Indian Army’s Border Roads Organization was supposed to have built between 1999 and 2012, only 36 percent had been completed by 2016.46 There are few incentives to formalize. One study finds that much of the employment growth that has occurred in the manufacturing sector since 1989 has consisted of informal establishments in tradable sectors.47 There was a rise in employment in informal tradables by more than 10 million workers over 1989–2010, equivalent to the entire net growth in the manufacturing sector over the same period, while, in the informal sector workforce, the representation of tradable establishments with one employee grew from 6 percent in 1989 to 21 percent in 2010.

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3.2.6  Assessment India has demonstrated resilience in the wake of crises both past and present. Since the global financial crisis in 2007–09, the services sector has been the star performer, and the financial sector has lagged. The trade in services is weathering the crisis much better than the trade in goods.48 Evidence from Indian service exporters suggests that the trade in services is more robust for three reasons: less cyclical demand, less dependence on external finance, and few explicitly protectionist measures in services. In 2022, services and consumption were the twin engines of the Indian recovery from the pandemic. Standard explanations of growth patterns do not explain the long slowdown, followed by a sharp collapse, in the 2010s. India is now facing a Four Balance Sheet challenge—banks and infrastructure companies plus nonbanking financial companies and real estate companies—and has faced successive waves of other challenges that have trapped it in a mix of high interest rates, depressed growth, and a generation of more risk aversion.49 The first wave occurred when the infrastructure investment boom of the mid-2000s began to weaken. Despite demonetization and the goods and services tax shocks, the economy continued to grow, until a credit boom led to the financing of unsustainable real estate inventory accumulation, inflating a bubble that finally burst in 2019. One assessment finds that India’s growth experience during the past five decades has been unique.50 Unlike many of its East and Southeast Asian neighbors, India did not grow at miracle rates of more than 6 percent or as high as 10 percent, but, unlike Africa and Latin America, neither did it suffer periods of prolonged stagnation nor decline. Another wave of challenges India has faced revolves around governance. It is a young democracy characterized by significant openness, but there has not been a symmetric evolution in the regulatory architecture. When India has a scandal, the scandal is usually quite big. In 2008, there was the 2G spectrum case, when the telecommunication ministry was accused of selling 2G spectrum licenses on a first-come, first-served basis, rather than at auction, to benefit a few select bidders, thereby losing US$40 billion in government revenue. Other scandals abound. In Transparency International’s 2021 corruption perceptions index, India is ranked 85 out of 180 countries.51 The proliferation of opaque bureaucracy, complicated tax and licensing regimes, and mismanaged institutions provide many opportunities for rent seeking.

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3.2.7   India’s Future Where is India headed? Some talk of India becoming the next China. There is widespread agreement among pundits that the Indian economy is headed up, but the comparison with China seems premature. For sure, India is becoming an attractive investment location for many, and its booming services sector and large domestic market are great news. Supply chains can relocate to India. Its population will reach 1.5 billion in 2030, and has already eclipsed China in population. Morgan Stanley estimates that India’s GDP is likely to more than double from current levels by 2031, fueled by offshoring, investment in manufacturing, the energy transition, and the country’s advanced digital infrastructure.52 India may become the world’s third-largest economy and stock market before the end of the decade. The Government is engaging in a major capital expenditure-­ funded infrastructure boom with its 2019 National Infrastructure Pipeline,  with an ambitious plan to modernize the country’s roads, ports, and airports. One expert, Pranjul Bhandari, chief economist at HSBC India, finds grounds for optimism in the fact that there is a lot of liquidity and money in India and a large appetite for risk taking.53 The volume of Indian exports in 2021 was 17 percent higher than it had been on the eve of the pandemic, and the stars seem to have aligned over the entire ecosystem around new-age technology start-ups. India is not there yet. Its manufacturing sector is still small, infrastructure is inadequate, and administrative barriers are too large. Private investment is still low. Its dependence on imported capital and fuel as well as domestic welfare payments puts pressure on both  the current account deficit and fiscal deficit. It can benefit from deeper integration and reduced protectionism with its South Asian neighbors.54 Global players such as Apple and Samsung are trying to increasingly locate mobile phone operations in India, but after some initial success, there have been challenges in finding land, convenient logistics, and administrative and tariff simplification. The UNCTAD World Investment Report 2022 ranks India eighth among the world’s major FDI recipients in 2020.55 FDI flows into information and technology, telecommunication, and automotives. It reached a value of US$45 billion compared with China, which receives US$181 billion in FDI. But India has a large internal market, which will serve it well in a world of globalization blues. And it has dynamism and momentum that can propel it forward. According to the Center for Economics and Business Research, India will become a US$10 trillion economy by 2035.56 The rest of the world will watch India’s ascent closely.

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3.3   The Latin American Trifecta: Brazil, Argentina, and Mexico 3.3.1  Brazil Brazilian Uniqueness Brazil covers half the South American landmass and borders every country in South America except Chile and Ecuador. At more than 3.4 million square miles, it is a mega country, the size of the continental United States. The mighty Amazon, the largest river in the world in volume, occupies a central space of lush jungle, major biodiversity, and one of the most rapidly depleting rainforests in the world. Southeastern Brazil is a highland containing São Paulo, an urban megalopolis and the country’s largest city, and Rio de Janeiro. The Almighty endowed Brazil with amazing natural resources. It has a dynamic agriculture and is the number one exporter of sugar and a top producer of beef, soybean, corn, and ethanol. It is the world’s largest producer of coffee, accounting for close to a third of global production in 2020. It was the coffee oligarchy around São Paulo that fueled Brazil’s initial economic expansion and industrial development. It has manufacturing capability and is the only developing country to make a major airplane, the Embraer. And it has a rich ethanol and biofuel industry. Brazil is unique among the emerging markets, except for Argentina, as a nation of immigrants. Among the more than 200 million people are millions of Arabs, Italians, Japanese, Spanish, and many other nationalities who emigrated to Brazil, especially at the beginning of the twentieth century. Brazil has a colorful history. The arrival of Portugal was one of the curious accidents of history. Portugal came to colonize Brazil, mostly because of the Treaty of Tordesillas in 1494, whereby Portugal and Spain, in grand imperial tradition, decided to divide the world. Trying to sort out disputes in the aftermath of Columbus’s voyages of discovery, the two powers divided the New World by population and land. Alas, neither the local populations nor the other European powers were consulted in these bilateral land grabs. As a result of this territorial division, Portugal claimed a large part of what is now Brazil. Brazil has a particular population of large firms, the seeds of which were planted by the state between 1930 and 1970 and which became global firms in subsequent decades. Most of Brazil’s largest firms, whether in

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steel, aluminum, beef, or frozen chicken, have leveraged growth in commodities markets, focused on processing raw materials, or capitalized on older industries that rely on traditional expertise and they tend not to be innovation-intensive.57 Because of economic reforms, significant growth and dramatically lower inflation characterized the mid-1990s. A combination of fiscal stabilization measures and anti-inflationary policies under the Real Plan yielded important dividends. Growth was sustained in the early 2000s, partly because of a favorable commodity boom. However, the last decade has been volatile and difficult because of corruption and, more recently, the onset of the pandemic. Brazil was a monarchy for many years. During the colonial period, it emerged as an exporter of commodities but not of manufactured exports. A rural, agro-oriented elite with large landholdings took political power. In 1808, the Brazilian royal family established the court in Rio de Janeiro. Upon reaching independence in 1822, the country still had a king. The monarch was overthrown in 1889 when Marshal Deodoro da Fonseca deposed Emperor Dom Pedro II, the first of many military takeovers in Brazil’s history. The First Brazilian Republic was established in that year by the military, which maintained control over the reins of power. Ruled for many years by the military, Brazil was consolidated politically under the Estado Novo (New State) of President Getúlio Vargas, a legendary figure in the country’s history. From 1930 to 1945 and then later in the early 1950s, Vargas presided over significant changes in the economy and polity. This was the era of import substitution industrialization, whereby protectionist tariffs and subsidies allowed Brazil to produce industrial goods. The government invested capital in steel manufacturing, iron ore, and other key industries. Nascent industry was allowed a captive domestic market, and investment capital was raised through a combination of public funds (fiscal and inflationary taxation) and foreign investment, which was used to finance transportation infrastructure.58 The focus was initially on consumer goods production but was then shifted to intermediate and capital goods. The military regimes promoted industrial growth and provided political repression. By the late 1950s, under Juscelino Kubitschek, Brazil had gained political stability. Kubitschek tried to industrialize rapidly, including by launching an automobile industry in Brazil. He was also responsible for establishing the new capital, Brasília, in the Planalto Brasileiro, the central Brazilian high plains, in an attempt to shift the historical centers of

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economic and population gravity from the southeast, around Rio de Janeiro and São Paulo. Its more than 1000-kilometer distance from the country’s two largest cities allowed Brasília to foster national integration and help support the agricultural development of the savannah. By the 1960s and 1970s, Brazil was experiencing a period of substantial growth, averaging more than 7 percent a year under a succession of military leaders who were becoming increasingly authoritarian. The country’s industrial strength had been carefully prepared. By the 1980s, the economy was mature, though democracy was still nascent. Michael Reid notes as follows: Brazilian dirigisme had succeeded in creating by 1980 what was the largest and most sophisticated industrial base in the developing world. Some of the seeds planted by the military government … would germinate later: Petrobras and offshore oil; a petrochemical industry; Embraer (the aircraft manufacturer); huge hydroelectric dams; and ethanol. At last farming began to expand rapidly, thanks to the opening up of the interior by new roads and Geisel’s establishment of Embrapa, a state agricultural research service.… Brazil ceased to be dependent on coffee as a host of nontraditional exports, including cars, aircrafts, arms, and soybeans came into being.59

At a time when the other BRICS were still rising, especially China and India, Brazil was already an economic giant. Between 1950 and 1980, Brazil grew at 7 percent annually, a record among developing countries. The growth was driven by all sectors, but the strongest push was supplied by manufacturing, which registered double-digit growth. The Commission on Growth and Development, a high-level body of academics and policymakers sponsored by the World Bank, concluded that Brazil was one of the 13 countries with high growth rates for more than 25 years.60 However, by the mid-1980s, in the wake of the international debt crisis, Brazil’s growth model had run its course. The chickens were coming home to roost. Like Argentina, Mexico, and other Latin American countries, Brazil had overborrowed to finance industrialization. The activist industrial policy, which had led to significant success, was facing proliferating macroeconomic challenges, such as growing fiscal deficits (because of subsidies), an inflationary economy (because of the way deficits had been financed), an overvalued currency, and high interest rates. The 1980s was viewed as a lost decade, especially in Latin America. By 1988, there was major political change and a new Constitution, which empowered the federal government and established a solid framework for the relationship with local and state governments.

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By the late 1990s, under President Cardoso, a former sociologist, Brazil had achieved the triple play: macroeconomic stability, political modernization, and social progress. The focus on reducing inflation, restoring political democracy, reducing inequality, and managing spending had worked. Cardoso governed with pragmatism and with openness toward foreign investors. His legacy was to put Brazil back on a solid economic footing. Perhaps his greatest victory was in the battle against the evils of inflation, a battle in which many of his predecessors had unsuccessfully engaged. With the support of a team of economists, Cardoso implemented a brilliant Real Plan that consisted of stabilizing the domestic currency in nominal terms by creating a transition unit of real value, which helped lay the foundation for the new currency. The inflation monster was finally deflated, and the days of hyperinflation were over. His successor, President Lula, continued to support good macropolicies and expanded social protection for those left behind. He governed as a centrist, avoiding measures that might deter investors, domestic or foreign. The signature achievements of the Lula years were an increase in middle-class growth and an improvement in the policy regime for foreign investment. The country also benefited from surging demand for its agricultural exports. Brazil’s rising economic power also reflects its ability to take advantage of two long-term global trends: strong commodity demand and the imperative of stabilizing the Earth’s climate.61 Moreover, the Brazilian state, because of its role as business manager and economic planner, helped prepare the way for the country’s commodity boom. By the late 2010s, there had been a period of political change under the leadership of President Dilma, who was followed by President Bolsonaro. Corruption allegations and political economic turbulence, coupled with the pandemic in 2020, have made the last five years challenging for the economy. Dilma faced twin shocks of economic recession and corruption scandals involving the state oil company, Petrobras, and the construction giant Odebrecht. Bolsonaro, the face of social conservatism, had the support of elements of the middle class distrustful of state institutions and of mining and logging businesses. In the aftermath of the pandemic in 2020, Bolsonaro provided fiscal relief of more than US$55 each a month to vulnerable households. The 2022 election was extremely close, reflecting one of the world’s most polarized electorates. On January 1, 2023, Lula was back as president, and he was pledging to continue reforms and social programs while preserving fiscal stability.

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Brazilian politics is complex and difficult for outsiders to understand. The country has had a bumpy journey. In his assessment, Albert Fishlow, a perceptive academic, notes the transformative changes since the country returned to civil rule in 1985. He dubs it starting over. He mentions three reasons for the move away from the authoritarian past toward the democratic present.62 First is a pattern of sequential advance. Politics took initial precedence, with concentration on preparing a new constitution as a framework for the New Republic.… But there was not the policy coherence required to end inflation and pursue economic growth. That only happened with the Real Plan and with subsequent macroeconomic adjustment of the economic model in 1999.… Second, of these multiple objectives, regaining economic growth quickly came to dominate. There was an impressive prior record of achievements to match.… Third, over the preceding twenty-five years, the outside world changed from a negative to a positive force, assisting Brazilian transformation.

 n Agribusiness, Mining, and Energy Powerhouse A Of the BRICS, Brazil, together with Russia, is the agricultural powerhouse. Agribusiness in Brazil is big business, and it has powerful political lobbies. It represents more than 30 percent of Brazilian exports and more than 25 percent of the country’s GDP. Brazil is one of the world’s most competitive agribusiness producers, and it is capable of expanding supply both horizontally and vertically, in some part because of its investments in technology and research.63 JBS, for instance, is testament to the power of Brazilian agriculture. It is now the largest meat processing company in the world, producing factory processed beef, chicken, and pork. Founded in 1953 and managed from a head office in São Paulo, it is not as well known internationally. Other factors responsible for success include the opening of the market to foreign competition. Custo and Competitiveness The custo Brasil has haunted Brazilian competitiveness. It refers to the costs that make Brazil a relatively expensive place to do business, including high taxes, layers of excessive bureaucracy, high interest rates, corruption in the public sector, and high labor costs. In Brazil, trade openness—the trade-to-GDP ratio as an indicator of the relative importance of

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international trade in the economy of a country—rose from 22.8 percent in 2010 to more than 39.0 percent by 2021 despite the level of per capita income, which was among the lowest in the world. Brazilian exports of goods and services have tripled since 2000, based mostly on favorable geographical and sector composition effects, while the slowdown in industrial exports, production, and investments is not related to insufficient demand, but, rather to supply-side inefficiencies and rising costs.64 Interest rates, although declining, are still well above the average under inflation targeting regimes in emerging markets.65 The combination of low domestic savings, including public savings, coupled with credit market segmentation and inflation inertia generated by the still pervasive practice of indexation, has acted to keep interest rates higher than normal. Brazil ranks low in many indicators. It ranked 71 in overall competitiveness according to the global competitiveness index.66 It is the least competitive of the BRICS countries and ranks lower than China (28), Russia (43), South Africa (60), and India (68). The WEF Executive Opinion Survey gauges the burdens companies face in complying with the requirements of public administration, such as permits, regulations, and reporting.67 It finds that Brazil and Venezuela have the lowest scores and rank at the bottom of the country sample. S tate Capitalism and BNDES Founded in 1952 to provide long-term credit for infrastructure projects, the Brazilian Economic and Social Development Bank (BNDES), or Brazilian Development Bank, has grown in recent decades. In 2020, its lending was almost triple that of the World Bank. Financed by relatively expensive debt, it has managed to avoid many successive waves of privatization. With total assets of slightly more than US$27.0 billion in 2020 and employing more than 2000 people, it is a key player in Brazil’s industrial landscape. Nobel laureate Joseph Stiglitz has said that Brazil has demonstrated how a single country can create an effective development bank.68 The bank initially had the sole purpose of supporting infrastructure finance, which normally requires higher capital costs than the private sector might handle. The bank gradually developed a model whereby it cultivated state industrial champions in sectors as diverse as telecom, food, manufacturing, and agribusiness. It has sought to establish a cadre of innovative Brazilian firms and has been expanding into new sectors. In some ways, it became a venture capitalist. In December 2020, it approved US$37.4 million in financing for Spain’s Powertis to build three

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photovoltaic solar power plants. It is also attempting to sell its equity in large listed companies, such as Petrobras, the state oil company, and Vale, the mining giant, to strengthen its balance sheet. Pro-BNDES observers emphasize the importance of overcoming credit market failures and the myopia of the private sector, while detractors believe the bank crowds out the private sector because of the high cost of capital. BNDES loans and equity investments do not have any consistent effect on firm-level performance and investment, except by reducing the expenditures associated with the subsidies accompanying loans.69 However, there is evidence that the bank does not systematically lend to underperforming firms, and it does not subsidize firms that could fund their projects through other sources of capital. By contrast, another study finds that BNDES lending places undue pressure on interest rates and damages economic efficiency.70 It also concludes that the benefits of a development bank that may be used as both a policy instrument during times of economic distress and a mechanism for correcting market failures are outweighed by the macroeconomic and microeconomic distortions. It is the role of BNDES in the economy—the large amounts of unsubsidized lending—that is responsible for credit market segmentation. Journalist Michael Reid describes two interesting conversations he had with Luciano Galvão Coutinho, the president of BNDES, and Arminio Fraga, the governor of the Central Bank, encapsulating the two points of view on the development bank. Coutinho insisted that the government’s industrial policy was different from the protectionist developmentalism of the 1960s and 1970s.71 “We have to support competitive sectors,” he told me. “The market is imperfect. The state also makes mistakes. A model in which we do industrial policy in the crucible of an open economy reduces the margin for error. We’re following the Asian model of openness.” But its critics accused the government of a fashionable drift toward state capitalism. According to Arminio Fraga, Cardoso’s Central Bank chief, this had never wholly disappeared in Brazil. “It’s a model which emphasizes benefiting selected companies, rather than letting the market work. It’s a bad model. Combined with protectionism, it’s even worse,” he said.

 he Triad: Engineering, Embraer, and Embrapa T Brazil achieved strong engineering and industrial capabilities more quickly than most other countries. Spurred on under military rule, the

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development of technical expertise and the fostering of innovation played a surprisingly important part in postwar Brazilian economic history. Based on the motivating vision of Air Marshal Casimiro Montenegro, who wanted to develop an indigenous engineering force, the Instituto Tecnológico de Aeronáutica (Aeronautics Institute of Technology) was founded in 1950. Modeled on the Massachusetts Institute of Technology, it was supported by the Brazilian Air Force. It became one of the top engineering schools in Brazil and contributed to the country’s industrialization. Its location in São José dos Campos, on the outskirts of São Paulo, helped foster agglomeration through local suppliers. The military government also laid the foundation for the development of Embraer, an aviation company which was launched in 1969 and then privatized in 1994.72 It is the world’s third-largest producer of commercial jet aircraft and focuses not only on large planes but also on mid-size aircraft. Its most direct competitor is the Canadian firm Bombardier. Embraer’s success derives from its ability to master demanding technologies and incorporate them into commercially attractive products. It has been supported by state intervention through the establishment of Embraer as an SOE, the development of a complementary research and development network, the provision of export financing, and assistance in forging effective alliances with foreign subcontractors. An important moment was the founding of Embrapa, the Brazilian Agricultural Research Corporation (Empresa Brasileira de Pesquisa Agropecuária). Established in 1973 by the military, Embrapa is a state-­ owned research institution. Its core mandate has been to develop technologies and knowledge to spearhead agriculture. It helped transform Brazil from a food importer to an agricultural powerhouse. Its biggest achievement has been the reclamation of land in the Cerrado, the vast tropical savanna in central Brazil. Historically considered barren, the Cerrado was revitalized through the application of lime and other materials using innovative techniques in plant breeding and soil management that were developed by Brazilian agronomists. The Embrapa model includes a decentralized approach organized according to several priorities. At the national level, the model requires close interaction with decision-makers in the Office of the President, Congress, and ministries. Embrapa is structured as a public corporation, but is free of bureaucracy. Compared with other sectors of the Brazilian economy and relative to the agricultural sector in many other countries, Brazilian agriculture has

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thus become an island of success in terms of productivity growth in recent decades.73 This productivity growth has been driven mainly by investments in agricultural innovation, rural credit, and trade liberalization. I nequality, Bolsa Família, and Social Transfers A recent initiative is the Bolsa Família Program, a social assistance and conditional cash transfer program for poor families. Bolsa Família was formally launched in 2003 as a synthesis of several older programs—Bolsa Escola with Bolsa Alimentação and Cartão Alimentação, which formed the core of President Lula da Silva’s Fome Zero antihunger program. It is now considered one of the most effective conditional cash transfer systems in the world. Families register with the single registry for federal government social programs. This may prompt home visits by municipal authorities. A qualifying family receives a citizen card (a form of debit card) that is issued by a government-owned savings bank. The program transfers benefits to poor households, usually a monthly allowance of a minimum of US$15 a month per child, on condition that the child is vaccinated properly and attends school. Estimates suggest that the average annual cost of the program is less than 0.5 percent of GDP, much lower than the country’s pension system, which cost more than 10 percent of GDP in 2019. The program is efficient, not visibly corrupt, and run by competent municipal authorities who screen and evaluate beneficiaries. It is transparent. Evaluations demonstrate that the program reaches more than a fourth of Brazilians and has been quite successful in reducing poverty. More than 14 million people were drawing benefits by 2020 (more than 15 percent of the population), receiving average monthly transfers of about US$70. The program can reach parts of the country, such as the northeast, where poverty is most widespread and where traditional programs have proven inadequate. Critics on the right contend that the program is a means of banking votes for left-wing politicians. Fiscal conservatives argue that any expansion of the program would be fiscally unsustainable. On the left, Bolsa Família is perceived as inadequate compared with a more extensive social safety net.74 The Bolsa benefit is not linked to inflation. It is therefore declining in real terms every year. The program does not reach all households that might be eligible. Anywhere from 800,000 to 2.2 million eligible households are not receiving the benefit.

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Poverty and inequality have occurred in waves. The slow pace of the reduction in the poverty rate between the mid-1980s and the mid-2000s, from 33 percent to 29 percent, reflects both the low growth and the low growth elasticity of poverty reduction in Brazil.75 Poverty and inequality declined more rapidly thereafter. The extreme poverty rate fell from roughly 15 percent in 2001 to a low of nearly 4 percent in 2014 because of tight labor markets and expansionary social policy, which boosted incomes among the poor.76 Other factors also played a part, including progressive minimum wage legislation and greater female labor force participation. The focus on social policy by policymakers was a major factor. The Gini coefficient of labor earnings fell by nearly a fifth between 1995 and 2012, from 0.50 to 0.41.77 The decline in earnings inequality was even larger by other measures. Thus, the 90–10 percentile ratio dropped by almost 40 percent. A combination of decreasing education premiums, a drop in the returns to potential experience, and substantial reductions in the gender, race, informality, and urban–rural wage gaps, conditional on human capital and institutional variables, also contributed to the decline in wage disparities.78 Nonetheless, poverty and inequality appear to be worsening again in the wake of the pandemic, pointing to a new challenge on the welfare agenda. 3.3.2  Mexico Mexico is the second-largest economy in Latin America after Brazil and one of the top 15 economies in the world. Its GDP is at more than US$1 trillion. It is an upper-middle-income economy, with a per capita income of more than US$8000 in 2020. Mexico has many advantages, including a rich history and culture, a good climate for agriculture, and a capable industrial sector. Yet, its fate has been inextricably tied with that of its wealthier northern neighbor. “Poor Mexico,” goes the quip attributed to President Porfirio Díaz (1830–1915), “so far from God and so close to the United States.” Indeed, Mexico’s economy is intertwined with the US market. The two countries share a land border of 1934 miles, a border that has been the topic of significant contention in the United States because of legal and illegal flows of migrants not only originating in Mexico but also passing through Mexico from third countries. A legal structure for the flow of temporary contract workers from Mexico for seasonal agriculture and railroad construction in the United

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States was established through the Bracero Program in 1942 and ran more or less in its initial form until 1964. This circular flow of temporary workers contributed to the growth of a binational community now representing a population of more than 30 million people of Mexican descent in the United States. More recently, illegal flows from the Northern Triangle of Central America (El Salvador, Guatemala, and Honduras) have been increasing. Mexico has many other problems, including, as in many Latin American economies, a large informal sector with an employment share of close to 55%, significant poverty, and wide income inequality relative to other members of the Organisation for Economic Co-operation and Development. GDP growth is projected to be close to 2 percent in 2023. Today, the wealthiest 10 percent of Mexicans control 43 percent of the country’s total income, while the poorest 10 percent hold less than 2 percent.79 Society is divided into three main tiers: the rich are rich, the middle class is constantly under pressure, and the poor survive on agriculture in the informal world. However, the National Council for the Evaluation of Social Development Policy notes that, between 2000 and 2018, progress was made in closing the gap in access to primary social rights and services.80 The country has gone through dramatic shifts in the predominant economic and political models in recent decades. In the last 30 years, Mexico has seen it all, from the rise of the largely duty-free and tariff-free maquiladora exporting firms, especially in border areas, to the North American Free Trade Agreement (NAFTA) and the United States–Mexico–Canada Agreement and from integration in the global economy to the rise of drug cartels and lawlessness in parts of the country. The cartels have diversified into a wide range of activities, including drug distribution to Mexico’s northern neighbor and the supply of otherwise state-provided services such as security and public works. Once on a similar path to the United States in the 1800s, Mexico has broadly diverged in socioeconomic performance. Mexico has many shades. The traditional culture is male dominant but, because of gender equality laws, half the members of Congress are women, one of the highest shares among the emerging markets. The economy is open, the peso has been stable, and it is integrated into global value chains. Successive governments have entered into dozens of bilateral and multilateral free trade agreements. Stakeholders have capitalized on the country’s location to turn Mexico into a gateway to the United States, especially among Asian firms. Yet, many key sectors—telecommunication,

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petroleum, electricity, and cement—have historically been monopolies and closed to competition. In telecom, competition has been allowed since 2013, and prices have gone down dramatically because of an independent regulator and asymmetric regulation to promote competition. Mexico can also be dangerous with an increase in organized criminality. Some of the drug cartels relocated from Colombia in the 2000s and have carved out niches across the country. In 2022, 31,127 violent homicides were reported in Mexico. That same year, Mexico became the deadliest country in the world for journalists. Gulf, Jalisco, Sinaloa, and other cartels control large areas. They are almost states within states. They are responsible for murders, kidnappings, and a general surge in violence. Many private sector firms are constrained by extortion and other crimes. Estimates based on the 2018 Mexico peace index show that the negative economic impact of violence was equivalent to more than 20 percent of GDP.81 Economic History Between the late 1940s and the early 1970s, Mexico enjoyed macroeconomic stability. The government built state and industrial capacity through a policy of import substitution industrialization. In the 1970s, the country began facing a series of shocks. External shocks, including the end of the Bretton Woods system in 1971 and the OPEC oil shocks of the late 1970s (which meant lump sum transfers for oil exporters), coincided with reckless government spending and overborrowing from US commercial banks, threatening the country’s macroeconomic stability. At the time, President López Portillo (1976–82) said that Mexico only needed to manage its abundance. These problems reached a crescendo in 1982. That year, the government was unable to service the country’s debts because of a large current account crisis and was obliged to devalue the peso three times. This led to a bailout by the US Federal Reserve and the IMF. In the 1990s, the country initiated another process of market-oriented reforms through liberalization, privatization, and the regional NAFTA trade deal. However, another crisis struck in 1994–95. It was caused by the government’s devaluation of an overvalued peso and the raising of interest rates to stem capital flight. Dubbed the tequila crisis because of the origin in Mexico of the repercussions on other currencies in Latin America, it led to another IMF bailout, this time at a cost of more than US$50 billion.

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The economy gradually returned to its normal, through suboptimal path. By 2020, the COVID-19 pandemic had led to the greatest recession in Mexican history, compressing GDP by close to 20 percent in annual terms. In the aftermath of the pandemic, a series of policies were adopted that were intended to stimulate the SME sector, which accounts for two-­ thirds of all business activities in the country and close to 80 percent of employment. These measures included federal government loans at subsidized interest rates of between 6 percent and 10 percent, private loans, loan deferrals, and liquidity from the Central Bank of Mexico. Some of the measures paid off, and the economy rebounded. S ocial Programs and Wages The government has relied on public expenditures to address income redistribution through social safety programs and welfare schemes. One of the most successful programs was launched in 1997 as Progresa. Rebranded Oportunidades in 2002 and now called Prospera, the program has helped more than six million low-income households through financial assistance. The benefits are conditional on school attendance and regular health care visits by children in the households. Seguro Popular was launched in 2002 to provide free or subsidized health insurance to the uninsured. It had the virtue of supporting more than two-thirds of Mexican women, but  in 2020 the program was revamped and centralized. The government also provides job training for workers, which explains the high skill set among some workers. However, these developments are offset by several factors. Many of the programs provide direct short-term transfers without skills development.  Some of the teens do not find good jobs and remain in poverty. Furthermore, there are low levels of public investment in health and education and historically low minimum wages (US$6.50  in 2020), lower than Argentina, Brazil, or Chile. More than 50 percent of Mexico’s labor force is in the informal sector, with poor wages and precarious short-term or irregular contracts. The country has a high tolerance for inequality.  AFTA, Migration, and Trade N The North American Free Trade Agreement was signed in 1994 by Canada, Mexico, and the United States, creating a trilateral trading bloc. A key element was the removal of tariffs among the three countries, with a key focus on agriculture, textiles, and the automotive industry. Supported by US President Bill Clinton, NAFTA was designed especially to catalyze

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the integration of the economies of Mexico and the United States. Moreover, it was meant to support development in Mexico by shifting the footing of the economy away from protectionism and toward greater openness and, in the process, expanding the middle class. NAFTA became a contentious feature in US presidential elections, and President Donald Trump renegotiated the deal, which became the United States–Mexico– Canada Agreement. The evidence on NAFTA has been mixed. It led to greater Mexico– United States market integration and political alignment. It helped triple Mexican farm exports to the United States and established an integrated and efficient North American automotive cluster that helped create hundreds of thousands of auto manufacturing jobs, but it fell short of fulfilling the bigger promise of employment growth and wage increases. Between 1993 and 2013, Mexico’s economy grew at an average annual rate of only 1.3 percent, and poverty remained at the same levels as in 1994. Between 2018 and 2020, four million more people fell into poverty because of the pandemic.82 The Economic Commission for Latin America and the Caribbean finds that the number increased in 2022.83 The NAFTA agreement, though it led to a surge in manufactured exports from Mexico, did not help converge Mexico to US levels of per capita income. Perhaps the jobs the United States lost to Mexico because of NAFTA would have gone to China anyway, given that country’s more competitive manufacturing sector. One hope of the architects of NAFTA was to make Mexico a more vibrant economy and reduce emigration to the United States. Because of concerns about illegal immigration and the effect of migration on US employment and social services, recent US presidents, from Obama to Biden, tightened the immigration laws and boosted border security. Mexicans account for more than one-fourth of the 45 million foreign-­ born residents in the United States and a significant share of the illegal immigration into the United States. The Mexican diaspora sends remittances back home that help support households. These remittances help build resilience in the economy, but most remittances are used for household survival, not investment.  hy Is Growth in Mexico So Sluggish? W Most economists find that Mexico’s growth performance has been mediocre despite the country’s opening to the world economy. It managed to avoid the hyperinflation of its southern Latin American neighbors. Since

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the peso crisis in the 1980s and the tequila crisis in the 1990s, government authorities have managed debt well and kept inflation low. There has been a large expansion in exports of manufactured goods, and the economy is well integrated into global production chains, especially in the automotive industry and electronics. Mexico is a significant oil producer. However, none of this has helped produce growth in output or productivity. Mexico has not been a driver of growth in Latin America. It lags some of Latin America’s better performers, such as Chile. From 2000 to 2020, the average growth rate was 1.4 percent in real terms and less than 1.0 percent in GDP per capita. Santiago Levy at Brookings notes that the labor market in Latin America is dysfunctional because half the region’s labor force is informally employed, and, coupled with stagnant productivity growth, this represents a great concern for economic growth.84 In the case of Mexico, the lackluster growth rates have four domestic causes: a poorly functioning credit market, monopolistic and anticompetitive practices, high prices for energy and telecommunication services (sectors with a scarcity of skilled labor), and the loss of the economy’s comparative advantage over China.85 Using comprehensive firm-level data on more than 20 million Mexican businesses over 25 years, a World Bank study concludes that Mexico’s disappointing aggregate productivity is weakened by structural factors across industries and firms—limited access to finance, lack of incentives to invest in technology, poor management capacity, and the difficult business environment—that impede the access of productive firms to resources.86 There is also a geographic productivity divide running between the north-­ center and the south of Mexico. The northern states benefit from trade and industry linked to their proximity to the United States, while the southern states are trapped in poverty and insecurity. Mexico appears to be perpetually trapped by a crisis of institutions. Thus, there is friction between the current political leadership and some key institutions. This is leading to a weakening of the autonomy of the institutions. There are heated fiscal debates. A constitutional amendment that was proposed would have handed control of the electricity market back to the state-owned electricity company. The country will have to decide the future of Pemex, the state oil company, and find a way to pay its more than US$100 billion in debt as the company represents a contingent liability for the Mexican government. There has been an attempt to curtail the National Election Commission. The silver lining continues to be the strong performance of FDI, which reached more than US$35

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billion in 2022. Nearshoring particularly in the automotive sector has played a role but compensation for labor may offset advantages of geographic proximity and specialized skills. Coming years will see how these battles play out. Mexico’s future will depend on its ability to handle its domestic political economy while navigating an increasingly complex world trading system. 3.3.3  Argentina Argentina is the second-largest economy in South America after Brazil. It is a poster child for macroeconomic crisis and IMF programs. The economy is export-oriented. Exports are focused on beef, wheat, corn, and soybeans. The safety net is partly effective, as a significant percent of the population still lives in poverty. The fabled Argentine pampas spread from Buenos Aires to the Andean foothills. The country is rich in water, oil, and gas. It is one of the more unpredictable emerging markets. Trade unions and social movements are powerful. The political drama and outsized political personalities are renowned. The country’s ups and downs are evident in the biography of the fabled Eva Perón. Named spiritual leader of the nation by the Argentine Congress, she grew up poor to become the wife of President Juan Domingo Perón and the enactor of much progressive legislation, including women’s suffrage in 1947 and reform to protect vulnerable communities. Her unfortunate death by cancer at age 33 left the nation in mourning. Argentina has baffled macroeconomists and observers. Around 1900, Argentina was one of the richest economies in the world. It was outperforming Australia, Canada, and much of Europe. It was the dominant power in Latin America, and Buenos Aires was the wealthiest of cities. Migrants from Europe, especially Italy and Spain, poured in to form a greater part of the population in Argentina than in any other country. With a large endowment of fertile land, a literate population, and neighbors free of conflict or war, Argentina had all the characteristics for a development success story. However, events did not unfold as anticipated. A combination of political instability and macroeconomic mistakes, compounded by suboptimal policy advice by external financiers, has meant that Argentina has been confronted by volatile economic and social deficits. It has required emergency bailouts from the IMF and other creditors and has not been able to capitalize on the rich natural resource endowment, including the

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sprawling pampas and the Patagonian shale reserves. Only 20 percent of the population is employed in the private sector. Economic performance has not mirrored the national team’s recent World Cup success. On top of this, the country faced a historic drought in 2022–2023, linked to climate change, which damaged its grain exports and is thought to have affected US$20 billion in agricultural exports. Argentina has experienced severe economic shocks. It is unique among the leading emerging markets for its regular macroeconomic crises. It holds the unenviable record of defaulting eight times. In 2001, Argentina recorded the largest sovereign debt default in modern times when it failed to make timely payments on US$85 billion in debt. Argentina defaulted again in May 2020 because it was unable to pay US$500 million to creditors. It managed to avoid the full impact of the default only by reaching a deal with international creditors to restructure US$66 billion in debt. History After independence from Spain in 1816, the government embraced a long process of nation building. Like the governments of Brazil and Mexico, it initiated a policy of import substitution to develop industrial capacity. That process was abandoned in the mid-1970s because of growing fiscal imbalances and high inflation. These years also marked the political ascent of Juan Perón, perhaps the most influential person in Argentine history. Perón implemented a new program of nation-building involving fiscal expansion. Peronism was a unique Argentine political and social movement, unifying labor, industry, and liberal and conservative elements. The Peronist trio of political sovereignty, economic independence, and social justice was uniquely Argentine. The 1990s and 2000s were a roller coaster for the economy. A program to tame hyperinflation and privatize many loss-making state enterprises was supported by the adoption of a fixed exchange rate peg to anchor the currency and foster financial credibility. However, the peg collapsed in the early 2000s, and the country was forced to float the currency. It appears that the peg was maintained too long, leading to an overvalued currency. The government was unable to discipline the regions, and spending went out of control. There was widespread poverty and unemployment, which increased to 25 percent of the labor force. After the subsequent default, the government began a journey of recovery under Nestor Kirchner and then his wife, Cristina Kirchner, who became president in 2007. There was a commitment not only to growth

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but also to social issues and labor. Between 2003 and 2011, the economy recovered from the crisis, and growth averaged more than 5 percent a year. Growth-oriented macroeconomic management and favorable commodity prices helped. The measures undertaken during this period— devaluation, export taxes, exchange and capital controls, a freeze on utility rates, and a heavy reliance on public transfers as a Band-Aid on rising poverty—are still key features of the economy.87 There have been dissenting voices. Firms are underleveraged; utilities are subsidized; banks are de-dollarized; and export taxes are a key source of foreign exchange. But it is unclear if there are other viable options. The international financial crisis of 2007–09 had a negative impact on the economy and choked recovery. Under President Mauricio Macri, who promised stability and credibility, the government negotiated a deal with private creditors and eventually turned to the IMF, which provided an unprecedented US$57 billion loan to stave off a liquidity crisis. There was some initial success in economic stabilization, a return to bond markets, and the end of controls, but the policies failed to inspire confidence among investors and the public. The IMF loan failed to deliver positive results, and the country returned to macroeconomic crisis. The IMF Executive Board found flaws with the program: capital flight, a lack of longer-term financial viability, and unrealistic macro assumptions about growth.88 The capital flight put pressure on the exchange rate, which continued to depreciate, increasing inflation and weakening real incomes, especially among the poor. Eventually, under Macri’s successor, Alberto Fernández, the government continued negotiations on debt restructuring with bondholders and made a deal with the IMF.  Minister of Economy Martín Guzmán noted that the negotiated agreements will save Argentina more than US$37 billion in debt payments over the next decade by lowering the average coupon rate (in US dollars) from about 7 percent to about 3 percent.89 For the moment, it seemed that the roller-coaster macroeconomic performance had been postponed. But the pandemic amplified the economic fluctuations, and the poverty rate crossed 40 percent in 2020. The economy shrank by 10 percent in 2020 and then rebounded more than 10 percent in 2021, supported by a resilient agricultural sector. Runs on the peso, a weak reserves position, divergent official and parallel rates, and recalcitrant inflation to more than 100 percent in mid-2022 maintained the macroeconomic malaise.

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Social Programs Argentina has a rich history of social programs shielding the vulnerable. At the apex of the system is the Ministry of Labor, Employment, and Social Security. Leading its efforts is the National Social Security Administration, the key administrator of social security and subsidy programs. Government administrators, business leaders, and labor unions have worked in collaboration. The universal family allowance per child for social protection guarantees that more than 9 million children and adolescents are now social security beneficiaries. The minimum wage has been recently revised upward to close to US$385 per month. The Global Gender Gap Report 2022 ranks Argentina as 33 out of 146 countries in terms of gender equality, demonstrating a good performance. A strong feminist movement has helped women achieve social progress.90  he Argentine Paradox T Several factors may help explain the Argentine paradox. First, exports and imports account for less than 30 percent of GDP.  The country is thus significantly less well integrated into the global economy relative to other emerging markets. A recent study argues that bad trade policies, rooted in distributional conflict and shaped by changes in constraints, have favored industry over agriculture in a country with a fundamental comparative advantage in agriculture.91 While the anti-export bias impeded productivity growth in agriculture, the import substitution strategy was not successful in promoting efficient industrialization. The country’s main exports are natural resource-intensive and linked to agribusiness, and there has been little diversification to more sophisticated exports. Many tariff lines remain at the maximum level of 35 percent, while nontariff barriers persist in many sectors. Related to this, the level of competition is low in many sectors, and consumer prices are high in international comparisons. The available stock of FDI is also significantly lower in Argentina than in other Latin American countries. Argentina has been a member of Mercosur—a trade association of Argentina, Brazil, Paraguay, and Uruguay—since its founding in 1991, but the organization has not been effective at boosting regional trade and forging preferential deals with external partners such as the European Union (EU) and the United States. There seems to be a missing ingredient in Mercosur compared with ASEAN, which is an active regional champion in a high-trust environment. Argentina and Brazil’s move in 2023 to

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start the process of adopting a common currency is a promising initiative. It may boost regional trade. Second, Argentina has committed the sin of ignoring original sin. It has borrowed excessively in foreign currency, which has turned the country into a victim of dollar appreciation and the international investor community. It has not done enough to develop local currency bond markets. Of course, it has also been a victim of vulture funds, funds whereby international bondholders buy distressed debt at a discount and then sue for full repayment. Vulture funds have attracted the attention and concern of the United Nations and prompted efforts to address the problem by fixing the underpinnings of the international financial architecture. Third, the fiscal system is inefficient. Historically, Argentina has had a tendency to run sizeable fiscal deficits and fund them from the capital market and from printing money from the central bank. The country spends more than it earns from taxes, and there are some indiscriminate subsidies on utilities, transportation, and energy. Moreover, Argentina is a decentralized country. Subnational governments are responsible for almost 50 percent of total consolidated public sector expenditures and more than two-thirds of public sector expenditures (excluding pensions).92 But, because taxes are handled mainly by the national government, the large resulting vertical fiscal imbalances are addressed through a complex system of intergovernmental transfers. The system is labyrinthine, and there is a trust deficit between the central government and the provinces. Small provinces are able to hold the central government hostage through excess spending, which complicates fiscal management at the center. The journey remains long. The country will have to handle the perpetual foreign reserve crises, the large gap between the official and the parallel peso-dollar exchange rate, and the continuous legal battles with overseas investors regarding bond payments. Reliance on preferential exchange rates for agriculture and various bond swaps may help alleviate some macro problems in 2023 and onward, but the competitiveness problems persist. Spending reductions may provoke social unrest. The national elections of 2023 will be fiercely contested with a range of policy proposals from across the political spectrum. Proposals for dollarization, central bank independence, and fiscal consolidation may not take Argentina to the promised land given its low domestic savings and uncompetitive industries. However, there are possibilities. With better macropolicy and better use of natural and human resources, the country has the potential to return to stronger growth and better human development.

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3.4   The Oil Powers: Russia and Saudi Arabia 3.4.1  Russia Russia is one of the more complex emerging markets. It is a middle-­ income country among the top 10 world economies. Oscillating from communism to democracy to authoritarian capitalism, it mirrors China in the variety of economic transitions. Emerging from the ashes of the much bigger Soviet Union and once (and still) a formidable geopolitical foe of the United States, Russia has struggled to find a viable economic, political, and social model. Of all the economies in the G20, Russia may be the most difficult to understand because, beneath the surface, much is unknown. There was some truth to Winston Churchill’s statement in 1939 that Russia is “a riddle, wrapped in a mystery, inside an enigma.”93 Its recent invasion of Ukraine has made Russia a pariah in the West. In October and November 2021, there was a significant Russian troop buildup along the border with Ukraine that culminated in an invasion in February 2022. The invasion has had tremendous geopolitical consequences, prompting a response by the North Atlantic Treaty Organization and dividing the world again into competing blocs. This has created concerns among many, including the United Nations secretary-general and the Pope, about the risk of greater conflict. Given the geopolitical importance of Russia, its resources, geography, and weaponry, the war with Ukraine risks becoming a protracted conflict. Russia is large, spanning 11 time zones on two continents. From Vladivostok in the East to Kaliningrad in the West, the distance across the country is the longest in the world. Russia is also one of the richest emerging markets in terms of per capita income and, prior to the war, was the fifth-largest economy in Europe. It is a mix of urban centers, oil and gas regions in the north and east, and old industrial cities. With 25 percent of the world’s proven gas reserves and more than 100 billion barrels of oil reserves, Russia is the second-largest oil producer after Saudi Arabia. It produces 10 percent of the global supply of oil, and oil revenues account for close to 50 percent of the state revenues of Russia, which is heavily dependent on oil and gas exports. Russia is an energy superpower and controls huge energy companies such as Gazprom and Rosneft. The Ministry of Gas in the Soviet Union and a private company under Yeltsin, Gazprom was taken over by the government once more under Putin in 2005. Although Russia is not a formal member of OPEC,

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it has a great deal of influence over OPEC. It is a key member of OPEC+, which is a grouping of 24 oil-producing nations, including the members of OPEC and 11 other non-OPEC producers. Dating back to the communist era, Russia has invested in human capital. Russia, according to the HDI, which is a composite measure of life expectancy, mean years of schooling, and gross national income per capita, is at a medium level of human development and ranked 62 among 173 countries in 2000 and 52 among 191 countries in 2021.94 The life expectancy of men, which is affected by excessive alcohol consumption among older men, has now improved, but the combination of declining birth rates and emigration poses demographic challenges. Social indicators for women, which were quite positive during the communist era, have improved. However, the picture may be more nuanced because there is evidence of widening inequality and shrinking social safety nets. Inequality has increased substantially more in Russia than in China and former communist countries in Eastern Europe, and the wealth held offshore by rich Russians is about three times official net foreign reserves and is comparable in magnitude to the total household financial assets held in Russia.95 It is not widely appreciated that Russia has a strong agricultural sector. Agriculture is Russia’s fourth-largest export earner. It is somewhat ironic that Russia and Ukraine have been competing as the world’s biggest grain exporters. Russia is the world’s largest exporter of wheat. Russia’s wheat exports account for close to 20 percent of global wheat exports and provided US$25 billion to the Russian budget in 2020. Annual grain harvests reach more than 100 million tons. Russian agriculture is booming, including on large industrial farms with expansive land and livestock holdings and often with close ties to Russian elites. A United States Department of Agriculture study notes that Russia has had strong grain harvests because of four factors: improving supply inputs, financing availability, state support, and favorable growing conditions for both winter and spring crops.96 The Russian Agricultural Bank provides credit in this sector. It is the envy of every African farmer. What else is important? Physical infrastructure has benefited from Russian investment since the Soviet era. Infrastructure investment averaged 2 percent of GDP per year between 2000 and 2020. This has helped support the boom in oil and gas exports to overseas markets. However, the orientation is clearly toward the needs of Moscow and Saint Petersburg, though there has been some infrastructure development around Kazan, Sochi, and other second-tier cities. Infrastructure development lags across eastern Russia, including Siberia.

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Russia has a complex political economy. It has generally been under an authoritarian government, and thus traditions of democracy and human rights are shallow. Government is a state within a state, a system with its own rules and protocols, a powerful executive, and a weak legislature and judiciary. The heads of state companies are the tycoons who make fortunes on natural resources, including in agriculture. The siloviki—the Russian security elite and the security-intelligence apparatus—are the tools and facilitators of power, the palace guard authorized to use force against citizens and others. In theory, the government in Russia follows a constitutional federal model, but in practice, government actors use the system for their own advantage, either to consolidate power or to extract rents. The federalism is inevitable given the large size of the country, but the system oscillates between decentralization and recentralization. Many regions lag in economic growth and human development, some by virtue of geography, some by virtue of money, and some because of poor regional leadership. Disparities across regions have narrowed in the past two decades but remain relatively substantial. Socioeconomic outcomes remain worse in lagging regions despite their more rapid growth and a convergence in incomes. Because of the Russian system, many resource-rich regions grow poor as the resources are centralized at the federal level.97 The central government collects 60 percent of all taxes and then transfers revenues to regions and subnational governments. Quick History For much of the twentieth century, after the overthrow of the Romanovs and the 1917 November Revolution, Russia was under communist rule. The communist model, which was developed by Lenin but then changed by Stalin, involved state economic central exercised through ambitious five-year plans aimed at building up industrial capacity and agriculture. Implementation of the system required much violence and repression, and during Stalin’s tyrannical rule, millions died. While there was an increase in industrial output and much greater support for women’s rights and public health and education, the system started to deteriorate in the 1960s and imploded in the 1980s. Visiting department stores in Moscow prior to the fall of the Berlin Wall, one became distinctly aware of the inefficiencies, the shortages, the long lines, and the lack of individual dynamism. By the late 1980s, the system was deep in crisis, prompting Mikhail Gorbachev to adopt the concepts of glasnost (openness or transparency)

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and perestroika (restructuring or reconstruction) in public discourse as an antidote to economic and political stagnation. His vision was of a reformed socialist model. Further destabilized by a dramatic decline in the international price of oil to US$30 in the mid-1980s, communist Russia quickly became an anachronism. On December 31, 1991, the Soviet Union was replaced by 15 independent countries. In the process, much of Eastern Europe was freed from Russian control. Years later, in 2005, Vladimir Putin, in his annual state of the nation address to the State Duma (one part of the bicameral Federal Assembly), declared that the collapse of the Soviet Union was the greatest geopolitical catastrophe of the century.98 The 1990s was a challenging time as Russia moved in shifts and starts to a new economic and political model under Boris Yeltsin, who governed from 1991 to 1999. Yeltsin and his team, led by Yegor Gaidar, tried to privatize and liberalize the Russian economy rapidly. Yeltsin eliminated most price controls and allowed for the ownership of private property. In January 1992, he signed a decree allowing anyone to go out into the street at any time to sell anything at any price. Supported by Western economic advisers and aid, a privatization program was developed to boost economic efficiency and profitability. Starting in 1992, many companies were privatized, including Lukoil, Sibneft, and Sidanko (oil); Norilsk Nickel and Novolipetsk Metal (metals); and Murmansk Shipping and Northwest Shipping. Some companies were leased through auctions for money lent by commercial banks to the government. A variety of schemes were used, including voucher privatization and an ill-fated loans for shares program. In practice, privatization failed and was marred by a host of regulatory and governance issues. Many state assets were sold at fire sale prices to dummy corporations, enriching a generation of oligarchs. The legacy of the Yeltsin years was mixed. The foundations were laid for an economy with a private sector, and democratization occurred in waves. However, the economy contracted in 1991–97 amid bouts of stumbling growth, inflation, and rising poverty and corruption. By the time of the ruble crisis in August 1998, GDP had fallen by almost half, and the poverty rate had increased from 2 percent to more than 40 percent. High interest rates, illegitimate privatization, poor corporate governance, and capital market liberalization provided incentives for asset-stripping but not equitable growth. People became disillusioned because the transition from communism to capitalism had not led directly to the fulfillment of the promise of unprecedented prosperity.99 Macroeconomist Jeffrey Sachs, an advisor to the Russian government in the early years, said that it

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was tragic that the West, with its power and wealth, had not contributed to more satisfactory change in Russia and that Russian elites had been even more irresponsible because they had allowed the massive corruption to take place.100  ecent Macroeconomic Performance R The economic performance of Russia post-2000 has been mixed. Russia has some macroeconomic resilience. Beginning in the late 2000s, Russia began nourishing several funds to save resources for a rainy day. Between gold reserves, the National Wealth Fund, and the Reserve Fund, Russia had close to US$640 billion prior to the start of the Ukraine war. Prudent macroeconomic management of oil and gas windfalls has helped buffer the economy from external shocks. In January 2001, the country became the first large economy to adopt a flat tax (13 percent). Until the Ukraine war, the country had a relatively balanced budget and low public debt, and inflation was close to the central bank target of 4 percent. The recent trends have been less positive. Sergei Guriev notes that, in 2013–19, the Russian economy started to shrink relative to other emerging markets.101 Real GDP grew by only 0.9 percent annually on average, and real household incomes declined. Investment became quite weak during the 2010s, a result linked to corruption and weak institutional quality. Simeon Djankov notes that in recent years, the Russian economy has shifted from crony capitalism to state capitalism, characterized by an increase in state ownership in sectors like finance, energy, and transportation; use of energy exports as instruments of foreign policy; delays in reforms in pensions and healthcare due to resource revenues; rise in the share of extreme wealth in the economy; and rise of sanctions by the United States and European Union.102 And there was the chronic problem of excessive regulation, which prevents private sector actors from starting up businesses and impedes general business development. Russian entrepreneurs complain about the complicated permitting and approval process, which becomes even more complex when a foreign business is involved. A study more than two decades ago found that, in the Russian industrial landscape, despite privatization, robust competition is still lacking, stifled by excessive concentration, vertical integration, and geographic segmentation, and that many established firms enjoy protection from rivals.103 That observation is even more pertinent today.

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Political tensions with the West in the aftermath of the 2014 Ukraine crisis led to sanctions on the Russian economy in 2014 and 2015 and consequent adverse effects. GDP declined by at least 1 percent after the first set of sanctions in 2014. The sanctions and the COVID-19 shock dampened prospects.  he Impact on Russia of the War in Ukraine T In the aftermath of the Ukraine invasion, Western nations imposed an array of sanctions designed to weaken the Russian economy. Sanctions against high-ranking Russian government officials and certain Russian oligarchs were also implemented. The Russian Ministry of Finance, international organizations, and independent experts all projected a significant decline in growth, mostly because of the war, the sanctions, and the associated decline in private investment. Indeed, GDP fell by 2.1 percent in 2022, and this was one of the largest slumps in GDP growth since the collapse of the Soviet Union in 1991. But it was much smaller than expected, compared to projections that it would fall by more than 10 percent in 2022. Among the sanctions, the financial measures included an attempt to limit Russian access to money and the removal of Russian banks from the international SWIFT payment system. The assets of Russian banks were frozen overseas, and it became quasi-impossible for Russian corporates to borrow money from Western banks. The United States banned all Russian oil and gas imports, and the EU banned sea imports of Russian oil. Starting in December 2022, the EU and G7 decided to cap the price countries pay for Russian oil at US$60 a barrel. The EU did not impose sanctions on Russian gas because it relies on Russia for about 40 percent of its gas needs. But it imposed a price cap on both Russian and non-Russian gas at US$180 per megawatt hour. However, the Russian government decided to cut gas being supplied through Nord Stream 1, citing technical issues. The German government froze plans for the opening of the Nord Stream 2 gas pipeline from Russia. Nord Stream 2 was eventually sabotaged. In retaliation to the sanctions, the Russian government prohibited firms located in Russia from paying overseas shareholders and stopped foreign investors from selling their investments in Russia. The country has banned exports of more than 200 goods, including medical, agricultural, and electrical equipment and timber products.  Russia also managed to circumvent the sanctions by increasing oil exports  through third countries, including China, India, Turkey, Kazakhstan, Armenia, and

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Kyrgyzstan. Russian trade with China reached a record US$190 billion in 2022, and Russia overtook Saudi Arabia as China’s top oil supplier. This Russian pivot to the East  has led to a realignment of the global energy system.  The budget went into a deficit of 2.3 percent of GDP in 2022 as the economy transitioned to the new reality and as resources were transferred from the civilian sector to the security sector. Russian budgets in the last decade have usually been in surplus, reflecting a conservative fiscal policy and a balanced budget using an oil price of US$45 a barrel and preferring to put money in the sovereign wealth funds rather than expanding safety nets. Military spending has been supported by taxes on exports of oil and gas. Gazprom has seen major declines in gas exports to Western Europe because of the sanctions and the events around the Nord Stream pipelines. Russian imports are estimated to have contracted substantially because of the war and the sanctions. A comparison of actual trade flows with a no-war counterfactual suggests that aggregate Russian imports in March– August 2022 were about 40 percent below the corresponding counterfactual, with much stronger effects among flows from sanctioning countries and in certain products, such as motor vehicles and electronics.104 Many international companies have left Russia. There has been an exodus of Russian talent into Europe and North America. Another shock has been the decline in industrial production because of the cuts in imports of high-­ technology parts. Some global agricultural supply chains have been disrupted, leading to higher global wheat and fertilizer prices. Russian agriculture has remained relatively stable, and the high global oil and gas prices have put wind in the Russian sails. Gazprom made huge profits in 2022 because of the high gas prices, and oil revenues rose in Russia by more than 40 percent. The government succeeded in rerouting some oil and gas exports to China, India, and Türkiye, even by selling at a lower price than in Europe and focusing on countries that are not enforcing the price cap. There were challenges in reorienting gas to China because of pipeline capacity. The invoicing of Chinese oil purchases in rubles helped shield the operation from sanctions. The Russian government also continued to sell oil to some Eastern European countries—the Czech Republic, Hungary, and Slovakia—through pipelines. Russian oil is now trading at a significant Urals discount. Russian policymakers developed an alternative to the SWIFT payment system by creating a national payment card, the Mir. And the ruble survived in 2022 as one of the top-performing currencies because of the

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savings in the sovereign wealth funds and capital control measures introduced by the Russian central bank. A decision that had been taken in early 2022 to raise interest rates to 20 percent to fight growing inflation, which had reached more than 17 percent, helped protect the currency. Inflation has since come down significantly to lower single digits, and the key Russian interest rate is now 7.5 percent. In the absence of a difficult political settlement, the sanctions on Russia are expected to remain in force for the foreseeable future, leading to isolation from technology and capital markets and longer-term economic stagnation in Russia up to 2030 and beyond. However, in a recent speech, the Governor of the Central Bank of Russia has spoken of the adjustment of the Russian economy, the structural shifts in the economy, including rise of construction, some manufacturing sectors, and transportation, the rise of new logistics corridors (especially in the East), the low unemployment and tight labor market, the importance of potential future rate hikes in case inflation would exceed the 4 percent target, and the decline in private sector investment due to sanctions.105 But the collapse in imports and private investment, leading to supply shortages in industrial sectors, especially automotives, will have longer-term economic consequences. Many see long-lasting costs to Russia from the loss of talent, foreign firms, and inputs. The trifecta of excessive state control, flight of investment capital and human resources, and delinking with the West suggests a stagnating future path.  However, this can be partially  offset by sizeable  energy reserves,  larger  Russian exports of oil and gas to  Asia via the Power of Siberia pipeline in Western Siberia, an eventual peaceful settlement of the Ukraine-Russia conflict, and greater exploration in the Arctic. 3.4.2   Saudi Arabia The desert kingdom, Saudi Arabia, is the world’s largest petroleum exporter and the second largest oil producer after the United States. Its fate has been inextricably linked to the international price of oil. Oil accounts for 80 percent of government revenue. A high per barrel price means a high fiscal and current account surplus, low government debt, and high reserve accumulation. Since the early 2000s, on the back of the oil boom, GDP and household income have more than doubled, and the economy is now valued at US$830 billion. Because of more than 270 billion barrels in oil reserves, Saudi Arabia has been the only economy in the world with the spare capacity to tilt the market price. Decisions by the

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Saudi government in OPEC meetings are closely watched. Current accounts in many non-oil emerging markets are influenced by what happens in Riyadh. The IMF estimated that the Saudi economy grew at an 8.7 percent rate in 2022, the highest growth rate among emerging markets or advanced economies. The government managed to keep inflation below 3 percent in 2022. The economy follows a state-run model. The public sector thus accounts for two-thirds of GDP, and the private sector is dependent on government contracts. During booms, the government is flush with revenue, which is used for public investment projects. The procyclical fiscal policy means that government expenditure expanded every year from 2003 to 2015 and then again after 2021, coinciding with oil booms. The country blends tribal norms, social conservatism, ambitious urban planning, and capital-intensive energy extraction. Anyone who has visited Riyadh notices the stark contrasts between the traditional mosques and the sleek designer stores. The destinations of millions of Hajj pilgrimages each year, the holy sites of Mecca and Medina generate close to US$15 billion a year for the Saudi treasury. Saudi Arabia is difficult to study because of the significant obstacles to accessing information. Fred Halliday has observed that no economy in the world is as opaque and as strategically significant as Saudi Arabia.106 “I’m telling you, you can’t compare Saudi Arabia to other countries,” the Saudi billionaire Al-Waleed bin Talal once said.107 Social policy and labor market policy are evolving. The government’s policy toward women has been antiquated but is now under reform. The gender gap ranking shows Saudi Arabia as a poor performer, with significant gender wage gaps.108 But, despite many discriminatory practices, more women than men are now graduating from universities. The share of Saudi women in the labor force has doubled to 35 percent since 2018.109 People ages below 30 represent about 58 percent of the population. In 2021, the number of new entrants who had not previously worked was more than 200,000. The Government is now seeking foreign talent and foreign capital. The initial public offering of stock in Aramco, the government-owned oil company and one of the most profitable global players in oil, captured substantial investor interest. The government decided to privatize a minority stake in the company, which had been a state monopoly for years. Raising nearly US$30 billion for the kingdom, the initial public offering was one of the largest ever, surpassing the US$25 billion offering of stock in the Chinese internet giant Alibaba in 2014.110

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History and the Economy On Valentine’s Day 1945, Franklin Delano Roosevelt met Saudi King Abdul Aziz Ibn Saud on the USS Quincy. During the meeting, FDR, now in considerable ill health, asked for the settlement of 10,000 Jews in Palestine and for strategic access to Saudi oil. An oil-for-security deal, which has recently been unraveling, was cemented at the meeting. The outcome was a strategic pact with the United States that has guided the polity and economy of Saudi Arabia. Ever since Chevron and Texaco had discovered oil in eastern Saudi Arabia, US policymakers had viewed Saudi Arabia as a strategic partner. Eventually, Saudi Arabia became one of the guiding founders of OPEC in the 1960s, together with Iran, Iraq, Kuwait, and Venezuela. Although there is debate around whether the economic evidence demonstrates it is a true cartel, OPEC does exert substantial influence on the oil market including by ensuring oil price stability. The Saudis have been trying to diversify, partly to create jobs for younger Saudis. The government encouraged farmers to grow wheat and become self-sufficient and ended up paying them close to US$1000 a ton for the product in the 1970s. However, the program led to depletion of the water table and was expensive, and it was canceled. In the 1970s, under King Faisal, the government tried to use tariffs to finance the establishment of domestic manufacturing. Because of the lack of a dynamic private sector, the power of importers, the complex supply chain, and the higher export costs, the endeavor never bore fruit. The petrochemical industry and some other industries linked to the oil sector were the only ones that managed to survive. Saudi Basic Industries Corporation, a chemical manufacturing company involved in petrochemicals, fertilizers, and metals and one of the largest public companies in the Middle East, became the crown jewel of domestic industry. The country has a well-managed financial system and a high credit rating. The government has instituted the Public Investment Fund, a well-­ capitalized sovereign wealth fund, financed not by the Saudi banking sector but by a combination of government capital transfers and foreign loans. The fund is currently valued at close to US$500 billion. It is not merely a government asset holding company but a venture capital investor seeking new business opportunities. Thus, over the last decade, using the fund, the Saudi authorities have undertaken an ambitious plan covering close to 80 megaprojects. The plan seems to be an attempt to build almost everything: the world’s tallest tower, several megacities, massive rail links, tourism infrastructure, an enormous road network, and much else. Under

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Crown Prince Mohammed bin Salman, the government is now constructing a futuristic high-tech US$500 billion city in northwest Saudi Arabia that will be devoted to future technologies in 16 sectors, including tourism, manufacturing, and technology. It is also creating an ambitious set of four special economic zones and using low corporate tax rates to attract relocation of foreign companies. It hopes its joining the WTO in 2005 will reap rewards. Economic Management The country’s macroeconomic architecture rests on four pillars: a dollar peg to the euro, the use of fiscal policy to manage the macroeconomy, the development of the sovereign wealth fund, and a prudent approach to managing current account sustainability. The dollar peg is important because the country’s main exports are priced in dollars. The government uses fiscal policy strategically. For example, in the aftermath of the global financial crisis of 2007–09, the government launched a fiscal stimulus package, and capital spending reached more than 10 percent of GDP. During busts, there is some retrenchment in spending. The government relies on a formula to deposit excess revenues into the Public Investment Fund. The low cost of debt servicing and food imports relative to the large volume of exports ensures that the current account is always in surplus.  hallenges and Vision 2030 C Oil dwarfs the rest of the economy, and the only sectors that are growing are construction and services. Except for the Moslem hajj pilgrimage, tourism remains elusive but has potential. The size of the population is close to 21 million. The unemployment rate is around 10 percent, and it is especially high among young people and college graduates. Under a new policy, low-skilled Saudis and higher-skilled Saudis are starting to take jobs from migrants and more highly skilled expatriates. Construction, banking, retail, and IT are dominated by foreigners. The labor market needs to be rebalanced. It is segmented between a private sector largely staffed by expatriates at the higher end and migrants at the lower end, who are usually paid less and are easier to hire and fire, and a public sector largely staffed by Saudi nationals. Almost two times more Saudis work in the public sector (3.2 million, including the military and security services) than in the private sector (1.7 million). Promising fresh areas for jobs include health care, retail, tourism, and local services.

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The government is in the midst of economic reform. The target of the diversification undertaken as part of the reform and laid out in Vision 2030, a strategic development framework, is based on three pillars: to reinforce the Kingdom as the heart of the Arab and Islamic worlds; to turn the economy into a global investment powerhouse; and to utilize the Kingdom’s geographical advantage to connect Africa, Asia, and Europe.111 The vision is ambitious, including the goal of becoming one of the top 15 economies in the world; increasing the private sector’s contribution to GDP from 40 percent to 65 percent; increasing FDI from 3.8 percent to 5.7 percent of GDP; and raising the share of nonoil exports in nonoil GDP from 16 percent to 50 percent. The government also has a plan to improve institutional quality and streamline decision-making. A flurry of initiatives are involved in the plan to try to turn Saudi Arabia into one of the more technologically advanced countries through investments in innovation and by attracting international talent. The aim of a new program of research, development, and innovation is to add US$16 billion to GDP by 2040. Another project, Saudi Vision Cable, involves laying a first high-capacity submarine cable in the Red Sea. The Alibaba Cloud in Riyadh will deliver cloud computing and IT services. Covering an area of more than 10,000 square miles, Neom, a futurist high-tech smart city in northwestern Saudi Arabia is planned. The Line in Neom, a smart linear city 110 miles long and 660 feet wide that is part of the project, is expected to have no cars, streets, or carbon emissions. The country is also aggressively targeting the establishment of regional headquarters for foreign companies. The country appears rife with opportunity. Several challenges persist. The Saudi economy is overly dependent on oil prices, and, given the fluctuations in the international oil market, the country remains vulnerable. Moreover, lower subsidies, higher taxes, and more expensive labor have eroded some of Saudi Arabia’s traditional advantages for firms.112 Tourism is facing competition from other countries, and it is hard to see tourism as the largest provider of new private sector jobs. FDI inflows have been lower than expected. Ambitious public flagship investment projects may be a gamble. Housing prices have increased rapidly in Riyadh and Jeddah, and there is some discontent about the 15 percent value-added tax and the decrease in subsidies. The economy of Saudi Arabia is in transition, especially between the traditional and the modern. The recent signing of Cristiano Ronaldo, a superstar, to play for Saudi Professional League club Al Nassr for an estimated US$200 million a year indicates a desire to bring in foreign talent.

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But questions persist about the country’s economic model in a context of climate change. At the 2018 Future Investment Initiative Conference, Saudi Oil Minister Khalid Al-Falih said that the market will never be without oil and gas producers because they are indispensable to avoiding the shifts and that oil and gas will continue to occupy two-thirds of the energy mix over the next three to five decades.113 But there is a general global consensus that fossil fuels will really start to diminish in significance in the next ten to twenty years. Can the Saudi economy make a successful transition to a nonoil economy? Will its non-oil private sector continue to grow? What is the future of both physical and digital infrastructure projects? Can the country’s social contract between government and citizen be rewritten? History will be the judge.

3.5  Other Emerging Economies: Indonesia, South Africa, and Türkiye 3.5.1  Türkiye An important member of the G20, Türkiye was until recently a poster child for economic recovery because of the country’s significant economic and social development following a long period of failed growth. Between 2000 and 2015, the economy surged, leading to increases in productivity and foreign investment. Significant investments in infrastructure improved the country’s competitiveness. The country’s airports, roads, and ports were modernized. Clothes, cars, hazelnuts, and much else were the stars of an export miracle. The country became increasingly linked to global value chains (GVCs). Three Turks in four were living in urban areas, and the cities were booming. All the leading conglomerates were large and versatile and owned by families, some across multiple generations. The opening up of trade and capital flows helped Turkey’s economic modernization, with the share of trade in GDP rising from 10 percent in the 1980s to more than 50 percent currently. The customs union with the EU helped Turkey become part of the “European convergence machine,” which helped accelerate the technological modernization of Turkish manufacturing.114 However, the 2010 pledge of President Erdogan to make Türkiye one of the 10 top-performing economies by 2023, which was also the centennial of the modern state of Türkiye, did not fully materialize. In recent

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times, the economy became plagued by currency crises, debt, and volatile capital flows. Some of the shocks have been external; some of the wounds, self-inflicted. Some of the institutions, such as the Central Bank, have become politicized and have lost independence, and democracy has been affected. Recent surveys show that more than two-thirds of the population is struggling to pay for food and cover rent because of an inflation rate at more than 80 percent, and the effort to stabilize the lira is a struggle. The incidence of poverty—the rate had declined from 44 percent to 18 percent between 2002 and 2014—is showing signs of increasing because of the rising cost of living. The recent severe earthquake of February 6, 2023, caused an economic impact accounting for more than 5 percent of the country’s GDP. History The modern Turkish state emerged from the breakup of the Ottoman Empire in the early 1920s. Spanning more than 600 years, the Ottoman Empire, at its peak, controlled the area of modern-day Türkiye, the eastern Mediterranean, coastal areas of North Africa, and large parts of Eastern Europe and the Middle East. Emerging from the Anatolian heartland in central Türkiye, the Ottomans ruled their large empire through a combination of centralized power, military might, a degree of autonomy and protection for ethnic and religious minorities, and the control of trading corridors between Asia and Europe. According to economic historian, Şevket Pamuk, the longevity can be explained by the fact that the central bureaucracy of the Ottoman Empire adapted the empire’s economic, monetary, and military institutions to changing circumstances with a degree of flexibility.115 However, by the nineteenth and early twentieth centuries, the Ottoman Empire was in decline and labeled “the sick man of Europe.” After World War I, the Ottoman Empire, which had been among the Central Powers, was dismantled. From the ashes emerged Kemal Atatürk, the founder of the modern Turkish state, who abolished the Ottoman caliphate and modernized the government. The government model involved an elite civil service, together with the army, but tempered by an intellectual class. Atatürk secularized Türkiye and removed the Islamic religion from the public sphere. He banned the fez and romanized the alphabet. In both substantive and symbolic ways, he facilitated Türkiye’s entry into the modern nation-state system.

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Economic Development During the 1980s and 1990s, despite a transition from import substitution to a neoliberal model under President Turgut Özal, the government was unable to find a sustainable growth model and achieve macroeconomic stabilization. The economy was hampered by high inflation and mired in debt, stagnant growth, and political turbulence. In the aftermath of the East Asian and Latin American crises of the late 1990s, the country experienced a severe crisis in 2001 in the financial sector and banking that then spilled over to the rest of the economy. The root causes were a government that was spending and borrowing excessively and a banking system that was poorly regulated. The government was trying to finance its operations by selling large quantities of high-interest bonds to Turkish banks. This was unsustainable. In December 2000, bank interest rates reached close to 1700 percent, part of a desperate attempt to prevent high inflation and rescue the plunging lira. Capital flight and a deep recession were the consequences. What were the deeper causes of the 2001 crisis? Türkiye had become excessively dependent on inflows of short-term capital. The result of the availability of this hot money was a boom-and-bust cycle. Private banks had become increasingly reliant on borrowing abroad and on resident foreign exchange deposits for investment in Turkish treasury bills. Almost two-thirds of the liabilities were denominated in foreign currencies.116 Coalition politics were not working, and corruption was endemic. It was time for the government to change course. The crisis shook the country to the core. An international bailout by the IMF led to significant economic restructuring and a bailout of US$11.4 billion in 2001. Under the Minister of Economic Affairs Kemal Derviş, the country went through a reform program of macroeconomic stabilization. This was serious medicine, not cosmetics. Many unproductive state enterprises were privatized. Macroeconomic management was modernized; the Central Bank became more independent; public banks were restructured; and private banks were recapitalized. The exchange rate was floated, and incentives were provided to attract FDI.  Several important independent regulatory agencies were created, and the foundation was laid for successful cooperation between the public and the private sectors. The policy reform survived the government of the Justice and Development Party that now came to power. The reforms helped jump-start the economy. The neoliberal magic had actually worked. Türkiye was back. Between 2002 and 2015, the economy

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grew at an annual rate of more than 6 percent. The evil beast of inflation was finally tamed. Infrastructure projects proliferated; manufacturing became a new growth engine; FDI flowed in; poverty declined; and the middle class surged. The country successfully introduced universal health care in 2003, financed by taxes. Turkish firms, especially in the construction and engineering sectors, expanded outside the country’s borders. Investments in energy, infrastructure, and telecommunication helped fuel growth. Something profound had occurred. Out of central Anatolia, a class of entrepreneurs emerged in Ankara, Gaziantep, and Kayseri. Turkish Airlines became a world-class airline. Despite the world financial crisis, Türkiye continued on a growth path until 2015. In the late 2010s, Türkiye was suffering reversals. The magic had worn off. The overdependence on heavy borrowing in foreign currencies fostered volatility. A trend of low domestic savings was hurting households and the private sector. Investment was hampered by the triple threat of global geopolitics, the government’s inability to stem inflation through interest rate policy, and depressed financing. Then came the Russian invasion of Ukraine, the surge in oil prices, and the high inflation. Living standards eroded. The increase in food prices reached close to 100 percent in 2022 relative to the previous year. Domestic consumption, which accounts for close to two-thirds of the Turkish economy, was particularly affected. Shortages were increasing. The country’s reserve position was evaporating, and more than 50 percent of bank deposits were in dollars or other foreign currencies. Manufacturing Turks like to tell foreign visitors about the Anatolian tiger. Turkish firms have emerged as world leaders, but this did not happen overnight. First, there was the rise of a dynamic entrepreneurial group in the Turkish heartland. These were all family-run businesses in sectors ranging from agroprocessing and automotives to textiles. Why did manufacturing surface in the part of the country with the highest logistics costs rather than the more accessible coastal regions? Some sort of cluster had formed among the cities of Anatolia, and the enterprises had somehow already acquired negotiating skills, business expertise, and networks. The cities were far from imperial Istanbul, and they had an ambivalent relationship with political power. They were not recipients of subsidies or the money of foreign investors, though some had entered into joint ventures with strategic partners.

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Koç Holding is Türkiye’s largest conglomerate, with more than 100 companies and 90,000 employees. It began as a family business but now accounts for close to 10 percent of Türkiye’s exports. It is the only Turkish company listed in the Fortune 500. Like many conglomerates, it has a wide array of interests, including banking, supermarkets, energy, oil refineries, white goods, real estate, and automotives. “This is my code,” said Vehbi Koç, the founder of Koç Holding, “I live and prosper with my country. As long as democracy exists and thrives, so do we. We shall do our utmost to strengthen our economy. As our economy prospers, so will democracy and our standing in the world.”117 What is its secret? In a way, Koç exemplifies the dynamism and agility of the country’s firms. It succeeded because of the manufacturing capabilities of the founder and its diversification into multiple product lines. It entered into joint ventures with Fiat and Ford. It capitalized on Türkiye’s unique location to provide quality manufacturing for European product suppliers and integrate into European global value chains. It benefited from low shipping costs. It took advantage of competitive wages to become a global player in construction, food and beverages, and home products. In a country with a population with an average age of 31, the conglomerate is guaranteed a pool of talented labor. Successes and Challenges The World Bank finds that three factors explain Türkiye’s progress to the threshold of high-income status: successful integration with the world economy based on the anchor provided by trade relations with Europe, solid public finances that allowed the country to move from debt service to public service in the wake of the 2001 crisis, and a dynamic private sector buoyed by broadly market-friendly policies.118 In a cautious assessment, Harvard macroeconomist Dani Rodrik finds that Türkiye’s shift from printing money to capital inflows helped lower inflation and that the switch from public sector to private sector borrowing led to lower government deficits.119 Mediocre growth rates resulted from a lack of sustainable external deficits, and the economy’s dependence on financial market sentiment and confidence renders it vulnerable. The Turkish model that relies on foreign savings and large current account deficits is able to generate growth, but it runs into inherent problems. Current stability in the Turkish economy relies on foreign-exchange-protected deposits and foreign exchange sales by state banks, both of which are affected by high capital outflows and costly external financing.120 Two experts, Sebnem

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Kalemli-­Özcan and Selva Demiralp, note Turkey’s slow motion economic crisis and argue that Turkish banks cannot engineer a balance between exchange rates and interest rates in a country with liberalized capital flows, where banks’ funding conditions are affected not only by the global financial environment but also by country risk.121 Previous balance of payment crises in Türkiye have ended in military interventions or the collapse of political parties. The Turkish model worked well from 2000 to 2015. Government spending was under control; exports were expanding; and growth was booming because of its productivity in manufacturing and services. But the dependence on hot money was not a recipe for success. Negative real interest rates are prominent in Türkiye compared to other emerging markets. However, the dependence of Turkish banks on external flows is worsening as the dollar rises, with more than US$140 billion in foreign bank financing. Istanbul Chamber of Industry Chairman Erdal Bahcivan is worried.122 Turkish exports face a financing crunch because of a restriction on lira loans to companies that are deemed to hold too much foreign exchange and because of the growing difficulties faced by exporters in obtaining loans from the state-owned Export Credit Bank of Türkiye. Companies are being encouraged to sell foreign currency to protect the weakening lira. Tourism and informal funds from Saudi Arabia and other countries are providing critical foreign exchange. Türkiye has made uneven progress in human development. It ranked 54 among 189 countries on the HDI.123 It has made significant progress, but lags substantially in gender equality. In 2019, the average income among women was only 47 percent of the average income among men, and the labor force participation rate was only 34.0 percent among women, against 72.6 percent among men. Inequality does not help. In 2020, the richest 20 percent of the welfare distribution accounted for close to half of all national income, while the poorest 20 percent accounted for under 5 percent. Türkiye illustrates the good and the bad of globalization. It is an emerging market where there has been a successful IMF program, and it has managed to demonstrate old-fashioned macroeconomic reform. It has capitalized on its location in the EU market. But its vulnerability to the external world remains a liability, a double-edged sword. The future of Türkiye seems uncertain. Predicted to reach 100 million people by 2040, the country can continue to capitalize on its skilled and competitive labor force, young population, geographical location, and dynamic

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entrepreneurial class. But it has to overcome political polarization and macroeconomic volatility. Türkiye’s journey forward in the twenty-first century may be unpredictable. 3.5.2  Indonesia Valued at more than US$1 trillion, the Indonesian economy is the largest in Southeast Asia. If it were grouped in East Asia by the United Nations, it would be the fourth-largest economy in that region after China, Japan, and Korea. It is an upper-middle-income country and a stable democracy in Southeast Asia, a region where reversals are frequent. The large population, 270 million in 2020, is rapidly becoming more urban. Household consumption represents more than 55 percent of GDP. Indonesia has not been on the radar of pundits in the West, partly because of distance and partly because it has grown in the shadows of other centers of gravity. Indonesia is an archipelago of more than 17,000 islands, the only such country on the planet. At the same time, despite its internally remote geography and heterogeneity, it is characterized by strong social cohesion and a nationalist ethos. Its capital, Jakarta, is a booming and congested megacity. As anyone who has visited Indonesia can testify, traffic is as jammed in Jakarta as in Cairo, Dhaka, or Manila. In contrast, the country is blessed by nature and is a natural resource powerhouse, exporting rubber, oil, timber, and palm oil. Overnight, it has become a steel exporter. It has sometimes banned exports of raw materials, including bauxite and nickel, in order to spur industrial development at home, prompting legal challenges at the World Trade Organization. In January 2020, Indonesia banned the export of raw nickel as part of a relatively successful “downstreaming” policy to get higher export revenues and develop a mineral smelting industry and an electric vehicle (EV) cluster.  Nickel-related export revenues have increased from US$2 billion before the ban to close to US$34 billion, and the country is working with Chinese investors to deepen its manufacturing capabilities. It is facing a probable major energy transition; because of its extensive use of coal, it is a top 10 carbon emitter. Indonesia joined Malaysia, the Philippines, Singapore, and Thailand as founding members of ASEAN in 1967. This organization, despite all the pessimism at its birth, has flourished. However, compared with its ASEAN neighbors, Indonesia is less well integrated into the world economy. Its ports are congested, and its roads are not world class. Delays in land acquisitions for infrastructure projects and bureaucratic inefficiencies have

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hindered the flow of FDI. Exports account for only 20 percent of GDP, and FDI is low relative to many of the country’s neighbors, averaging 2 percent of GDP.  Historically, the government has viewed FDI with a degree of suspicion, and it has tried to maintain local or national ownership over resources. The economy is based on a combination of SOEs in telecommunication, gas, and banking and private, family-owned conglomerates, many run by Chinese Indonesians. The government holds a majority share in many listed companies. Some conglomerates that first emerged in the 1960s and 1970s are also currently listed on the Indonesia stock exchange. These conglomerates span real estate, retail, construction, and health care. Macroeconomic management has been sensible, and fiscal policy has been prudent. The country has not had unsustainable current account deficits, and the debt-to-GDP ratio is relatively low, at 40 percent in 2022. Inflation has been stable. Since the 1980s, the government has always maintained a relatively flexible and competitive exchange rate. Export growth has been relatively solid. At the microlevel, the middle class is growing rapidly, reaching more than 90 million people, while human development indicators are constantly improving. The national savings rate is now more than 30 percent relative to GDP.  ecent Economic History R During Suharto’s administration, from 1966 to 1998, the poverty rate showed an appreciable reduction amid robust economic growth. Indonesia was regarded as an Asian tiger, with an average growth rate of more than 7 percent a year. The government and stakeholders made a quick transition to export-oriented manufacturing in the mid-1980s, a major structural adjustment that followed the footsteps of other Southeast Asian countries, such as Malaysia and Thailand. It was the sharp decline in oil prices in the mid-1980s that pushed the technocrats on the economic team of Suharto, led by the Berkeley Mafia, to build up a solid industrial base.124 In parallel, the country became self-sufficient in rice production at this time. The government focused on promoting the development of food crops and provided input subsidies for fertilizer, pesticides, and irrigation that helped boost yields. Farmers obtained access to credit, and they applied new technologies and rice varieties developed by the International Rice Research Institute in Los Baños in the Philippines. The late 1990s proved a difficult time because of the Asian financial crisis (1997). Despite low inflation, a strong trade surplus, and a fiscal

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surplus, Indonesia was unable to resist the contagion effect of the Thai financial crisis. The country was overly exposed to foreign exchange risk in the financial and corporate sectors because of significant inflows of speculative money. Indonesia became the poster child of crony capitalism. The net swing from inflows to outflows between 1996 and 1997 totaled more than US$100 billion in the five crisis countries—Indonesia, Korea, Malaysia, the Philippines, and Thailand—or 11 percent of their GDP before the crisis.125 The economy was severely affected, and what began as a currency crisis in the summer of 1997 became an economic and political crisis. Corporate balance sheets worsened. The rising prices associated with a devaluation were the immediate cause of the end of the government of President Suharto after 32 years in power. After these difficulties of the late 1990s, the 2000s have seemed much better. Indonesia has enjoyed significant political stability. It had turned a corner. The current president, Joko Widodo, popularly known as Jokowi, who campaigned on a platform centered on reducing costly energy subsidies and upgrading infrastructure, has had partial success. In his first term, in 2014–19, the economy reached a GDP growth rate of 5 percent, compared with his announced goal of 7 percent. He tried to reduce the fiscal deficit and restore the confidence of international investors in the economy. In 2020, his administration imposed a new regulation, the Omnibus Bill or Job Creation Bill, to boost investment and employment. Initiatives have also been introduced to foster infrastructure development and digital transformation. Recent, more subtle transformations have occurred in governance. Practices evident during the heyday of crony capitalism in the 1990s have lost currency in the last two decades.126 There is no longer overt discrimination against Indonesians of ethnic Chinese descent. There is no longer a single center of power, and monopoly has given way to oligopoly. Private business has become socially respectable. And, now, democracy signifies a coalition government and a negotiable political settlement. Manufacturing Before the Asian financial crisis, Indonesian manufacturing was doing well. Manufacturing output grew by more than 10 percent between 1990 and 1995. After the commodity boom in the 2000s, the sector went into a relative decline, largely because of an increase in commodity exports, including the Chinese hunger for Indonesian coal. During the surge in prices for raw materials, there were few incentives for Indonesian industry

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to transform exports of raw materials into more highly processed products. The country did not become integrated into global supply chains. Compared with its East Asian competitors, Indonesian manufacturing was more closely focused on textiles, food, automotives, and tobacco than on sophisticated electronics or machine products. The numbers tell the story. The average rate of return on equity across listed firms in manufacturing dropped from 14 percent during 1990–96 to 7.5 percent during 1999–2010. The country may be facing early deindustrialization because manufacturing, which represented more than one-­ fourth of economic output in the 1990s, had fallen to less than a fifth by 2020. But the manufacturing sector has been expanding more recently, notably in automotives and chemicals. Manufacturing exports were valued at close to US$180 billion in 2021, more than 75 percent of the country’s total exports. The government hopes to make Indonesia a manufacturing superpower. The trajectory of the sector remains uncertain, however, especially given the growing services sector and the natural resource endowment. Coal is king in Indonesia, and the energy transition will be complex. The country produces substantial amounts of palm oil. It possesses a sustainable growth engine, and it is in a peaceful neighborhood. Its technocrats have been guiding it wisely. Crony capitalism seems to have been swept aside as a policy. In today’s upside-down world, these advances should not be underestimated. The fate of the archipelago may be bright. 3.5.3   South Africa South Africa had a turbulent twentieth century. Emerging from the shadows of apartheid, whereby a white elite ruled over a country with a large black population, it underwent a difficult transition to the twenty-first century. Benefiting from a coastal location at the Horn of Africa and a favorable natural resource endowment, South Africa is the most industrialized and diversified country in sub-Saharan Africa and a statistical outlier on the continent. Its mining sector is a global envy, contributing more than US$10 billion a year in foreign exchange. Gold and platinum rule. First-­ time observers may feel they are not in Africa when they see the country’s airports and highways. The infrastructure is well developed and sophisticated. The financial sector is strong. The capitalization of the stock market is at more than US$1 trillion. Many international companies are engaged

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extensively in the country. This includes Anglo American plc, Barclays Bank, BMW, General Electric, the Standard Bank Group, Vodafone, Volkswagen, and more than 75 percent of all top global companies active in Africa. The labor union membership rate, at more than 25 percent of the employed workforce, is one of the highest in the world. Private sector businessmen may be heard complaining about the competitive compensation available to public sector employees. The country is also blessed with truly wonderful agriculture. Together with Argentina and Brazil, South Africa produces abundant, high-quality meat and vegetables. Nelson Mandela said that the combination of natural beauty and Africa’s most splendid wildlife makes South Africa the most beautiful place on earth.127 Yet, though South Africa is an upper-middle-income country, the averages mask huge disparities. No other emerging market has such a racialcontested history, such a contrast between beautiful topography and messy past. Driving around the sprawling megacity of Johannesburg and the economic engine of the country, one can understand the many speeds of the economy. Johannesburg is a city of profound contrasts. It was initially a kind of boomtown during the gold rush of the 1880s. There is the rich Central Business District, with its dense agglomeration of skyscrapers; Sandton, the financial and shopping center; and Hillbrow, the high-crime, densely populated inner city that became destitute after many businesses left the area in the post-apartheid era. Then there are the municipalities and townships, such as Soweto (South Western Townships), part of the City of Johannesburg Metropolitan Municipality. This suburb is home to 1 million people and was the former residence of Mandela. Originally populated by black laborers who had migrated from rural areas during the early twentieth century, it represented residential segregation par excellence under the apartheid regime. Conveniently, it borders the city’s southern mining belt. (South Africa is one of the most coal-dependent emerging markets; more than 85 percent of its energy comes from coal.) And of course, not far away is Pretoria, the administrative capital, formerly an Afrikaner stronghold and now a more global city. The weird equilibrium is fascinating. The majority controls the political apparatus, whereas the minority controls the land and other assets. There is some redistribution through a good service delivery model. There is some unity in the air, and the decentralized system of local governments seems to work. But the country has persistent structural problems: a low

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household savings rate, high crime rates, an inability to integrate into global value chains, the dominance of inefficient SOEs, and mountains of red tape to do business. Recent History Apartheid was formally established in 1948. It was a cruel system based on an elaborate machinery of institutionalized racial segregation, political disenfranchisement, and public service inequalities that privileged white South Africans over the nearly 80 percent of the population that was black. It targeted especially low-wage black laborers in the mines and the informal economy. The system collapsed for a combination of moral and economic reasons and because of incessant opposition supported by the domestic resistance of the African National Congress and international pressure, including sanctions. The post-apartheid transition was driven by a compromise that averted substantial bloodletting in a civil war and that was forged between an unexpected reformer from the Dutch Reformed Church, F. W. de Klerk, and Nelson Mandela, prisoner of conscience and a moral voice of the twentieth century. A democratic political system was adopted, and Mandela became president in 1994. A process of truth and reconciliation was embraced in 1996 through the Truth and Reconciliation Commission, a court-like restorative justice entity. Four major shocks struck after the country’s rebirth as a constitutional democracy. The first was the troubled transition to political and economic stability in the wake of Mandela’s death in 2013. The second revolved around the repercussions of the global financial crisis of 2007–09. South Africa was somehow hit more severely than other emerging markets, and it has not entirely recovered. The economy went into a tailspin, and more than 1 million jobs disappeared. Real GDP growth slowed, falling from 4.0 percent a year in 1999–2008 to 1.7 percent in 2010–19. Average incomes rose during the last period by only 0.15 percent a year. The debt-to-GDP ratio more than doubled, and the country’s creditworthiness has deteriorated.128 The government responded by expanding public works, social grants, and public wages. This public sector expansion helped poor people afford housing, water, and electricity, and it supported movement toward the middle class, but it gradually became fiscally unsustainable. The third shock, which spanned 2009–17, was the difficult political economy around the Jacob Zuma presidency and the state capture and corruption that developed. The findings of the Zondo Commission,

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named after Chief Justice Raymond Zondo, show how multiple branches of the state, especially the revenue service, South African airways, and the railways, had been bankrupted by the then leaders of the African National Congress. The commission report documents collusion between state interests and private business interests that was detrimental to the country’s development and cites a culture of undue influence and impunity.129 The fourth shock was the COVID pandemic, coupled with the Ukraine crisis. In 2020, the economy shrank by 6.4 percent, the informal sector was damaged, and services and manufacturing collapsed. There was a rebound in 2021 and 2022, driven by commodity prices and a gradual reopening, but the war in Ukraine pushed up food and fuel prices. In 2022 and 2023, the trade federations organized widespread protests demanding basic minimum wages to shield the population from escalating living costs and growing inflation, which had reached a 13-year peak in 2022. In 2022, the new president, Cyril Ramaphosa, pledged to jump-­ start the economy, stamp out corruption, and end the interminable power cuts. Structural Transformation The South African paradox: despite planning efforts and good intentions, the economy has not been freed from the low-growth trap. The structural rigidities have persisted even after the promising post-apartheid rebound. The end of apartheid did lead to an improvement in the lives of many black South Africans. More than four million homes have been provided through state programs, and many poor black Africans have been assisted through the expansion of the social wage, that is, investment in education, health services, social development, public transport, housing, and local amenities. But a deep transformation of the economy has not occurred, and job creation has not met the needs of new entrants to the labor force. Between 2010 and 2018, the labor force grew approximately 15 percent more quickly than employment. In the last 25 years, there has been some evidence of structural transformation, with a shift in labor resources from low-productivity sectors, such as agriculture, to higher-productivity sectors, such as transport, financial and business services, construction, and trade. Agroprocessing and horticulture have expanded. The tertiary sector (services) has become the main source of employment growth. Of the 4.9 million new jobs created since 2000, 4.3 million have been in the tertiary sector.130 There are several trends: rapid growth in financial and business services aimed at more highly skilled workers, growth in

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low-­paid, less-skilled service sector jobs, such as security and casual manual work, which cannot be outsourced, and an increase in public sector employment. The labor and jobs market are uneven. The result has been an increase in wages at both the top and the bottom of the labor market (partly because of the minimum wage policy), but a hollowing out in the middle. Unionized public sector employees have helped lobby for public sector wage increases, but at the same time, it is hard to find good private sector jobs. A World Bank study identifies the constraints on good-quality jobs: insufficient skills; the skewed distribution of land and productive assets and weak property rights; low competition and low integration in global and regional value chains; limited or expensive spatial connectivity and underserviced, historically disadvantaged settlements; and climate shocks, the transition to a low-carbon economy, and water insecurity.131 Inequality Compared with other emerging markets, South Africa has quite high levels of inequality. The country’s Gini coefficient has been increasing since the 1990s. It is currently about 0.63, one of the highest coefficients in emerging markets, comparable only with Brazil. The 10 percent of the population that owns 90 percent to 95 percent of the wealth is mostly white. This wealth distribution is more unequal than the corresponding distribution of labor income: 10 percent of the population receives 55 percent to 60 percent of labor income.132 According to several metrics, consumption inequality may be widening. The broad prosperity that was expected in the heady times after apartheid has not been realized. How did this inequality emerge? Mostly, it is a legacy of apartheid. The 1913 Natives Land Act reserved more than 90 percent of the land for the white minority. In 2020, much of this division of the land was still intact. Black South Africans, who account for four South Africans in every five, own only 5 percent of the land, while whites, who represent 8 percent of the population, control 72 percent of the land. One hears in South Africa that 800 farmers produce 80 percent of the country’s food. Unemployment The government and other stakeholders have been unable to fill in the missing middle between the top and bottom of the wealth distribution. The key failure is reflected in the high rate of unemployment, which had reached more than 35 percent by the end of 2022. This translates into

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more than 10 million unemployed. Among individuals ages 15–24, two in three were unemployed as of the summer of 2022. Only about 60 percent of working-age South Africans participate in the labor force. The situation among women is particularly difficult: one woman in two does not receive an income. The share of the population living below the upper-middle-­ income poverty line fell from 68 percent to 56 percent between 2005 and 2010, but has since trended slightly upward, to 57 percent in 2015, and is projected to have reached 60 percent in 2020.133 Many people have been left behind since the end of apartheid.  skom: From Best to Worse E The lack of reliable power has impeded growth, and blackouts have become daily affairs. Eskom, the public sector electricity utility, was once a strong performer, but is now ridden with inefficiency and debt, although it is the largest producer of electricity in Africa and plays a seminal role in the South African economy. Together with Transnet, the state-owned freight and logistics firm Eskom is central to the solution of South Africa’s developmental challenges. Founded in 1923, the company built several coal-fired power plants to supply the dynamic gold mining industry. It became financially lucrative over the years. South Africa became known for providing surplus electricity to its neighbors. After the end of apartheid in 1994, there was a significant expansion in the supply of electricity to black South Africans, including many in municipalities and townships such as Soweto. Eskom was recognized for its good management, and, in 2001, the Financial Times named Eskom the world’s best power company.134 However, since then, it has not gone well. Eskom began accumulating bad debt, close to US$30 billion by 2022. The company has become synonymous with corruption and decay. Its fleet of 15 coal-fired power plants has maintenance issues. There were more than 100 days of blackouts in 2022. It is common for many people to have power for only five hours a day. Many South Africans are unable to obtain power. Load shedding has been particularly damaging to SMEs. Underinvestment has affected the maintenance and upgrading of coal plants. Sabotage, vandalism, and power theft have been reported at Eskom plants. Municipalities have fallen behind in the payment of power bills. Private companies have been blocked from producing power. The utility cannot charge sufficient power prices to meet costs and finance new plant construction. It has therefore taken on new debt.

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Many solutions have been proposed. The government has been trying to close some of the older coal-based power plants and break up the companies into more efficient parts. It is also pushing for incentives to increase the role of the private sector in energy transmission. However, the initiative has not eliminated the blackout problem. A possible outcome might involve the government absorbing some of the Eskom debt and reforming the management of the utility. South Africa’s future will depend on its ability to resolve this and other key bottlenecks. Reforms around electricity tariffs, land reform, corruption, and labor laws will have to be considered. A political consensus will be needed to address long-standing issues and rescue South Africa’s growth from its relative stagnancy.

Notes 1. Fortune (2022). 2. Huang and Véron (2022). 3. Raiser (2019). 4. Chang (2001); USCC (2006). 5. Fukuyama (2011, 2014). 6. World Bank (2022). 7. Wang and Mason (2007). 8. Lardy (2003). 9. Branstetter and Lardy (2006). 10. Véron and Huang (2022). 11. Yusuf (1994). 12. Borst (2013). 13. Irwin and Ward (2021). 14. Dinh et al. (2013). 15. Yueh (2015). 16. Bloomberg News (2021). 17. Pettis (2022b). 18. See Li et al. (2015). 19. Kynge and Yu (2021). 20. Federal Reserve Board (2021). 21. Autor et al. (2016). 22. Autor et al. (2016, 3). 23. IP Commission (2017). 24. Hukou refers to the system of household registration. Kou means mouth, and the term originates from the practice of regarding household members as mouths to feed. A record officially identifies an individual as a permanent resident of an area. It includes identifying information, such as name, parents, spouse, and date of birth.

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64. Cavallari et al. (2013). 65. Segura-Ubiergo (2012). 66. Schwab (2019). 67. Schwab (2019); Schwab and Zahidi (2020). 68. Democracy Now! (2014). 69. Lazzarini et al. (2015). 70. de Bolle (2015). 71. Reid (2014, 219–20). 72. Amann (2009). 73. Arias et al. (2017). 74. Lavinas (2013). 75. Ferreira et al. (2010). 76. Ferreira de Souza (2022). 77. Ferreira et al. (2022). 78. Ferreira et al. (2010). 79. Rubio (2020). 80. Hannan et al. (2021). 81. IEP (2018). 82. CONEVAL (2021). 83. Duran (2022). 84. Levy (2016). 85. Hanson (2012). 86. Iacovone et al. (2022). 87. Levy Yeyati (2022). 88. IMF (2021). 89. Guzmán (2021). 90. WEF (2022). 91. Brambilla et al. (2018). 92. Tommasi et al. (2001). 93. Cowell (2008). 94. HDI (Human Development Index) (dashboard), United Nations Development Programme, New  York, https://hdr.undp.org/data-­ center/human-­development-­index#/indicies/HDI 95. Novokmet et al. (2018). 96. USDA (2018). 97. Dynnikova et al. (2021). 98. NBC News (2005). 99. Stiglitz (2002). 100. PBS (2000). 101. BCF (2022). 102. Djankov (2015). 103. Broadman (2001).

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104. Borin et al. (2022). 105. Nabiullina (2023). 106. Halliday (1974). 107. BrainyQuote.com (2023). 108. WEF (2022). 109. Nihal (2022). 110. Gross (2019). 111. Kinninmont (2017). 112. Economist (2021). 113. Al Arabiya News (2020). 114. Raiser (2015). 115. Pamuk (2004, 2012). 116. Akyüz and Boratav (2003). 117. “Founder Vehbi Koç,” Koç Holding, Istanbul, https://www.koc.com. tr/about-­us/history/founder-­vehbi-­koc 118. World Bank (2014). 119. Rodrik (2015). 120. Kubilay (2022). 121. Demiralp and Kalemli-Özcan (2021). 122. Yilmaz (2022). 123. HDI (Human Development Index) (dashboard), United Nations Development Programme, New  York, https://hdr.undp.org/data-­ center/human-­development-­index#/indicies/HDI 124. The Berkeley Mafia refers to a group of Indonesian economists who had studied at the University of California, Berkeley, and who first obtained positions in the Suharto government during the late 1960s. They promoted free-market capitalism and sought to reverse progressive economic reforms adopted previously by the Sukarno government. The country was characterized by massive corruption during this period. 125. World Bank (1999). 126. Dick and Mulholland (2018). 127. James (2014). 128. Hausmann et al. (2022). 129. Commission of Inquiry into State Capture (2022). 130. Bhorat and Stanwix (2022). See also Allen et al. (2021). 131. World Bank (2018a). 132. Orthofer (2016). 133. World Bank (2018b). 134. Sguazzin et al. (2022).

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Schneider, Ben Ross. 2009. Big Business in Brazil: Leveraging Natural Endowments and State Support for International Expansion. In Brazil as an Economic Superpower: Understanding Brazil’s Changing Role in the Global Economy, ed. Lael Brainard and Leonardo Martinez-Diaz, 159–186. Washington, DC: Brookings Institution Press. Schwab, Klaus, ed. 2019. Insight Report: The Global Competitiveness Report 2019. Geneva: World Economic Forum. http://www3.weforum.org/docs/WEF_ TheGlobalCompetitivenessReport2019.pdf. Schwab, Klaus, and Saadia Zahidi. 2020. The Global Competitiveness Report Special Edition 2020: How Countries are Performing on the Road to Recovery. Geneva: World Economic Forum. Segura-Ubiergo, Alex. 2012. The Puzzle of Brazil’s High Interest Rates. IMF Working Paper WP/12/62, February. Washington, DC: International Monetary Fund. Sguazzin, Antony, Prinesha Naidoo, and Paul Burkhardt. 2022. Eskom Turns 100 Next Year: Here’s How It Went from World Best to SA’s Biggest Economic Risk. News24: Business, September 27. https://www.news24.com/fin24/ economy/eskom-­t urns-­1 00-­n ext-­y ear-­h eres-­h ow-­i t-­w ent-­f rom-­w orld­best-­to-­sas-­biggest-­economic-­risk-­20220927. Sinha Roy, Sutirtha, and Roy van der Weide. 2022. Poverty in India Has Declined over the Last Decade but Not as Much as Previously Thought. Policy Research Working Paper 9994. Washington, DC: World Bank. Stiglitz, Joseph E. 2002. Who Lost Russia? In Globalization and Its Discontents, ed. Joseph E. Stiglitz, 133–165. New York: W. W. Norton. Subramanian, Arvind, and Josh Felman. 2019. India’s Great Slowdown: What Happened? What’s the Way Out? CID Faculty Working Paper 370, December. Cambridge, MA: Center for International Development, Harvard University. Tommasi, Mariano, Sebastián Saiegh, Pablo Sanguinetti, Ernesto Stein and Mauricio Cárdenas, 2001, Spring. Fiscal Federalism in Argentina: Policies, Politics, and Institutional Reform. Economía, 1 (2): 157–211. UNCTAD (United Nations Conference on Trade and Development). 2022. World Investment Report 2022: International Tax Reforms and Sustainable Investment. New York: United Nations. USCC (U.S.–China Economic and Security Review Commission). 2006. Statement of Gordon G. Chang. August 22. Washington, DC: USCC. https:// www.uscc.gov/sites/default/files/06_08_22_23_gor don_chang_ statement.pdf. USDA (United States Department of Agriculture). 2018. Russian Federation: Agricultural Economy and Policy Report. GAIN Report RS1819, July 19. Moscow: Global Agricultural Information Network, Foreign Agriculture Service, USDA.

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Véron, Nicolas, and Tianlei Huang. 2022. The Advance of the Private Sector among China’s Largest Companies under Xi Jinping. VoxEU Column, July 7. https://cepr.org/voxeu/columns/advance-­private-­sector-­among-­chinas-­largest­companies-­under-­xi-­jinping. Wang, Feng, and Andrew Mason. 2007. Demographic Dividend and Prospects for Economic Development in China. In United Nations Expert Group Meeting on Social and Economic Implications of Changing Population Age Structures, Mexico City, 31 August–2 September 2005. Population Division, Department of Economic and Social Affairs, Document ESA/P/WP.201, 141–54. New York: United Nations. https://www.un.org/en/development/desa/population/ events/pdf/expert/9/full_report.pdf. WEF (World Economic Forum). 2022. Global Gender Gap Report 2022. Insight Report, July. Geneva: WEF. World Bank. 1999. Global Economic Prospects and the Developing Countries, 1998–1999: Beyond Financial Crisis. Report 18777. Washington, DC: World Bank. ———. 2014. Turkey’s Transitions: Integration, Inclusion, Institutions. Report 90509-TR. Washington, DC: World Bank. ———. 2018a. An Incomplete Transition: Overcoming the Legacy of Exclusion in South Africa; South Africa Systematic Country Diagnostic. Washington, DC and Cape Town: World Bank and UCT Press. ———. 2018b. Overcoming Poverty and Inequality in South Africa: An Assessment of Drivers, Constraints and Opportunities. Washington, DC: World Bank. ———. 2022. Navigating Uncertainty: China’s Economy in 2023; Special Topic, Youth Unemployment: An Emerging Challenge. China Economic Update, December. Washington, DC: World Bank. Yilmaz, Ugur. 2022. Turkish Industry Group Warns of Financing Crunch for Exporters. Markets, July 5. https://www.bloomberg.com/news/ articles/2022-­07-­05/turkish-­industry-­group-­warns-­of-­financing-­crunch-­for-­ exporters?leadSource=uverify%20wall. Yueh, Linda. 2015. China’s Growth: A Brief History. Economics, December 9. https://hbr.org/2015/12/chinas-­growth-­a-­brief-­history. Yusuf, Shahid. 1994. China’s Macroeconomic Performance and Management During Transition. Journal of Economic Perspectives 8 (2): 71–92. Zafar, Ali, Masrur Reaz, and Faaria Tasin. 2020. Bangladesh’s Journey to Middle-­ Income Status: The Role of the Private Sector. Dhaka: International Finance Corporation.

CHAPTER 4

A GEMINI Assessment

Abstract  The framework comparing the top 10 emerging markets across a range of indicators yields several insights. An analysis of growth, equity, money, institutions, national competitiveness, and infrastructure shows the heterogeneity of countries and the diverse political economies, macroeconomic policies, and microeconomic environment. Many factors influence growth. China, India, and Indonesia do better, while Russia, Argentina, Mexico, and South Africa are lagging. Not all things go together. Success in one area may be offset by difficulties in another. Keywords  Macropolicy • Human development • Gender • Demography • Banking • Capital markets • Fintech • Institutions • Productivity • Competitiveness • Globalization • Infrastructure • Sustainable energy • Climate change • Coal • Oil • Natural gas

4.1   Overall The GEMINI framework provides a structure for the assessment of trends in socioeconomic development. It also helps understand how some emerging market countries have been caught in the middle-income trap and have been unable to graduate to upper-income status. Middle-income traps are neither biology nor destiny but a product of concrete policy

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0_4

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choices. Using the GEMINI framework, policymakers may explore ways to transition emerging markets into high-income economies. 4.1.1   The Methodology This analysis relies on six sources of information to establish the GEMINI framework. Indicators are used that can provide the best metric for a particular category using authoritative sources that are considered apex in their respective areas: the IMF, the United Nations Development Programme, the Bank of International Settlements, the World Bank, and the WEF. The study combines point and trend analyses. Sensitivity analysis was also carried out using other indicators, but the impact on the findings was minor. As a general principle, the lower the indicator, the better the performance and the higher the rankings on the indicator. The six sources of information are as follows: • Growth is measured using real GDP data based on the IMF World Economic Outlook.1 It represents the real average GDP growth rate for each country in 2010–2020. • Equity is gauged using the HDI ranking of 2021.2 The lower the ranking, the better the performance. • Money represents the share of credit going to the private sector as a percentage of GDP.  It is computed by the Bank for International Settlements.3 The data are for 2017 and 2021. • Institutions is a ranking of the WEF.4 It measures security, social capital, checks and balances, public sector performance, transparency, property rights, and the future orientation of government. The data are from 2019. • Competitiveness is a ranking of the WEF.5 • Infrastructure is assessed through the logistics performance index of the World Bank.6 The index covers six variables: customs, infrastructure, international shipments, logistics competence, tracking and tracing, and timeliness. The rankings are aggregated for 2012–2018. 4.1.2   The Findings The findings are striking, as follows:

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Countries are heterogenous; they have different strengths and weaknesses. There is generally a virtuous circle in which most indicators are correlated, but this is not always the case. Favorable rankings on many of the indicators are correlated with high economic growth. The top 4 growth performers are China, India, Türkiye, and Indonesia (Fig.  4.1). The top 4 HDI performers are Saudi Arabia, Argentina, Türkiye, and Russia (Fig. 4.2). China is the top performer in gender equality, while India is the poorest performer. China is an outlier among emerging markets in terms of growth performance, credit to the private sector, national competitiveness, and infrastructure quality. However, it lags in institutions and in equity. With credit to the private sector, competitiveness, and gender equity, it performs well. It provides credit to the private sector at more than 200 percent of GDP, which is higher than the rates in the advanced economies (Fig. 4.3). Country performance varies. India has the second-best performance in growth after China. Its performance is decent in infrastructure and credit to the private sector, but it lags in human development and gender equality. It faces challenges because of competitiveness issues and less integration into the global economy. The Latin American countries have the lowest growth and the weakest institutional quality. Human development is uneven, and macroperformance and competitiveness are challenges. South Africa has low growth and low human capital development. The quality of infrastructure is good, but there are challenges to competitiveness. 8 7 6 5 4 3 2 1 0 -1

China

India

Brazil

Russia

Mexico

Indonesia

Saudi Arabia

Turkey

Argentina

South Africa

Fig. 4.1  EM10 real GDP growth, by economy, 2011–2020 (%). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/ world-­economic-­outlook-­databases#sort=%40imfdate%20descending)

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140 120 100 80 60 40 20 0

Saudi Arabia

Argenna

Turkey

Russia

China HDI

Mexico

Brazil

South Africa

Indonesia

India

GII

Fig. 4.2  GII and HDI rankings, by economy, 2021. (Sources: GII (Gender Inequality Index) (dashboard), United Nations Development Programme, New  York, http://hdr.undp.org/en/content/gender-­inequality-­index-­gii; HDI (Human Development Index) (dashboard), United Nations Development Programme, New York, https://hdr.undp.org/data-­center/human-­development-­ index#/indicies/HDI) 250 200 150 100 50 0

2017

2021

Fig. 4.3  Credit to the private sector, by economy, 2017 and 2021 (% of GDP). (Source: Credit to the Non-financial Sector (dashboard), Bank for International Settlements, Basel, Switzerland, https://www.bis.org/statistics/totcredit. htm?m=2669

Many of the emerging countries face serious constraints. Argentina is prey to difficult macroimbalances despite its strong performance in human capital development. India is the opposite: insufficient human capital development, but respectable macroperformance. Mexico has institutional problems, while Indonesia faces competitive challenges in logistics and transport. Türkiye will have to monitor runaway inflation and hot money, while Brazil will have to deal with institutional issues and political corruption. Russia has historically had decent macroeconomic and human

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120 100 80 60 40 20 0

China

India

Brazil

Russia Institutions

Mexico

Indonesia

Nat Comp

Saudi Arabia

Turkey

Argentina

South Africa

Infrastructure

Fig. 4.4  EM10 comparisons: Infrastructure, institutions, and competitiveness. (Sources: LPI (Logistics Performance Index) (dashboard), World Bank, Washington, DC, https://lpi.worldbank.org/; Schwab 2019. Lower rank indicates better performance; institutions and national competitiveness are from World Economic Forum rankings)

development, but it faces major institutional weaknesses and sanctions that will erode its long-term macroeconomic prospects. The relationships among variables are complex. There is an asymmetry among infrastructure development, institutional changes, and competitiveness (Fig. 4.4). The relationship between growth and human capital is complex and nonlinear (Fig. 4.5). There appears to be a long-term relationship whereby higher GDP growth is correlated with better institutional quality. Argentina, Brazil, and Mexico are at one extreme, whereas China, India, and Saudi Arabia are at the other (Fig. 4.6). As countries grow, their institutions become stronger, and as the institutions become stronger, the economies grow more quickly. Meanwhile, some countries in Latin America are facing institutional degradation.

4.2   Growth and Macropolicy The triple combination of the need for reform, the COVID-19 shock, and the Ukraine conflict has amplified the macroeconomic challenges among emerging markets. 4.2.1   Macroeconomic Management What is the future of macroeconomic policy in emerging markets? Relative to a decade ago, what is the macroeconomic pulse of these 10 economies? How have they adjusted fiscal and monetary policies to address the shocks? How have they handled debt and inflation?

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Argentina

Turkey Saudi Arabia

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Real GDP Growth 2011-2020 (%)

Fig. 4.5  Comparison: GDP growth and HDI. (Sources: HDI (Human Development Index) (dashboard), United Nations Development Programme, New  York, https://hdr.undp.org/data-­center/human-­development-­index#/indicies/HDI; WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/ SPROLLS/world-­economic-­outlook-­databases#sort=%40imfdate%20descending)

Institutions (WEF)

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South Africa

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Indonesia Saudi Arabia

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Fig. 4.6  Comparison: Institutions and GDP growth.(Sources: Schwab 2019; WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/ world-­economic-­outlook-­databases#sort=%40imfdate%20descending)

4.2.2   Fiscal Policy After the 2007–2009 global financial crisis, the governments of some emerging markets adopted fiscal stimulus measures to prod the economy. Since the crisis, many of the emerging markets have improved their policy fundamentals and built greater reserve holdings. In the wake of the 2020

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pandemic, the fiscal support was much lower in emerging markets than in advanced economies and was less than it had been during the global financial crisis. Fiscal policy in emerging markets tends to be procyclical. Governments in Brazil, India, and elsewhere did provide some fiscal support, but many governments, such as those in Indonesia, Mexico, Russia, and Saudi Arabia, were unable to provide much stimulus given the low price of oil in 2020. Because of rising debt and inflation, the room for additional fiscal spending has been limited in any case, except in the oil economies, which have seen a dramatic rebound. Many emerging markets had higher fiscal deficits in 2021 than in 2010 (Fig. 4.7). These countries are now more vulnerable to currency depreciation and changes in international investor sentiment. In more than 60 percent of emerging market and developing economies, the share of foreign currency denominated government debt has risen above pre-pandemic levels, and, in more than half of these economies, the share of government debt held by nonresidents has increased.7 The dilemma facing emerging market policymakers is fiscal stimulus versus rebuilding fiscal buffers. In Argentina, India, and elsewhere, the fiscal space appears more limited than in China and Saudi Arabia, which have comfortable cushions in reserves. Russia is spending a lot of money on security. There is no consensus on the degree of fiscal consolidation post-pandemic; it depends on the circumstances.

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Argentina

Brazil

China

India

Indonesia Mexico 2010

2015

Russia

Saudi Arabia

South Africa

Turkey

2021

Fig. 4.7  Emerging markets: Fiscal balance (% of GDP).(Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/world-­ economic-­outlook-­databases#sort=%40imfdate%20descending)

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4.2.3  Debt The emerging markets have higher levels of debt now than a decade ago (Fig.  4.8). The pandemic and the Ukraine crisis have exacerbated debt levels, and higher interest rates have made borrowing more costly. It is a perfect storm. Five of the EM10 countries—Argentina, Brazil, China, India, and South Africa—have debt-to-GDP ratios that cross 60 percent. According to the IMF, average gross government debt in the emerging markets is up by almost 10 percentage points since 2019, reaching an estimated 64 percent of GDP by the end of 2021, with large variations across countries. Debt has been steadily building over the last decade. Six countries— Argentina, Belize, Ecuador, Lebanon, Surinam, and Zambia—defaulted on their debt in 2020. Some emerging markets will need debt restructuring. Countries that are more vulnerable to debt default are Egypt, El Salvador, Ghana, and Pakistan because of their high debt and high interest payments. The EM10 are stronger in fiscal terms and, except for Argentina, are less likely to experience a sovereign debt default. Debt from domestic sources has also increased. Emerging market banks have provided significant credit, driving their holdings of government debt as a share of their assets to a record 17 percent in 2021, and, in several economies, government debt is a quarter of bank assets.8

120 100 80 60 40 20 0

Argentina

Brazil

China

India 2010

Indonesia 2015

Mexico 2020

Russia

Saudi Arabia

South Africa

Turkey

2022

Fig. 4.8  Emerging market debt (% of GDP). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/world-­economic-­ outlook-­databases#sort=%40imfdate%20descending)

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4.2.4   Oil Economies and the Current Account Managing the current account has complicated macroeconomic management in the EM10 (Fig. 4.9). After the start of the Ukraine conflict, current account positions worsened in the emerging markets, except for the oil economies. Countries have foreign exchange shortages, and governments are under pressure to support the financing of costly imports. This also exerts pressure on the currency, which tends to depreciate relative to the US dollar. India and Türkiye face a growing import bill, and significant foreign exchange reserves will be required to pay for the imports. The hope is that, over the medium term, with an anticipated fall in oil prices to the US$50 to US$70 range, the current accounts of the emerging markets will return to a more sustainable path. 4.2.5   Managing Inflation Inflation is clearly the worst nightmare of central bankers in 2022 (Fig. 4.10). After years of worrying about deflation, central bankers are now concerned about the rise in prices, especially food and petroleum prices. Supply chain constraints, plus the fiscal stimulus related to the pandemic, have had unintended consequences. Although the monetary policy framework in emerging markets has been improving in the last two decades, the recent bout of inflation has been exceptional. High inflation has affected Argentina, Russia, and Türkiye. Most emerging markets are 20 15 10 5 0 -5

Argentina

Brazil

China

India

Indonesia

Mexico

Russia

Saudi Arabia

South Africa

Turkey

-10 2010

2015

2020

2022

Fig. 4.9  Current account balance, 2010–2022 (% of GDP). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/ world-­economic-­outlook-­databases#sort=%40imfdate%20descending

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60 50 40 30 20 10 0 -10

Argentina

Brazil

China

India 2010

Indonesia 2015

Mexico 2020

Russia

Saudi Arabia

South Africa

Turkey

2022

Fig. 4.10  Inflation trends, 2010–2022 (%). (Source: WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/SPROLLS/world-­economic-­ outlook-­databases#sort=%40imfdate%20descending)

experiencing inflation levels in the high single digits. The only EM10 markets that have low inflation are China and Saudi Arabia. In response, several central bankers have been increasing policy interest rates (Fig. 4.11). Some emerging market governments with limited buffers have started to adjust monetary policy to combat inflation, which is worsening the purchasing power of poor households. The Reserve Bank of India, which targets consumer price index inflation at 4 percent, allowing a 2 percent deviation in either direction, has had to increase the policy rate to close to 6 percent, while, in Brazil, which once struggled against hyperinflation, the government has raised the benchmark rate to close to 14 percent in line with the inflation targeting framework. Argentina and Türkiye, which cannot be shown in Fig. 4.11 because they are significant outliers, face daunting challenges. In Argentina, inflation reached 64 percent in June 2022 and more than 100 percent in March 2023, requiring a central bank interest rate of 69.5 percent, while, in Türkiye, an inflation rate of 78.6 percent has led the central bank to raise the rate to 14 percent. In all the countries, there is a debate on how high the rates should go to take the wind out of inflation, and a few central banks are beginning to relax rates as inflation falls.

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China Indonesia Saudi Arabia

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USA Euro Area 8

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Note: Policy rate is on vertical axis and inflation is on horizontal axis.

Fig. 4.11  Central bank inflation and the policy interest rate, June 2022 (%). (Note: Policy rate is on vertical axis and inflation is on horizontal axis)

4.3  Equity, Human Development, Gender, and Demography The EM10 generally exhibit greater inequality and weaker human capital development than their richer counterparts. People are poorer, live shorter lives, and have less access to services than in the advanced economies. While the emerging markets lagged during the early years of development, they have recently been performing much better. The HDI in emerging markets has shown a steady ascent. According to the Human Development Report 2013, there has been a rise in the South, whereby the shortfall in human development indicators relative to the world average was reduced between 1990 and 2012 by close to 25.0 percent in India, 34.0 percent in Brazil and Mexico, and 40.5 percent in China.9 Progressive social policy helped these countries narrow inequality. These patterns persisted until the pandemic shock, when there was global slippage in human development. At the US$6.85-a-day poverty line, India, Indonesia, and South Africa still have significant poverty, while Brazil and South Africa have the highest levels of inequality (Fig. 4.12). In 2018, the World Bank developed the human capital index, which is globally comparable across countries and benchmarks the key components of human capital development in the world’s economies.10 By measuring the human capital that children born today can expect to attain by age 18, the index highlights the impact of current health and education outcomes on future productivity. Many of the top-performing countries are in the West or Asia. Most of the emerging markets are not in the top tiers of the

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Argenna

Brazil

China

India

Indonesia

Gini Coefficient (rescaled between 0 and 100)

Mexico

Russia

South Africa

Turkey

Poverty ($US 6.85 per day at 2017 PPP)

Fig. 4.12  Inequality and poverty headcount, EM10, 2020 (%). (Source: PovcalNet: Data (database), World Bank, Washington, DC, http://iresearch. worldbank.org/PovcalNet/data.aspx)

index. The top two are Asian countries (Korea and Singapore). Russia is first at 34; China, 46; Türkiye, 53; Argentina and Mexico, 63 and 64; and Indonesia and India, 87 and 115. At the bottom is South Africa at 126. According to the UNDP multidimensional poverty index value, Brazil was at 0.016 in 2015, China at 0.016 in 2014, and India at 0.069 in 2021.11 China, India, Mexico, and South Africa show widening inequality relative to the incomes of the top 10 percent of the welfare distribution (Fig. 4.13). This inequality may be a function of many factors: initial asset endowment, the attainment of education and skills, technology, geographical location, the differential impact of economic growth, and gender. As elsewhere in the world, elites are becoming richer, and the gap between the top and the rest is widening. The EM10 are no strangers to the Piketty phenomenon of growing global inequality.

4.4   Money: Banking, Capital Markets, SMEs, and Fintech Finance is a bridge that supports the move from underdevelopment to development. It is the glue that binds economies together. A generation of policymakers, economists, and financiers has understood the importance of the allocation of capital and the role of financial intermediation in running an economy. In the last 20 years, banks, capital markets, and fintech in emerging markets have grown by leaps and bounds. Entrepreneurs are awash with liquidity in a way that was not possible several decades ago.

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Indonesia

Argenna

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0.7 0.65 0.6 0.55 0.5 0.45 0.4 0.35 0.3 0.25 0.2

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Saudi

Fig. 4.13  Inequality: Share of pre-tax national income of top 10 percent (%). (a) South Africa and others. (b) Türkiye and others. (Source: WID (World Inequality Database) (dashboard), Paris School of Economics, Paris, https://wid.world/)

Consider banking. Banking in emerging markets is growing and is projected to grow even more in the next two decades in China, India, Indonesia, and other countries, while growing more moderately in established economies, such as Brazil, Mexico, and South Africa. Digital banking is omnipresent now. China is growing so quickly that the four largest banks in the world are now Chinese. These Big Four—Industrial and Commercial Bank of China Ltd., China Construction Bank, Agricultural Bank of China, and Bank of China—reported a combined asset value of US$17.3  trillion, up 16.9 percent from the 2020 Standards and Poor ranking.12 Then you have Brazil banks, such as Itaú Unibanco and Caixa Econômica Federal. There are a new class of banks in other EM10 countries: ICICI Bank and HDFC Bank in India (one of India’s leading housing finance companies), Sberbank in Russia, and Standard Bank Group in South Africa. These banks are altering the global banking landscape and have been navigating regulatory and technological changes. Credit is booming, especially in China. Historically, the investor foundation was small, and banks lent to domestic companies, often in foreign currency. But this started to change. Through political will and regulatory reform, emerging markets developed stock markets in the 1980s and 1990s, coming of age by the 2000s. The market capitalization of emerging market countries has more than doubled over the past decade, growing from less than US$2  trillion in

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1995 to about US$5 trillion in 2005 and to US$8 trillion in 2020, which is more than 10 percent of global stock market capitalization. The MSCI Emerging Markets Index measures equity performance across 26 developing countries.13 The countries include Argentina, Brazil, Chile, China, Colombia, Egypt, Greece, Hungary, Indonesia, India, Korea, Mexico, Saudi Arabia, South Africa, and Taiwan, China. In parallel, a bond market developed as governments sought to finance spending. The Chinese bond market is currently the third largest in the world, with a market capitalization of US$12  trillion. Turkish corporates have been taking on a lot of foreign currency debt, while the Indian corporate bond market, although small, is scaling up. From a historical perspective, emerging markets developed in four phases, as follows: • 1988–2003: Emerging markets became more visible in the world of investors as an asset class that earned returns. • 2003–2008: The growth of emerging market equities was strong because of the robust growth performance of many emerging market economies. China also evolved into a major economy. • 2008–2021: Growth in emerging market equities was significant but volatile and was influenced by the quantitative easing of the Federal Reserve and a weak dollar in the United States. The emerging markets appeared to be significantly better performers than advanced economies. Yields on local-currency bonds improved because of the good recovery from the pandemic by early 2021. Debt issuance linked to environmental, social, and governance expenditures more than tripled to US$190 billion in 2022. • 2021 (May)–23: The combined impact of the shocks led to inflation, higher interest rates, and tightened liquidity, leading to a decline of more than 20 percent in the MSCI emerging markets index as investors fled emerging market stocks and bonds. The yield on US Treasury bonds was 3 percent. According to the Institute of International Finance, portfolio flows to emerging markets stood at US$1.7 billion in December 2022, and equity and debt flows were US$4.4 billion and −US$2.6 billion, respectively.14 Chinese equities posted US$6.3 billion in inflows. There has been some reversal of the outflows of more than US$40 billion since early 2021.

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Fintech is mushrooming in the emerging markets. The innovations in online banking and e-commerce and among remittance providers are revolutionizing banking and attracting millions of the unbanked to participate in financial systems. The recent ascent of Alipay, the digital platform in China owned by the Ant group and serving more than a billion users and 80  million merchants, demonstrates the power of this new model, although there are still questions about possible bias in the regulatory regime in China. In India, the fintech world was valued at more than US$50 billion in 2021. There are more than 20 fintech unicorns in areas such as mobile payments, credit, pensions, e-commerce, and much more. Mercado Libre, an Argentine company headquartered in Montevideo, Uruguay, and incorporated in the United States, operates online marketplaces focused on e-commerce and online auctions. In 2007, it became the first Latin American technology company listed on the NASDAQ. Indonesia, South Africa, and Türkiye all have nascent fintech ecosystems that are introducing the unbanked to the modern world of finance.

4.5  Institutions, Governance, and State Capacity There are several models of political governance in the emerging markets. China and Russia are authoritarian. Saudi Arabia is monarchist. Argentina, Brazil, India, Indonesia, Mexico, South Africa, and Türkiye are democracies. However, none of these labels are especially accurate. The categories must be nuanced. China and Russia differ in their authoritarianism. Democracy in Indonesia and South Africa is still nascent. Mexico and Turkey are democracies, but they are beset by institutional crisis. This is an eclectic bunch of countries. They combine a mix of state capitalism and market economy. Their institutions vary in strength and effectiveness. All have complex political economies, and none of them is a minimalist state in the sense of some interpretations of the Washington Consensus. In emerging markets, the state’s role is much broader because, for example, the state provides development financing, picks winners through industrial policy, protects inefficient firms, redistributes resources, administers vast social programs with some success, and builds infrastructure. Democracy is partially correlated with better quality in governance, but authoritarian governments in East Asia have managed to achieve a strong record in service delivery. An analysis of institutional rankings shows that there is some correlation between economic growth and the quality of

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institutions in emerging markets.15 Argentina, Mexico, Russia, and Türkiye appear as the weakest countries among the EM10 in terms of institutional capabilities. In their 2012 book, Why Nations Fail, Daron Acemoglu and James Robinson argue that countries fail or succeed based on the quality of their institutions.16 Distinguishing between inclusive institutions, which foster productivity gains and technological advances, and extractive institutions, which are predatory and rent-seeking, they contend it is the former that helps countries grow. However, some believe that authoritarian regimes, such as Korea under General Park or China under Deng, realize more rapid economic growth than democracies. In Korea, some of the most successful economic reforms have been imposed from the top without a democratic consensus, while in Singapore, economic success has been based on a capable state and is not tied to full political liberalization. The capacity of the state to implement reform is linked to the quality of political leadership and culture. State capacity is the ability of a government to accomplish policy goals through dedicated, competent personnel who are insulated to some degree from the ups and downs of bureaucratic politics. It is the ability to deliver goods and services to a population. It may be linked to many areas: drafting legislation, administering a safety net program, establishing an inflation targeting framework, and protecting property rights. Tim Besley maintains that effective states are able to tax, enforce laws, regulate, and maintain social order.17 By building coercive power through legislation (law enforcement and the legal system) and encouraging voluntary compliance in the payment of taxes, a capable state can help spur economic development. Another perspective finds that the key to the emergence of state capacity is a transformation in incentives and professional norms in the public sector.18 The crux of state capacity is the culture of bureaucracies, that is, the incentives, beliefs, and expectations or norms shared among state personnel about how others are behaving. States and institutions do not emerge suddenly. They are the products of a long process of evolution. How does all this apply to the EM10? Institutions and the regulatory regime are less well developed in the EM10. There is greater reliance on informal institutions, and local and national governments exert more pressure. It is difficult in these economies to insulate decisions from complex political pressures. The empirics show that, in emerging markets, the fiscal capacity to tax ranges to a low of 20 percent of GDP compared with 30 percent among more advanced economies. Transparency International

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rankings indicate there is a greater trend toward corruption and bribery in the EM10 than in the advanced economies.19 Emerging markets vary and diverge in other ways, too. In China, there is an elite consensus that promoting economic development is a high priority.20 China has an authoritarian political system but a competent meritocratic bureaucracy and relatively well-functioning institutions. It is not democratic but it appears to have a system whereby incentives based on examinations and performance rewards encourage individuals to deliver good outcomes. For example, regional provincial leaders are rewarded based on the growth performance of their region and their ability to attract investment. Higher-level authorities have established effective incentives and other motivational aids that spur the various layers of the vast Chinese bureaucracy down to local government cadres to realize national policy priorities.21 However, as former Treasury head Larry Summers and political scientist Minxin Pei have argued, authoritarian systems such as the one in China may face legitimacy challenges and not be accountable to the middle class.22 The Indian state has produced a mixed performance. The civil service, the core of the government, was inherited from the higher civil service of the British Empire in India in 1858–1947. Based on the vision of Sardar Patel, civil service recruitment has been relatively meritocratic, and it has been quite effective in promoting social cohesion in a heterogeneous country.23 Meanwhile, the Indian civil service has been accused of being elitist and out of touch with the realities of the country. However, India’s strength lies in the resilience of many of its institutions, such as the Reserve Bank of India, the Election Commission, and the Auditor General. Political scientist Devesh Kapur finds that Indian institutions have been more effective in certain situations and settings, especially macroeconomic ones, and have underperformed in microeconomic outcomes, where delivery is episodic and the possibility of exit is inbuilt, rather than where delivery and accountability are quotidian and more reliant on state capacity at the local level.24 From his perspective, a triad of explanations account for the institutional problems in social service delivery: understaffing in  local government, consequences of the country’s precocious democracy, and the persistence of social cleavages in India by caste, gender, and religion. There is great variety in the efficiency of social service delivery depending on the region. The first two decades of elected state government in Kerala in south India, for instance, saw improvements in human

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development and female literacy because of state government commitment. Bihar and Uttar Pradesh did not exhibit the same trends. Latin America may be democratic but state capacity is lagging. Latin America has a singular history. Political scientist Sebastián Mazzuca finds that the weakness of the state is the most important cause of Latin America’s problems, including social inequality, economic stagnation, and poor governance.25 According to him, Latin America is caught in a middle-­ quality institutional trap, combining flawed democracies and states with low-to-medium capacity. A recent report on Latin America notes that the concentration of power in the hands of a few who defend their private interests connects high inequality with low growth, leads to distorted public policies, weakens institutions, and allows economic elites to block fiscal reform.26 Markets in Latin America tend to be dominated by a small number of large firms, and there is a high level of monopoly power, leading to higher prices, entry barriers among newer firms, and lower levels of innovation in oligopolistic industries. But there is some good news. In Brazil, the success of the conditional cash transfer program, Bolsa Família, has also been associated with the administrative competence of front-line service providers. The program operates in all 5570 municipalities in Brazil through a network of 176,000 local operators. This is unique.

4.6  National Competitiveness, Global Integration, and Productivity Competitiveness is an elusive word. It refers to a country’s ability to export more products relative to its competitors. It may be linked to the overall investment climate and the ease of doing business in a country. Or it may involve the level of competition in an economy and the presence or absence of barriers to market entry or the persistence of domestic oligopolies or household businesses. It may also refer to the productivity of an economy as measured by the efficiency of the use of capital and labor. 4.6.1   Global Integration and Trade At the end of World War II, luminaries such as John Maynard Keynes and Harry Dexter White understood that the design of a postwar order should embrace a liberal economic trading system. The lessons of the 1930s, with protectionist blocs, high tariffs, and competitive devaluation, were fresh in

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their minds. The postwar order would be based on the movement of capital and labor, with a strong hegemon, the United States, to support it. The General Agreement on Tariffs and Trade, the predecessor of the WTO, was designed to anchor trade liberalization and set the rules for global trade. The mandate was to require all members to adhere to low and predictable trade barriers. With the support of the WTO, tariffs were eventually reduced significantly in most emerging markets. From 1945 to 1971, the system delivered some success. Japan, the United States, and Western Europe enjoyed economic growth and political stability. Under this system, East Asian economies, such as Korea, Singapore, and Taiwan, China, emerged as powerful trading economies. By the 1980s, new economic powers had arrived on the scene, ready to reap the benefits of free trade and globalization. By the 1990s, there was an even greater flow of finance, goods, technology, information, and jobs among countries. Migration surged as both unskilled and skilled workers left countries to search for better jobs. China joined the WTO in December 2001. The liberal vision under US President Clinton was focused on helping China become a more open economic and political environment. Many other emerging markets took advantage of trade and the possibility to export new products and import critical raw materials and capital goods. Argentina became a top exporter of soybeans, and Brazil became an agribusiness power. India embraced globalization by promoting the rise of a domestic IT sector. Russia and Saudi Arabia capitalized on the high global demand for oil, while Turkish construction companies roamed the Middle East and North Africa for opportunities. Globalization became a bit of a success story for many in emerging markets. By 2020, emerging market economies accounted for more than 50 percent of global exports, up from 25 percent in 1996. But all was not right with globalization. An intellectual critique in the West, spearheaded by academics such as Nobel laureate Joseph Stiglitz and Harvard economist Dani Rodrik, felt that globalization had overpromised.27 The core of Stiglitz’s argument was that, if not managed well, globalization may increase instability, reduce growth, and make countries more vulnerable. Rodrik critiqued what he termed hyper-globalization. Unlimited economic integration across borders meant that national economic policies could come into conflict with economic globalization. While many poor people in China had become richer by benefiting from the export economy, there was a significant loss of jobs in the advanced economies as companies relocated or expanded elsewhere in

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search of cheaper labor in Asia. The loss of manufacturing jobs has been a key factor in catapulting the rise of Marine Le Pen in France, Giorgia Meloni in Italy, the Brexit movement in the United Kingdom, and Donald Trump in the United States. The distribution of winners and losers in free trade was uneven. Skilled workers did better than unskilled workers and were quick to adapt to a changing world economy. Economist Gordon Hanson analyzed Mexico’s experience with trade liberalization and noted that, in the 1990s, incomes fared relatively poorly in parts of Mexico that had experienced little of the effects of globalization relative to the states of northern Mexico, where export-oriented industries are magnets for foreign investors.28 Indeed, trade liberalization contributed to the decomposition of the manufacturing belt in and around Mexico City and the formation of broadly specialized industry centers in northern Mexico. 4.6.2  Productivity Productivity is significantly lower in emerging markets than in advanced economies, especially in terms of TFP. The reason for the lower productivity is often associated with a misallocation of resources that is driven by policy distortions or a shortage of incentives for innovation. Whether this is called a productivity slowdown or secular stagnation, there is clearly an element missing in the EM10. The possible culprits are many: a political economy in emerging markets that involves politically motivated resource allocations, a lack of innovation, diminished returns from technology transfers, and inertia. Capital and labor may also be participating in the outcome. Half the slowdown in labor productivity growth in recent years reflects a failure to accumulate because weak investment has left labor with too little capital. The shortfall in investment explains the productivity slowdown in the Middle East and North Africa and in South Asia, and it explains two-thirds of the productivity slowdown in Europe and Central Asia. At the same time, the contribution of labor mobility to growth, which was about 1.1 percentage points in the years before the global financial crisis, has fallen to 0.5 percentage points in more recent years.29 A recent analysis found significant challenges to productivity growth in emerging markets.30 Figure 4.14 shows the lag between TFP in emerging market and TFP in the United States. The BRICS all have TFPs at less than 60 percent of the US TFP, suggesting there is significant scope for

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1.20 1.00 0.80 0.60 0.40 0.00

1956-01-01 1958-01-01 1960-01-01 1962-01-01 1964-01-01 1966-01-01 1968-01-01 1970-01-01 1972-01-01 1974-01-01 1976-01-01 1978-01-01 1980-01-01 1982-01-01 1984-01-01 1986-01-01 1988-01-01 1990-01-01 1992-01-01 1994-01-01 1996-01-01 1998-01-01 2000-01-01 2002-01-01 2004-01-01 2006-01-01 2008-01-01 2010-01-01 2012-01-01 2014-01-01 2016-01-01 2018-01-01

0.20

China

US

India

Brazil

Russia

South Africa

Fig. 4.14  TFP in emerging markets relative to the United States (index). (Source: Feenstra et al. (2015))

catching up. Brazil and South Africa are on a declining TFP path. The TFP in China showed a significant ascent before stabilizing. In India, the TFP is rising. Russia had volatile TFPs even prior to the Ukraine war.

4.7  Infrastructure, Facilitation, and Sustainable Energy The EM10 have invested heavily in infrastructure in recent decades. Some started much earlier, especially in Latin America. By the 2000s, China was leading the emerging world through record investments in roads, airports, bridges, and much more. Other countries were not far behind. Historically, infrastructure was mostly financed by the public sector and averaged about 5 percent of GDP in many of the EM10 countries. Many countries that traditionally underinvested in infrastructure have been playing catch-up in the last two decades. India, Indonesia, and Türkiye, which were once laggards, are now investing huge sums in roads, power plants, water facilities, and ports. As the infrastructure gap increases, countries are seeking financing from all sources, especially the private sector. China has established a state infrastructure investment fund worth close to US$75 billion to spur infrastructure spending. Indian media are filled with news about the construction of more than 40,000 houses a day, so every Indian can have a home. Financed by a public–private partnership (PPP), Istanbul Airport in Türkiye is projected to become one of the biggest in the world, serving more than 200 million passengers annually once the project is complete.

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4.7.1   China’s Belt and Road Initiative One of the most ambitious infrastructure development ventures is the Belt and Road Initiative. Funded by China, the government-led  project involves the construction of port facilities and roads to establish new land routes and sea passages to improve trade flows between China and the rest of the world. Encompassing many dozens of countries, mostly in Africa, Central Asia, the Middle East, and South Asia, the initiative has been valued at more than US$ 1 trillion. It combines a land “belt” across Eurasia with a maritime “road” across the Indian Ocean connecting China with Southeast Asia, Middle East, East Africa, and Europe. According to the China Banking and Insurance Regulatory Commission, Chinese banks have already lent US$200 billion for 2600 projects.31 This is part of an effort meant to provide financing from state-owned Chinese companies, usually at commercial rates, to build physical infrastructure to strengthen the project land corridors. Focusing on transportation,  energy, petrochemicals, and  mining, this lending has eclipsed traditional Western lending. To be completed in 2049, the initiative has been both fascinating and controversial. It represents China’s first major foray into coordinated global infrastructure investment. It allows countries to obtain valuable capital and technology for road and energy projects. Yet, market-based financing conditions are sometimes difficult for cash-constrained economies, leading to a potential debt trap. This has been especially noted in the cases of Pakistan, Sri Lanka, and Zambia. However, China has recently scaled back this initiative due to a reorientation of finance towards domestic economic challenges. The BRI has offered a model for South–South cooperation, but there has been considerable debate in the countries involved, especially around debt implications. A recent study assessing Chinese financial flows to the rest of the world notes that almost all of China’s lending and investment abroad is official, much of the lending is opaque, and that advanced and higher middle-income countries receive portfolio debt flows, while lower income developing economies mostly receive direct loans at market rates from China’s state-owned banks.32 4.7.2   Public–Private Partnerships Governments throughout the world are becoming discouraged because of the high fiscal costs of building infrastructure. The infrastructure gap has

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been estimated at between US$1 trillion and US$2 trillion by 2030, and governments face political and economic barriers to filling this gap. They are therefore increasingly turning to the private sector for financing. The PPP model is being adopted to finance relevant transportation infrastructure, electricity generation plants, water treatment plants, and telecommunication networks. Since 2000, there has been a rise in infrastructure spending by the private sector.33 Much of this increase has been going to the transportation and energy sectors. In 2021, private participation in infrastructure investment accounted for US$76.2  billion across 240 projects, representing 0.26 percent of the GDP of all low- and middle-income countries. Though this was an upturn in investment relative to 2020, when the pandemic first began, it was still below the peak during the early 2010s. Many emerging markets—especially Argentina, Brazil, China, India, Mexico, and Türkiye—have been experimenting with multiple models, especially in energy and transport, whereby the public sector contracts out to the private sector to build necessary infrastructure. The type of arrangement varies according to the country, the legislation, and the institutional framework. Argentina, one of the leaders in PPPs, has had a long history of PPP projects and a current pipeline of close to US$170 billion in infrastructure investment. India accounts for close to 70 percent of the more than 1200 infrastructure PPPs in South Asia, and the private sector is financing at least 20 percent of total infrastructure projects, while a quarter of the highway projects are managed by private operators. Türkiye’s new Istanbul Airport is being constructed through a build-operate-­transfer PPP (a project financing and delivery method), whereby a consortium of five local Turkish firms are developing the airport at a cost of close to US$10 billion. The airport is envisaged to handle 150 million travelers a year when it is completed and will have the capacity to welcome 200 million passengers a year. The results of PPPs have been mixed. Former World Bank Integrity Vice President Leonard McCarthy has argued that PPPs can provide rapid injections of cash from private financiers, the delivery of quality services, and overall cost-effectiveness that the public sector is not able to achieve on its own.34 On the negative side, PPPs can also increase costs, underdeliver services, harm the public interest, and introduce new opportunities for fraud, collusion, and corruption. More than half of the PPP contracts are renegotiated, and some contracts are opaque. In the highway sector in India, after an initial euphoria in the early 2010s, many projects were

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stalled or terminated because the private infrastructure companies involved had accumulated too much debt without earning sufficient revenues. It was unclear who bore the first risk in cases where there was an overestimation of the volume of traffic on a toll road. There is a debate about this issue because the development and bidding costs of PPP projects can be higher than those of government procurement processes. In India and other emerging markets, there is often also a regulatory maze, whereby approvals for environmental or land acquisition can take excessive amounts of time. 4.7.3   Climate and Environment Climate change is a cancer of the times. The Earth is becoming a world of warming temperatures, fires, droughts, routinely nonroutine storms, and melting polar ice. The attention given to this issue, from policymakers to activists and from international organizations to civil society, is growing. The reports of the Intergovernmental Panel on Climate Change make depressing reading. Nations will have to cooperate to limit temperature rises to 2 °C, an aim that will require global greenhouse emissions to start falling soon. A rise of 3 °C–4 °C would be a disaster, displacing millions. Emerging markets, though not the world’s worst initial polluters, are catching up with the advanced economies. China is now officially the top single source of emissions, accounting for more than 25 percent of global emissions in 2022. After the United States, at more than 10 percent, the third top emitter is India, at close to 6.5 percent. Russia is fourth. Other emerging markets are farther down the list (Fig. 4.15). South Africa uses more coal as a relative share, but it is a smaller economy. Argentina, Mexico, Russia, and Saudi Arabia are oil and gas economies. Indonesia and Türkiye combine oil, natural gas, and coal, while Brazil relies heavily on oil, biofuels, natural gas, and hydropower. The EM10 may also be among the biggest victims of climate change, given their geography. Some climate models show that GDP losses associated with climate change will be greater in emerging markets, especially in Asia, Latin America, and the Middle East, than in Japan, North America, or Western Europe. Moody’s has calculated that the cost of climate change to the global economy may range from US$54 trillion to US$69 trillion by 2100 if global temperatures rise beyond the United Nations targets.35 Countries have agreed to ambitious schedules to achieve net-zero emissions. The Chinese leadership has confirmed that the country’s emissions

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120.0 100.0 80.0 60.0 40.0 20.0 0.0

Brazil Coal

Mexico

China

Natural gas

India Nuclear

Russia Hydro

Argenna

Saudi Arabia

Biofuels and waste

South Africa Oil

Turkey

Indonesia

Wind, solar, etc.

Fig. 4.15  Energy sources, by economy, 2020 (% of total). (Sources: Based on industry analysis; Data and Statistics (dashboard), International Energy Agency, Paris, https://www.iea.org/data-­and-­statistics; Statistical Review of World Energy (dashboard), BP, London, https://www.bp.com/en/global/corporate/energy-­ economics/statistical-­review-­of-­world-­energy.html)

will peak before 2030. Chinese SOEs have invested heavily in wind power, accounting for 70 percent of installed capacity, and the country has become the world leader in wind generation in less than 20 years. Among the top 10 wind turbine manufacturers in the world, 6 are Chinese. India is targeting net-zero carbon emissions by 2070. All the Latin American countries, including Argentina, Brazil, and Mexico, have ratified the Paris Agreement, which seeks to limit global warming to between 1.5 °C and 2.0 °C above preindustrial levels. There is a flurry of investments in renewable energy in emerging markets, reaching close to US$200 billion in the late 2010s.

Notes 1. WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/ SPROLLS/world-­e conomic-­o utlook-­d atabases#sort=%40imfdate%20 descending. 2. HDI (Human Development Index) (dashboard), United Nations Development Programme, New  York, https://hdr.undp.org/data-­ center/human-­development-­index#/indicies/HDI. 3. Credit to the non-financial sector (dashboard), Bank for International Settlements, Basel, Switzerland, https://www.bis.org/statistics/totcredit. htm?m=2669.

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4. Schwab (2019). 5. Schwab (2019). 6. LPI (Logistics Performance Index) (dashboard), World Bank, Washington, DC, https://lpi.worldbank.org/. 7. Kose et al. (2022). 8. Deghi et al. (2022). 9. UNDP (2013). 10. HCP (Human Capital Project) (dashboard), World Bank, Washington, DC, http://www.worldbank.org/en/publication/human-­capital. 11. MPI (Multidimensional Poverty Index) Interactive Data Bank, Oxford Poverty and Human Development Initiative, Oxford, http://www.ophi. org.uk/multidimensional-­poverty-­index/mpi-­data-­bank/. 12. Feliba and Ahmad (2021). 13. MSCI (2023). 14. IIF (2023). 15. Schwab (2019). 16. Acemoglu and Robinson (2012). 17. Besley (2020). 18. Khemani (2019). 19. CPI (Corruption Perceptions Index) (dashboard), Transparency International, London, http://www.transparency.org/research/cpi/ overview. 20. Naughton (2015). 21. Ang (2016). 22. Guilford (2014), Pei (2008). 23. Naidu (2018). 24. Kapur (2020). 25. Mazzuca (2022). See also Reid (2022). 26. UNDP (2021). 27. Rodrik (2011), Stiglitz (2002). 28. Hanson (1997). Another paper by Hanson (1994) is also relevant. 29. Economist (2020). 30. De Gregorio (2018). 31. Chin (2018). 32. Horn et al. (2020). 33. World Bank (2021). 34. McCarthy (2013). 35. Climate on demand (dashboard), Moody’s Analytics, New York, https:// www.moodysanalytics.com/microsites/climate%20on%20demand?utm_ medium=cpc&utm_campaign=climateondemand&utm_source= google&utm_term=usa.

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References Acemoglu, Daron, and James A. Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown Business. Ang, Yuen Yuen. 2016. How China Escaped the Poverty Trap. Cornell Studies in Political Economy Series. Ithaca, NY: Cornell University Press. Besley, Timothy J. 2020. State Capacity, Reciprocity and the Social Contract. Econometrica 88 (4): 1307–1335. Chin, Stephen. 2018. BRI Debt Trap: An Unintended Consequence? Spotlight (blog), October 9. https://theaseanpost.com/article/bri-­debt-­trap­unintended-­consequence. De Gregorio, José. 2018. Productivity in Emerging Economies: Slowdown or Stagnation? PIIE Working Paper 18–12, October. Washington, DC: Peterson Institute for International Economics. Deghi, Andrea, Fabio Natalucci, and Mahvash S.  Qureshi. 2022. Emerging-­ Market Banks’ Government Debt Holdings Pose Financial Stability Risks. Financial Sector Stability (blog), April 18. https://www.imf.org/en/Blogs/ Articles/2022/04/18/blog041822-­g fsr-­c h2-­e merging-­m arket-­b anks­government-­debt-­holdings-­pose-­financial-­stability-­risks. Economist. 2020. Emerging Economies Are Experiencing a Prolonged Productivity Slowdown. Finance and Economics: Not Just a First-World Problem, January 16. https://www.economist.com/finance-­a nd-­e conomics/2020/01/16/ emerging-­economies-­are-­experiencing-­a-­prolonged-­productivity-­slowdown. Feenstra, Robert C., Robert Inklaar, and Marcel Peter Timmer. 2015. The Next Generation of the Penn World Table. American Economic Review 105 (10): 3150–3182. Feliba, David, and Rehan Ahmad. 2021. The World’s 100 Largest Banks, 2021. Research, April 23. https://www.spglobal.com/marketintelligence/en/news-­ insights/research/the-­worlds-­100-­largest-­banks-­2021. Guilford, Gwynn. 2014. Larry Summers Explains Why the World Is Too Optimistic about China’s Economic Future. End of the Line, October 15. https://qz. com/281609/larry-­s ummers-­e xplains-­w hy-­t he-­w orld-­i s-­t oo-­o ptimistic­about-­chinas-­economic-­future. Hanson, Gordon H. 1994. Regional Adjustment to Trade Liberalization. NBER Working Paper 4713, April. Cambridge, MA: National Bureau of Economic Research. ———. 1997. Increasing Returns, Trade, and the Regional Structure of Wages. Economic Journal 107 (440): 113–133. Horn, Sebastian, Carmen Reinhart, and Christop Trebesch. 2020. China’s Overseas Lending. National Bureau of Economic Research Working Paper 26050.

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IIF (Institute of International Finance). 2023. IIF Capital Flows Tracker. January 11. Washington, DC: IIF. Kapur, Devesh. 2020. Why Does the Indian State Both Fail and Succeed? Journal of Economic Perspectives 34 (1): 31–54. Khemani, Stuti. 2019. What Is State Capacity? Policy Research Working Paper 8734. Washington, DC: World Bank. Kose, M. Ayhan, Franziska L. Ohnsorge, and Naotaka Sugawara. 2022. Fiscal Space Watch: No Time to Sit on Laurels. Let’s Talk Development (blog), August 8. https://blogs.worldbank.org/developmenttalk/fiscal-­space-­watch-­no-­time­sit-­laurels. Mazzuca, Sebastián. 2022. The Deficiencies of the Latin American State Loom Large. Special Report: The State, June 16. https://www.economist.com/ special-­r eport/2022/06/16/the-­deficiencies-­of-­the-­latin-­american-­state­loom-­large. McCarthy, Leonard. 2013. Fixing Fraud in Public-Private Projects. Voices (blog), April 18. https://blogs.worldbank.org/voices/fixing-­fraud-­public-­private­projects. MSCI. 2023. MSCI Emerging Markets Index (USD). Index Factsheet. New York: MSCI. https://www.msci.com/documents/10199/ c0db0a48-­01f2-­4ba9-­ad01-­226fd5678111. Naidu, M.  Venkaiah. 2018. On Civil Services Day, Time to Remember Sardar Patel’s Vision of How to Move from ‘Swarajya’ to ‘Surajya’. Edit Page (blog), April 20. https://timesofindia.indiatimes.com/blogs/toi-­edit-­page/ on-­civil-­services-­day-­time-­to-­remember-­sardar-­patels-­vision-­of-­how-­to-­move-­ from-­swarajya-­to-­surajya/. Naughton, Barry J. 2015. Economic Policy. In Handbook of the Politics of China, ed. David S.G. Goodman, 165–186. Handbooks of Research on Contemporary China Series. Cheltenham: Edward Elgar. Pei, Minxin. 2008. China’s Trapped Transition: The Limits of Developmental Autocracy. Cambridge, MA: Harvard University Press. Reid, Michael. 2022. A Region Caught between Stagnation and Angry Street Protests. Special Report: Trapped, June 16. https://www.economist.com/ special-­r eport/2022/06/16/a-­r egion-­c aught-­b etween-­s tagnation-­a nd-­ angry-­street-­protests. Rodrik, Dani. 2011. The Globalization Paradox: Democracy and the Future of the World Economy. New York: W. W. Norton and Co. Schwab, Klaus, ed. 2019. Insight Report: The Global Competitiveness Report 2019. Geneva: World Economic Forum. http://www3.weforum.org/docs/WEF_ TheGlobalCompetitivenessReport2019.pdf. Stiglitz, Joseph E. 2002. Globalization and Its Discontents. New  York: W. W. Norton.

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UNDP (United Nations Development Programme). 2013. Human Development Report 2013, The Rise of the South: Human Progress in a Diverse World. New York. http://hdr.undp.org/en/2013-­report. ———. 2021. Regional Human Development Report 2021; Trapped: High Inequality and Low Growth in Latin America and the Caribbean. New York: UNDP. World Bank. 2021. Private Participation in Infrastructure (PPI): 2021 Annual Report. Washington, DC: World Bank.

CHAPTER 5

Medium Term: Where Are Emerging Markets Headed?

Abstract  The world in the next 25 years is unpredictable, of course, but a few trends may be identifiable and relevant. The world economy until 2050 and beyond will face a series of structural shifts that will affect both advanced and developing economies. Six tailwinds and six headwinds are identified. The tailwinds are: good macroeconomic fundamentals; improving health and education coupled with young demography; rise of capital market and fintech with growing private sector; growing state capacity; regional trade and skills upgrading; and the rise of renewables. Headwinds are: macro uncertainties, including low global growth, inflation and high debt; growing inequality and gender discrimination; end of an era of cheap money; authoritarian populism, institutional weakening, and corruption; selective deglobalization and productivity shortfalls; and accelerating climate change that represents an existential threat to the planet. Keywords  Macroeconomic fundamentals • Reserves • Inflation • Current account deficit • Debt • Health • Life expectancy • Equity markets • Private sector • Fintech • Policymakers • Regional trade • Skills • ICT • Renewables • Inequality • Discrimination • Monetary policy • Populism • Corruption • Democracy • Deglobalization • Productivity • Supply chain • Climate change • Energy transition

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0_5

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What can we say about the future of emerging markets? What are the key trends in the next decade or two that will affect them? And what is the best path forward for them? This section assesses the headwinds and tailwinds facing emerging markets until 2050. Imagine a Martian landing on earth in 2050. Assuming that there are no pandemics or wars, what will the Martian see? The planet will most likely be warmer. The center of the world’s economy and population will be shifting to Asia. Many of the world’s population of nine billion people will be living in emerging markets. Close to three people in four in emerging markets will be living in cities. Istanbul, Mexico City, Mumbai, São Paulo, Shanghai, and Shenzhen will be booming megacities. China and India will probably have added around one billion people to the middle class. More than three-fourths of the global increase in the middle class will be living in Asia. According to international professional services firm Pricewater houseCoopers, in 30 years, six of the world’s seven largest economies will be today’s emerging markets.1 The top 10 will be China, India, the United States, Indonesia, Brazil, Russia, Mexico, Japan, Germany, and the United Kingdom. The United States will drop from second to third. Japan will fall from fourth to eighth. Germany will decline from fifth to ninth. India will have outpaced China in population growth.

5.1   Country Trends The forecasts are pessimistic for 2023, with a few bright spots. Many are predicting the weakest growth in decades. The bad news seems to be everywhere. COVID in China. Inflation is not yet under control. The Ukraine war is raging. Supply chains have not entirely recovered. Labor market problems are troubling. Investment growth is projected to average 3.5 percent per year in EMDEs during 2022–23, and 4.1 percent in EMDEs excluding China, and these projected investment growth rates are below the long-term (2000–2021) average.2 The IMF chief Kristalina Georgieva has said that a third of the global economy will be in recession this year.3 In October 2022, the IMF predicted global growth would slow to 2.7 percent in 2023, the weakest growth since 2001. Secretary-General Rebeca Grynspan of the United Nations Conference on Trade and Development has argued that monetary and fiscal policies in advanced economies, including continued interest rate increases, may push the world toward a global recession and

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stagnation, potentially worse than the global financial crisis of 2007–2009 and the Covid-19 shock in 2020.4 The analysis here argues that the emerging market economies will continue to raise their share of world output, but not as quickly as they did in the 2000s. Why not? The world has changed since the golden era of the 2000s. The challenges they will face until 2030 will make it difficult for the emerging markets to outperform advanced economies. As they emerge, there will be an ongoing shift in clout toward them. The United States will continue to be a powerful hegemon, but the competition with China will deepen. The 2020s will not become a lost decade or a boom decade. It will be a decade of recovery unless there is another crazy Black Swan event, such as another war, another pandemic, or something new. Growth should average 3 percent to 4 percent in emerging markets until 2030. The tier 1 countries—China, India, Indonesia, and Saudi Arabia—are likely to enjoy stable growth, averaging 3 percent to 5 percent from 2025 to 2050. Tier 2 countries—Brazil, Mexico, and Türkiye—may be on a longer growth path, averaging closer to 2 percent to 4 percent until 2050. Türkiye is unpredictable though and is the country that can easily jump up or down in forecasts. Tier 3 countries—Argentina, Russia, and South Africa—should have low projected growth in the medium term according to current trajectories, but with volatility because of macroeconomic challenges and structural constraints. Russia may have negative growth because of the war. In general, in case of substantive reform or reform slippage, countries may move between tiers. 5.1.1   Tier 1 China • China should continue to grow at an average rate of 3 percent to 4 percent annually until 2030 and overtake the United States as the largest economy in the world in the 2030s in nominal GDP, though not in per capita terms. • The pandemic will continue to impact the country in 2023, together with a weak property market. Business confidence should recover by 2024, and rebalancing from export-led development will continue. Consumption, at 40 percent of GDP, will have to expand. Success will depend on stimulus to address property market challenges, local

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government debt, and low private sector and corporate confidence. A balance sheet recession, where corporates are not borrowing even when interest rates are low, may not be happening as deleveraging is concentrated in real estate sector.   • Its overall macroeconomic fundamentals remain strong, especially its cushion of reserves. • Its supply chains will continue to be competitive, although there will be some reshoring away from China. Green energy and robotics will be industries to watch. It has a growing innovation ecosystem. Tourism, finance, biotech and pharma, and new energy vehicles are promising sectors for investors. • The aging of the population will continue. The average age will rise as people live longer and births decline. In 2050, the proportion of Chinese over retirement age will reach close to 40 percent of the population. • Geopolitical tensions with the United States appear likely to continue in selected areas, such as intellectual property and tariff protectionism. • In the long term, Louis Kuijs, the chief economist–Asia at S&P Global Ratings, expects China’s trend growth to slow to 4.4 percent over 2022–2030 and 3.1 percent in 2031–2040, from 6.0 percent in 2017–2021.5 This will be driven by four factors: demographics, rebalancing, convergence, and reduced international economic interaction amid efforts by the United States and other countries to decouple at least partly from China. India • Fueled by domestic demand, service exports, digital infrastructure, an increasingly integrated national market,  the young population, and an innovative start-up ecosystem, India may become the world’s third-largest economy by 2030, with average annual GDP growth above 5 percent. It now has the fourth largest stockmarket after US, China, and Japan. India can also benefit from some realignment of supply chains from China.  • India will continue to reap the benefits of investments in technology and renewable energy. Renewables, consumer goods, healthcare, and automotives are promising sectors. The current high capital expendi-

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ture in infrastructure, driven by the Indian government, will help India position itself as a leading power. According to the Economist, India’s top 20 firms earn 50 percent of corporate cashflows. Several conglomerates—Adani (energy, transport), Reliance Industries (telecom, chemicals, energy, retail), Tata (IT, retail, energy, cars), and JSW (steel)—are planning to invest more than US$250 billion over the next five to eight years in infrastructure and emerging industries.6 • The economy will function at several speeds. The services sector will be dynamic, industry should grow faster than in past, while agriculture will move more slowly. • India will face challenges. Pranjul Bhandari, chief economist at HSBC, India, finds that high-tech services, including IT, and goods exports, especially pharma, are gaining global market share, but that low- and medium-term exports, such as food and textiles, are not performing as well.7 A time will come to focus on new growth drivers. Arvind Subramanian, former chief economic advisor to the government of India, and Josh Felman argue that the current Indian 3D advantage strategy—demographics, democracy, and demand— ignores the country’s weaknesses and will lead to a protectionist drift.8 Even before the onset of the Covid-19 pandemic, no more than 1 percent to 2 percent of the Indian population could be described as middle class, compared with 25 percent in China. Indonesia • Indonesia is one of the bright spots in the emerging market universe. It will be one of the largest global economies in the coming decade. It has a stable political environment. It could grow at an average of at least 4 percent for the next 10 years, supported by strong macroeconomic fundamentals, including credible fiscal management and low debt. Lower inflation relative to other emerging markets gives it room for more accommodating monetary policy. • It has many assets: growing domestic demand, natural resources (especially palm oil, nickel, and bauxite), commodity exports, a youthful population, and a digital and growing service economy. It has a high trade surplus and a lot of investor interest in agribusiness, mining, energy, and transport. The government and stakeholders can capital-

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ize on the country’s location in the dynamic Southeast Asia region. It remains together with Turkey a major tourist destination. • Its move toward downstream industry may be successful in helping it export higher value-added manufacturing, such as iron and steel, and it can become a global leader in electric vehicles (EVs) and digital technologies. • Increased government expenditure on education and welfare services will boost human capital in the medium term, but infrastructure will remain an Achilles heel. Managing an archipelago of so many islands will always be complex. Saudi Arabia • That the economy was the most rapidly growing of 2022 provides momentum to Saudi policy makers. As an energy power, Saudi Arabia can continue coasting on high energy prices until 2030. Its influence in OPEC+ is significant, and it will remain a kingmaker in the international energy market. Given that the price of oil is projected to reach above US$50 a barrel until 2030, the country’s medium-­term growth prospects are positive. • Oil price volatility and a projected long-term downward trend will adversely affect the Saudi economy, which will also be troubled by the rise of renewables in an eventual post-oil world. • Inflation has not been a problem, unlike in many emerging markets. Banking sector has solid prudential norms.  • The role of the Saudi Public Investment Fund is important. Success will depend on the implementation of Vision 2030. Potential sectors of growth in the next decade include tourism and hospitality, finance, manufacturing technology, and engineering-oriented value chains, but constraints will have to be overcome. • Industrial policy will be adversely influenced by the lack of private sector competitiveness, the low skills of Saudi graduates, and the lack of a clear, uncontroversial Saudi brand.

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5.1.2   Tier 2 Brazil • After 2.8 percent real GDP growth in 2022, the economy will continue to expand in the coming years, but at a lower rate than in past. The economy has forward momentum because of the combination of agriculture, technology, and energy. Reindustrialization can happen. Its large inflow of FDI in the last couple of years, its trade surplus (one of highest in EM10), continued agricultural productivity, and the decline in inflation to a possible 5 percent in 2023 due to tight monetary policy are positive developments for Brazil’s future.  • A diversified and robust export base, including industrial products, agribusiness, food, and oil, tends to insulate the economy from single shocks. China is now Brazil’s largest trading partner, a relationship that is bound to grow. Agribusiness, automotives, and renewables show strong promise.  • Fiscal pressures, especially because of social spending and inflation, are on the horizon. The central bank and financial markets are both concerned about fiscal risks and overshooting the 3.25 percent inflation target, while public pressure is for greater social spending and minimum wage increases. The new fiscal framework adopted in 2023 by Lula government is promising due to the linking of current government expenditure to 70 percent of the previous year’s revenue growth, and tax reform appears on the horizon. Weaker global demand and lower commodity prices may affect exports up to 2030. • In the medium term, the persistence of the chronic problems linked to the custo Brasil, the costs that make Brazil a relatively expensive place to do business, especially the high taxes, extensive regulations, and high interest rates, may impact growth. Brazil’s Selic benchmark interest rate of 13.75 percent in early 2023 remains among the higher ones in emerging markets.  Low domestic savings present a constant challenge.  • Deforestation in the Amazon is raising ever more clamoring environmental concerns. On the other hand, Brazil appears promising in the area of clean energy, especially hydropower. 

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Mexico • The second-largest economy in Latin America, Mexico, has a good macroeconomic policy framework, peso stability, and locational advantages. The IMF projects that the economy will grow 2.1 percent in 2022 and 1.2 percent in 2023, partly because of weaker US growth.9 Growth will be stable but low until 2030. Low public investment at 3 percent of GDP means that the economy will need more private investment in the years to come. FDI from the US and China is promising. • Low levels of debt, coupled with prudent fiscal and monetary policy, are expected to continue. • Inflation may be met with interest rate increases over the next few years. • High poverty rates and low female labor force participation rates may jeopardize long-term growth. • Reshoring may be beneficial through new investments in manufacturing and more exports of autos, electronics, and semiconductor components. Mexico can be a continued hub for US automotive manufacturing. Continued integration into global supply chains is a possibility despite the country’s large informal sector. It will be unclear if Mexico can replace China across many product lines. • Autonomous institutions may fall victim to a governance crisis and political capture. Cartel violence remains a major issue. Mexico’s failing health infrastructure and low investment in education will have to be tackled. The political transition will be important to watch.  Türkiye • The government and stakeholders will continue to capitalize on the country’s strategic location, entrepreneurial spirit, strong financial sector, young population, and robust manufacturing in the Anatolian heartland. Annual real GDP growth will be 2 percent to 4 percent until 2030. Exports to the European Union will continue to grow. Energy, financial and tourism services, healthcare, and automotives are projected to grow.  • Major challenges include soaring inflation, a weakening currency, and continued vulnerability to capital inflows and outflows. Recent post-election  changes in Central Bank and Ministry of Finance

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l­eadership and increase of interest rates to  25 percent to  control inflation appear promising. Financial sector stability and a shortage of foreign exchange can be challenges. Continued dependence on imported oil will keep the current account deficit large. Concerns about high domestic demand, volatility, and overheating will emerge. • Geopolitics, especially around the Russia–Ukraine conflict, and polarized domestic politics will have an outsized impact on economic performance. 5.1.3   Tier 3 Argentina • The economy may continue to underperform in the medium-term absent significant reform. Macroeconomic imbalances, the boom-­ and-­bust economic cycle, high inflation, excessive fiscal spending, and substantial debt will continue to affect longer-term growth prospects. Given the US$150 billion debt, the low reserves, and the fact that bonds are currently trading at only 20 cents to the dollar, the risk of sovereign debt default clouds the horizon. Debt restructuring through IMF programs, foreign exchange shortages, and peso-dollar volatility are expected to persist, forcing the government to resort to unorthodox solutions that may make matters worse. Swings in economic policymaking may undermine growth goals. The 2023 election may not lead to greater stability in a polarized system.  • Strong success and future potential in agribusiness and energy, the two most competitive clusters of the Argentinian economy, together with an innovation ecosystem, will be silver linings for the economy. But they will be offset by capital flight and the exodus of skilled talent, the excessive taxation of firms, and weak integration into global value chains. • Given the national poverty rate of 40 percent, the country’s subsidized health care and safety nets will play a key role in coming years. Fiscal policy will face tensions between inclusion and sustainability and between pressure for cash transfers and public investment. Subsidies in utilities and energy will require longer-term reform.

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Russia • Because of the military and political costs of the Ukraine war, the exodus of capital and skilled labor (an estimated one-third of IT professionals left the country in 2022), and the impact of Western sanctions and the EU gas price cap, the long-term problems will be significant, undermining Russia’s growth prospects. The shift towards a security state has fiscal and growth implications. In 2022, GDP declined by 2.1 percent, less than anticipated. Non-gas exports are underperforming. GDP growth can decline in 2023 because of lower oil prices and oil export volumes, but the jury is still out amid contentious political debates. Higher public spending, bank lending, and consumption have somewhat insulated the Russian economy.  • The lack of regular and accurate macro and micro data renders the assessment challenging. • The country is facing a slow decline rather than an implosion. The financial isolation, FDI pullout, especially of retail and automotives, emigration of skilled workers, and the shortage of high-tech imports will have a negative longer-term impact. The deep reserves, capital controls, and the flexible currency provide some strength, though the ruble will continue to slide downwards. The sharp drop-off in imports and the bans on foreign currency exports have had an impact. The long-term prognosis for Russian consumer confidence and credit appears more pessimistic. The future of construction is uncertain. • The sanctions have had less impact in the short term, partly because of high energy prices. The Russian economy has demonstrated resilience because of diversification in oil and gas exports to non-Western countries, such as China, India, and Central Asia. In spite of the Urals discount, where Russian oil is sold at a discount, the ample cushion of reserves, the rise in interest rates, capital controls, and low debt protected the ruble in 2022 and can continue to do so. The defense industry has also picked up because of the conflict. Russia’s self-sufficiency in natural resources and potential unexplored oil and gas in Western Siberia and the Arctic will help protect the economy from any collapse. Longer-term pivot to Asia is expected. 

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• Agriculture remains resilient, partly because the sanctions have exempted wheat and fertilizer. Russia is expected to remain a top wheat exporter. It will continue to attract the interest of many ­countries, such as Egypt, Pakistan, and Türkiye. From July 2022 to December 2022, Russia had a record crop and exported 24.9 million tons of wheat, 3.2 million tons more than at the same stage in the previous year.10 African countries will still need Russian fertilizer for agriculture in the years to come. • The creation of an alternative to the SWIFT clearing network is also a notable development. South Africa • The economy is projected to grow at a slow pace, partly because of structural factors and partly because of policy uncertainty. Underperformance will result from low public investment and low private investment. Policy uncertainty, especially in fiscal policy, debt management, and SOE reform, may present a challenge. Politics could trump economics. Big firms continue to dominate the economy and stock exchange, with some  of the revenue coming from outside South Africa.  • Strong agriculture, an established manufacturing base, and a stable financial sector, together with high household consumption, may continue to support the economy in the medium term. • The implementation of the US$97  billion Just Energy Transition (JET) plan over the next five years can help catalyze the economy. • Youth unemployment, at more than 50 percent, may dampen development prospects. • Electricity supply shortages, rolling blackouts,  Eskom debt problems, Transnet freight rail inefficiencies,  the slow transition out of coal, transport bottlenecks, and uncontrolled crime will create serious headwinds. Table 5.1 summarizes the tailwinds and headwinds that currently affect the emerging market countries.

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Table 5.1  Current tailwinds and headwinds, emerging market economies China Tailwinds: strong macrostability, competitive supply chains, credit to private sector, link to Asian trade Headwinds: deglobalization, high local government debt, property sector crisis, demographic challenges, battles with tech India Tailwinds: stable macro, service sector integrated with global economy, dynamic private sector firms at high end Headwinds: microchallenges—land, labor, capital; imperfect infrastructure; poverty and gender gaps; lack of quality jobs; coal Indonesia Tailwinds: Strong domestic market, natural resources, low debt Headwinds: Relatively closed economy, infrastructure deficit, high poverty, weak social safety nets

Mexico Tailwinds: stable macro, industrial base, strong exports, trade integration Headwinds: low competitiveness, low productivity, poor governance (cartels and crime), institutional weakness

Türkiye Tailwinds: competitive industry, stable banking system, openness to foreign trade (export boom) Headwinds: high inflation, weakening currency, dependence on foreign capital, growing political polarization Argentina Tailwinds: growth drivers (agriculture and technology); well-designed safety nets, health care; democratic governance Headwinds: macroeconomic imbalances (debt, inflation), high inequality, policy inconsistency, weak private sector Saudi Arabia Russia Tailwinds: Strong oil economy, robust Tailwinds: macroreserves, low debt, macro, expanding education of women diversification of trade, agriculture Headwinds: Low nonoil diversification; Headwinds: macrocrisis because of war, competitiveness shortfalls, especially in financial isolation because of sanctions, manufacturing; lack of transparency; weak exodus of capital and skilled labor, private sector governance failures, regional poverty Brazil South Africa Tailwinds: multiple growth engines Tailwinds: Diversified economy; strong (agriculture, energy, mining), social safety regional financial hub; advanced nets, state capacity infrastructure, especially transport Headwinds: microeconomic costs of doing Headwinds: macrovolatility, high inequality business, protectionist economy, high and unemployment, energy sector blackouts; social inequality growing corruption and complex political economy

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5.2   Future Headwinds and Tailwinds The world in the next 25 years is unpredictable, of course, but a few trends may be identifiable and relevant. The world economy will face a series of structural shifts until 2050 that will affect both advanced and developing economies. Six tailwinds and six headwinds may be identified using the GEMINI approach. 5.2.1  Tailwinds Strong macroeconomic fundamentals in emerging markets with solid reserves and fiscal buffers, driven by abundant resources and robust growth drivers. Emerging markets will remain the growth engine of the global economy in 2023, with the IMF projecting that China and India will contribute to more than half of global growth. There is no major currency crisis in the EM10 despite the global chaos, with the exception of Argentina and Türkiye. Because of the cushion of their reserves, these economies will be able to weather the storm. Many central banks in middle-income countries began raising rates before central banks in rich countries did so. These economies also possess floating currencies that allow them to adjust to shocks more effectively. Reserves have been carefully managed. EM10 reserves stood at more than US$5.5 trillion at the end of 2022. The countries can support the current account deficit, import food, and pay debt. The Economist Intelligence Unit estimates that most emerging economies in Asia are set to grow by 2 percent to 3 percent a year in 2022–2050.11 By contrast, growth in the United States and much of Western Europe will average only about 1 percent to 2 percent. Emerging markets generally displayed less fiscal firepower than advanced economies in the struggle to combat the pandemic and support the recovery. Their fiscal positions are therefore more untroubled. The macroeconomic fundamentals will be driven by strong natural resource endowments, commodity supercycles, dependence on fossil fuels in the near term, and selected sectors. Natural resources will fuel Indonesia. Manufacturing will supply export revenue to China and Türkiye. Oil will support Brazil, Russia, and Saudi Arabia. Agriculture will continue to be resilient in Argentina, Brazil, China, India, and Russia. Emerging markets will account for much of the rise in world wheat and rice production, and these economies will continue to play a leading role in feeding the planet.

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Who else is going to feed the growing demand? Ongoing service integration with the world will shield India from shocks. Continued improvements in health, life expectancy, and social safety nets, coupled with a relatively young demography. HDI has been rising, and there is no reason to believe the rise will stop. The EM10 have relatively younger populations than Europe and the United States. Human development has been improving across the board, although unevenly. EM10 healthcare sectors are much better than two decades ago. Eventually, there will be demographic transitions. The fertility rate will decline and life expectancy will expand, leading to aging populations, but this depends on the country context and the age structure. More fiscal space will have to be found in China, India, and others to support vulnerable rural populations. Overall redistribution accounts for 85 percent of the disposable income inequality between the developing economies and the advanced and emerging markets.12 In Argentina, Brazil, and Mexico, a focus should be on the urban poor because of substantial urbanization and safety net expansion. The rise of local-currency bond and equity markets and the fintech revolution. The local-currency bond market will continue to expand, propelled in part by the challenges involved in mobilizing external finance. The size of the local-currency bond market in emerging East Asia reached more than US$20 trillion in 2022. According to investment firm Lazard, emerging markets bonds are among the most mispriced asset classes, with valuations at some of the most attractive levels ever.13 Valuations are attractive relative to the past and to developed markets. Profitability, free cash flows, and dividend yields have all climbed, and earnings growth is expected to recover in 2023. The Lazard analysis also shows that emerging market investment returns have historically been closely tied to the rise and fall of commodity prices and global growth. The fintech market is expanding dramatically, crossing the US$100  billion threshold in 2021. It is projected to rise appreciably in mobile payments, e-commerce, digital banking, and supply chain logistics. While most unicorns are in the United States, the emerging market is rapidly catching up.14 China is home to around 40 percent of the unicorns in existence today, and the shares in India and Latin America are also growing. In Argentina and Brazil, a small group of high-tech, high-growth entrepreneurial ventures is clustered in relatively lower-tech domains, such as e-commerce, direct-to-consumer services, supply chains, logistics, and delivery. Finally, automation may help spur productivity, and can create as many jobs as it replaces. It is no

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accident that the largest two sectors in the MSCI Index are financial sector and IT technology, signifying investor appetite.  Growing state capacity and policy sophistication. Emerging market policymakers, including central bankers and directors and staff in ministries of finance, have acquired experience and sophistication. A new generation of policymakers, many graduates of top schools in the advanced economies, have come of age. They have returned to their countries and are implementing policies. Central bank governors—such as Raghuram Rajan in India and Elvira Nabiullina in Russia—ministers, and economic advisers— such as Martín Guzmán in Argentina, Justin Lin in China, Arvind Subramanian in India, Sri Mulyani in Indonesia, and Kemal Derviş in Türkiye—have come through to support their economies during troubled times. This is a sign of growing capacity and of timely knowledge transfers among countries. In some emerging countries, governments have improved service delivery, civil service capacity, and regulatory ability. There is also a growing recognition in several emerging markets of the importance and growing role of the private sector.  Regional trade and skills upgrading potential. The future of international trade is uncertain. There is no consensus on whether the global economy will become more highly integrated by 2050 or collapse into separate blocs. But there are increases in regional trade, such as US– Mexico commerce prompted by nearshoring and growing intraregional trade in East Asia, which has reached 40 percent in 2021. A selective decoupling is occurring between China and the United States. Many countries are pushing back against full globalization. Aimed at understanding whether global value chains are being broken, a study was conducted of the dynamics of global value chains in 2000–2016 using detailed trade data, particularly on intermediate goods (parts and components) along global value chains.15 The analysis revealed a mixed picture. There has been moderate growth in several sectors, but in the electronics sector, where global value chains are well developed, the share of the trade in office machinery and computers has declined. To realize the potential for gains in trade will require individuals with special skills in, for instance, hospitality, nursing, and information and communication technology. Nonetheless, emerging markets will continue to benefit from low labor costs. Even in cases of rising wages in China, there are still many other advantages that prompt FDI to locate there. Rise of renewables. The use of renewables is increasing significantly in emerging markets, especially wind, solar, and hydropower. It accounts for

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much of the fresh energy capacity. Global investment, including FDI, venture capital, and private equity, in renewable energy totaled US$226 billion in the first half of 2022. The investment in solar projects rose by US$120  billion, and wind financing represented US$84  billion. China alone invested US$41  billion in the first half of 2022 and a total of US$58 billion in wind projects.16 The governments of China, Indonesia, and South Africa have drafted strategies to wean the economy off of coal. There is forward momentum. 5.2.2  Headwinds Macro uncertainties, combined with low global growth and high debt. Amid the war in Ukraine, the COVID fallout, the sharp slowdown in China, and trade wars, the world economy is projected to grow 2.7 percent, and the 2023 slowdown will be broad-based. The IMF estimates that countries accounting for about a third of the global economy will show a two-­quarter contraction in real GDP in 2023 or 2024.17 Lower demand in the West also means smaller markets for developing-country exports. The forecasts for the medium term are pessimistic. Emerging market debt will be challenging until 2030 and beyond, barring any substantial debt restructuring. Growing inequality, persistent gender discrimination. Inequality is widening within and across countries because of shortcomings in trade, skills, technology, and policy. As Piketty has shown, there is a global decline in the share of compensation paid to labor, with implications for both advanced economies and emerging markets.18 None of these problems are expected to change significantly. The richest 10 percent of the global population takes 52 percent of global income, while the poorest half of the population earns only 8.5 percent. An individual in the top 10 percent of the global income distribution earns €87,200 (US$122,100) a year, while an individual in the bottom half of the distribution makes €2800 (US$3920) a year.19 Around 2.4 billion working-age women do not enjoy equal economic opportunity, and 178 countries maintain legal barriers that prevent women’s full economic participation.20 The end of the era of cheap money amid inflation and tight monetary policy. The recent tight monetary campaign of the US Federal Reserve has led to a rise in the cost of borrowing in emerging markets. A strong dollar is likely to persist. Mortgage rates that were 3 percent in 2020 are now 6 percent or 7 percent. Central bankers in emerging markets could have to

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maintain higher rates to counteract inflation. However, as of early 2023, it appears that central bank rates have peaked. Authoritarian populism, institutional weakening, and corruption. Authoritarian nationalism is widespread. Relations are unsettled between the West and authoritarian governments, especially in China and Russia. Russian political scientist Tatiana Stanovaya of the Carnegie Endowment for International Peace notes that, in 2023, Russia faces three crucial issues: President Putin’s plans for his future, the battle between the hawks and pragmatists in the elite, and looming government personnel changes.21 According to the assessment, the pragmatists are technocrats and mid-­ ranking officials in the military and the security services who want a rethink of the war, while the hawks are calling for a more aggressive military solution. These choices will have an effect on Russia for years to come. In China, the statistic model under General Secretary Xi involves promoting self-sufficiency and reducing any vulnerability toward external forces. The outcome will have an impact on the country’s long-term political equilibrium. One commentator concludes that the recent policies and actions of Xi and his choice of appointees indicate that China’s economic prospects increasingly depend more on politics than the dynamics of economic supply and demand.22 The risk is that the supremacy of politics over market mechanisms will undermine China’s four-decade process of reform and opening. In other emerging markets, political clouds lurk over the horizon. In Argentina, the fraught and charged political landscape risks destabilizing the macroeconomy. In Brazil, the storming of Parliament may be a harbinger of deep and widening political polarization. In Mexico, the 2022 and 2023 proposed reforms in the electoral law and the potential dissolution of the National Electoral Institute would have long-term implications. In Türkiye, actors and stakeholders continue to struggle with what the Financial Times labels a flawed democracy.23 The share of democracies is declining globally. Undemocratic rule may have an adverse effect on institutions and foster greater corruption. Deglobalization and productivity shortfalls. The era of hyperglobalization has reached an end, but the world economy will remain globalized in many ways, but especially through capital flows and supply chains. The world has somewhat changed in the aftermath of the global financial crisis and the pandemic. Protectionist impulses in the West, emanating partly from the weakness of globalization in advancing the incomes of less well-­ educated workers in the West and partly from inward-looking impulses in many of the emerging markets, have led to an impasse. The attempt to

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achieve a consensus on a new round of trade measures post-Doha has failed. The spillover of shocks has exposed countries to supply chain vulnerabilities, causing governments to rethink development models. Two academics have described the current period as deglobalization and documented a significant trend in this direction.24 For a variety of reasons, the global merchandise export-to-GDP ratio has been declining for the first time since World War II, falling by about 5 percentage points since 2008 to about 20 percent in 2020. Low- and middle-income countries that were growing at about 3 percent to 4 percent per capita annually before the global financial crisis have been averaging 1 percent to 2 percent growth since. This is a reversal from a previous era of hyperglobalization, whereby the global export-to-GDP ratio rose from 15 percent to 25 percent. Over the two decades leading up to the 2008 global financial crisis, developing countries benefited from the open trade system and started converging to levels similar to those in the West. This pattern has now reversed somewhat because of loosening supply chains. At the WEF annual meeting in Davos in 2023, historian Niall Ferguson said the idea that a major trend toward deglobalization has begun is a mirage not borne out by data.25 Despite trade conflict, China retains a dominant share of Asian supply chains (Fig.  5.1), suggesting that reshoring is more difficult in 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0

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04-2002

07-2001

10-2000

01-2000

0.0

Vietnam

Fig. 5.1  Share of Asian exports (%). (Sources: CEIC Data (database), CEIC, New York, https://www.ceicdata.com/en; S&P Capital IQ, S&P Global Market Intelligence, New  York, https://www.spglobal.com/marketintelligence/en/ solutions/sp-­capital-­iq-­platform)

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practice given the high fixed costs of developing an alternative. In parallel, at the microlevel, TFP in emerging markets is still less than 50 percent of TFP in the United States. Accelerating climate change. Climate change is here to stay and will become worse in the coming years. The world will have to get used to more droughts, forest fires, floods, ice melts, and sudden excessive precipitation. Emerging markets are smack in the middle of it, and many of them are quite vulnerable. Emerging markets and developing economies account for two-thirds of global greenhouse gas emissions, and most will be vulnerable to climate hazards.

Notes 1. According to the PricewaterhouseCoopers model, these trend growth estimates, which are abstracted from shorter-term cyclical trends, are driven by the following key factors: (a) growth in the working-age population and the potential workforce (based on the latest United Nations population projections); (b) increases in human capital, which is proxied by average educational attainment across the adult population; (c) growth in the physical capital stock, which is driven by capital investment and net of depreciation; and (d) TFP growth, which is driven by technological progress and the catch-up by lower-income countries using new technologies and processes. See PwC (2017). 2. Stamm and Vorisek (2023). 3. Tewari and Hoskins (2023). 4. UNCTAD (2022). 5. Kuijs (2022). 6. Economist (2022). 7. Bhandari (2022). 8. Subramanian and Felman (2022). 9. IMF (2022). 10. Fastmarkets (2023). 11. EIU (2022). 12. Amaglobeli and Thevenot (2022). 13. Lazard (2023). 14. Fleischman (2021). 15. Gaulier et al. (2019). 16. BNEF (2022). 17. WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/ SPROLLS/world-­e conomic-­o utlook-­d atabases#sort=%40imfdate%20 descending.

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18. Piketty (2014, 2015). 19. Chancel et al. (2021). 20. World Bank (2022). 21. Stanovaya (2023). 22. Liu (2022). 23. Financial Times (2022). 24. Subramanian and Felman (2020). 25. Reid (2023).

References Amaglobeli, David, and Celine Thevenot. 2022. Tackling Inequality on All Fronts. Finance and Development 59 (1): 54–57. Bhandari, Pranjul. 2022. Are Exports Holding Up? Opinion (blog), September 12. https://www.business-­standard.com/article/opinion/are-­exports-­holding-­ up-­122091201322_1.html. BNEF (BloombergNEF). 2022. Renewable Energy Sector Defies Supply Chain Challenges to Hit a Record First-Half for New Investment. bnef.com (blog), August 2. https://about.bnef.com/blog/renewable-­energy-­sector-­defies-­ supply-­chain-­challenges-­to-­hit-­a-­record-­first-­half-­for-­new-­investment/. Chancel, Lucas, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. 2021. World Inequality Report 2022. Paris: World Inequality Lab, Paris School of Economics. Economist. 2022. India Is Likely to be the World’s Fastest-Growing Big Economy This Year, London, May 14, 2022. EIU (Economist Intelligence Unit). 2022. Emerging Markets: Will the Economic Catch-Up Continue? EIU Update, October 12. https://www.eiu.com/n/ emerging-­markets-­will-­the-­economic-­catch-­up-­continue. Fastmarkets. 2023. Russia’s Wheat Export Pace Overtakes 2021’s Despite Challenges. Insights (blog), January 5. https://www.fastmarkets.com/ insights/russias-­wheat-­exports-­overtake-­2022#:~:text=The%20pace%20of%20 Russian%20wheat,analysis%20of%20export%20data%20shows. Financial Times. 2022. Erdoğan’s Autocratic Turn. Opinion (blog), December 15. https://www.ft.com/content/4d2b37cd-­a50a-­43e2-­aff1-­5ff4a53015a6. Fleischman, Tom. 2021. ‘Unicorns’ Are on the Rise in Emerging-Market Nations. Cornell Chronicle, November 2. https://news.cornell.edu/stories/2021/11/ unicorns-­are-­rise-­emerging-­market-­nations. Gaulier, Guillaume, Aude Sztulman, and Deniz Ünal. 2019. Are Global Value Chains Receding? The Jury Is Still Out: Key Findings from the Analysis of Deflated World Trade in Parts and Components. CEPII Working Paper 2019–01, January. Paris: Centre d’Etudes Prospectives et d’Informations Internationales.

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IMF (International Monetary Fund). 2022. Mexico, 2022 Article IV Consultation: Press Release and Staff Report. IMF Staff Country Report 22/334, November. Washington, DC: IMF. https://www.imf.org/en/Publications/CR/ Issues/2022/11/04/Mexico-­2 022-­A r ticle-­I V-­C onsultation-­P ress­Release-­and-­Staff-­Report-­525448. Kuijs, Louis. 2022. Economic Research: China’s Trend Growth to Slow Even as Catchup Continues. Comments (blog), November 10. https://www.spglobal. com/ratings/en/research/articles/221110-­e conomic-­r esearch-­c hina-­s -­ trend-­growth-­to-­slow-­even-­as-­catchup-­continues-­12550713#:~:text=Key%20 Takeaways,6%25%20in%202017-­2021. Lazard. 2023. Outlook on Emerging Markets. April 11. New  York: Lazard. https://www.lazardassetmanagement.com/docs/product/-­p 94-­/ 145/ lazardonemergingmarkets_2023q2.pdf. Liu, Zongyuan Zoe. 2022. Politics Will Determine China’s Economic Future During Xi’s Third Term. In Brief (blog), October 25. https://www.cfr.org/ in-­brief/politics-­determine-­china-­economic-­future-­xi-­jinping-­third-­term. Piketty, Thomas. 2014. Capital in the Twenty-First Century. Translated by Arthur Goldhammer. Cambridge, MA: Belknap Press. ———. 2015. The Economics of Inequality. Trans. Arthur Goldhammer. Cambridge, MA: Harvard University Press. PwC (PricewaterhouseCoopers). 2017. The Long View: How Will the Global Economic Order Change by 2050? The World in 2050. Report, February. London: PwC. Reid, Jenni. 2023. Idea of De-globalization Is a ‘Mirage,’ Says Historian Niall Ferguson. Davos WEF (blog), January 17. https://www.cnbc. com/2023/01/17/idea-­of-­de-­globalization-­is-­a-­mirage-­says-­historian-­niall-­ ferguson.html. Stamm, Kersten, and Dana Vorisek. 2023. Investment in Emerging and Developing Economies: Reversion to Trend is Not Enough. Brookings Future Development (commentary), February 22. https://www.brookings.edu/blog/future-­ development/2023/02/22/investment-­i n-­e merging-­a nd-­d eveloping-­ economies-­reversion-­to-­trend-­is-­not-­enough/. Stanovaya, Tatiana. 2023. Russia Faces Three Pivotal Moments in 2023. Carnegie Politika (blog), January 9. https://carnegieendowment.org/politika/88753. Subramanian, Arvind, and Josh Felman. 2020. Are Intellectuals Killing Convergence? Economics (blog), September 23. https://www.project-­ syndicate.org/commentary/covid-­deglobalization-­end-­of-­convergence-­by-­ arvind-­subramanian-­and-­josh-­felman-­2020-­09?barrier=accesspaylog. ———. 2022. India’s Size Illusion. Politics (blog), March 17. https://www2. project-­syndicate.org/commentary/india-­r esponse-­to-­r ussian-­invasion-­of-­ ukraine-­reflects-­weakness-­by-­arvind-­subramanian-­and-­josh-­felman-­2022-­03?b arrier=accesspaylog.

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Tewari, Suranjana, and Peter Hoskins. 2023. Third of World in Recession This Year, IMF Head Warns. Business (blog), January 2. https://www.bbc.com/ news/business-­64142662. UNCTAD (United Nations Conference on Trade and Development). 2022. Statement by Rebeca Grynspan, Secretary-General of UNCTAD: Launch of the Trade and Development Report 2022. October 3. Geneva: UNCTAD. https:// unctad.org/osgstatement/launch-­trade-­and-­development-­report-­2022. World Bank. 2022. Women, Business and the Law 2022. Washington, DC: World Bank.

CHAPTER 6

GEMINI Policy Reform to Get the Mojo Back

Abstract  There are many reform options for emerging markets to move forward in a world of chaos. There is good macroeconomic management, including fiscal, monetary, and debt policy, but there is an urgency of having a new model that includes the best parts of the Washington consensus and state capitalism. Continued focus on human development and financial sector expansion, including small and medium enterprises, while creating a strong regulatory framework, are key. Selective capital controls can help insulate countries from volatility. Building state capacity and having a well-managed industrial policy can help jumpstart growth. Reforms that invest in human capital and enhance productivity are important. Finally, it is key to manage climate change through increased climate finance, including from the private sector, and support renewables to steer the long-term energy transition away from fossil fuels. The role of China, India, South Africa, Russia, Saudi Arabia, and Indonesia will be especially important in the years to come to work with advanced economies to address both climate change mitigation and adaptation. Keywords  Macroeconomics • Fiscal policy • Monetary policy • Washington consensus • Debt • Inflation • Minimum wage • Safety net • State capacity • Institutions • Industrial policy • Productivity • Climate • Infrastructure

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0_6

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In light of the headwinds and tailwinds, what is the best way forward for emerging markets in a world of chaos? It is true that the world is not as growth-friendly now as it was in the golden era of the 2000s, when the economies of China and the United States were both expanding rapidly. But, for various reasons, the longer-term growth rate in many of these countries can be greater relative to the long-term economic growth rate in advanced countries, provided the appropriate policies are adopted. Given the cheap labor and capital scarcity in the former, the returns on investment will continue to be substantial. But, given the huge populations in these countries, especially in China, India, and Indonesia, the anticipation of a convergence in per capita incomes with advanced countries is not realistic. GEMINI provides an analytical and empirical framework for examining future trends and possibilities. The policy recommendations emerging from GEMINI differ from those derived from more traditional approaches. GEMINI is holistic, yet simple. It provides a structured approach to evaluating the prospects of an economy. Its assessment that, among some of the EM10, the tailwinds may be stronger than the headwinds is grounds for optimism. Which features favor the ability of the EM10 to avoid diverging or remaining stuck in a low-level equilibrium? • Macro buffers, including reserves and more manageable current account deficits • Big populations, a demographic dividend, and relatively younger populations than the advanced economies • A growing middle class; more than three-fourths of the middle class is expected to be in emerging markets • More finance flowing to emerging markets in the future, including equity, FDI, and the returns to slowly burgeoning local-currency bond markets • Maturing state capacity despite institutional weaknesses • Conglomerates and big innovative firms, coupled with competitive wages, low labor costs, and a focus on technology • Significant scope for catch-up and innovation given the productivity differentials with the West • The potential for infrastructure development and renewables What is the best development strategy given the domestic and external challenges? What should emerging market policymakers do in a world out

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of balance? What should the top priorities be? Given that emerging markets have unique characteristics, the following assessment is a baseline guide to a path to escape the middle-income trap and reach greater economic progress.

6.1   Washington Consensus Versus New Model Reforms should represent home-grown solutions that are championed by domestic reformers and that reflect local conditions and realities. The reforms may involve a mix of idiosyncratic, heterodox, and Washington Consensus policies that have the key goal of promoting growth and development. There are no textbook answers, only a series of pragmatic policy decisions based on the responses to circumstances. The hidden secret of development is that there is no magic formula. GEMINI operates based on the premise that reforms must be strategic and unlock binding constraints. Governments must target what ails the economy, rather than adopt a package of worn cookie-cutter structural reforms. There are many country-­ specific and sector-specific problems. Manufacturing and agriculture face different challenges in each country. The reforms must be pragmatic, not ideological, and rely on experimentation. The arsenal of tools must be expanded: competition policy, industrial policy, policy to enhance state capacity, and policies on financial regulation and safety net expansion. The EM10 should also play a role in international institutions to help support common actions on climate change, debt relief for poor countries, and multilateral approaches to health emergencies, such as pandemics. It is time for a new model that capitalizes on synergies between the public and private sectors and involves the state in addressing market failures. Such a model would take the best and reject the worst in the statist import substitution industrialization models and the neoliberal approach, with its focus on stabilization, privatization, and liberalization. Both models are dogmatic; both are products of their eras. The former helped build state capacity and industrial capabilities, but it also generated inefficiencies and was fiscally unsustainable. The latter has helped spur growth and release private sector dynamism, but it has not always led to desirable development outcomes, stability, or equitable solutions. Geoffrey Gertz and Homi Kharas at Brookings present the case against the weaknesses of the current neoliberal approach1:

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The neoliberal policy agenda for emerging markets was flawed and incomplete in many ways. Its shortcomings stand out in five particular areas. First, neoliberalism did not pay sufficient attention to the risk of financial crises and to the devastating impact of such downturns on economies’ long-run trajectories. Second, neoliberals tended to dogmatically reject industrial policy, even though support for industries has at times proven very effective (particularly in Asia). Third, neoliberalism was largely indifferent to inequalities, considering distributional issues as (at best) a second-order concern. Fourth, the environment was underprioritized, leading some countries to pursue economic policies that aggressively degraded environmental resources, which led to costly health hazards from polluted air and contaminated food, among other harms. Fifth and not least, neoliberal policy failed to grapple with how dysfunctional political processes could allow for the elite capture of the state, and how politics constrains economic policy options.

6.2  Good Macro, But Not Exclusively the Washington Consensus A lesson that policymakers have learned over recent decades is the importance of good macroeconomic management. This means the appropriate fiscal and monetary policies to promote growth, manage shocks, and keep the economy balanced. There is no readymade approach. Precise targets may be replaced by ranges. An eye must be on making sure expenditures increase in line with revenue mobilization, public money is well spent, and debt does not spiral out of control. Keep the exchange rates competitive and not overvalued. The optimal deficit would depend on the circumstances. The ideal macroeconomic policy framework and the growth strategies of countries are and will remain forever a subject of debate.2 The solution is not the Washington Consensus and an exclusive focus on low inflation and fiscal prudence. Inflation targets will have to be revised in the face of climate change and supply shocks, and reserves will have to be strengthened. If the rates of return on investment exceed the costs of capital, the government should increase public investment. Monetary policy will have to rely on more instruments, both conventional and unconventional, in a world of shocks. Policies in emerging markets will also be impacted by the Fed interest rate tightening cycles. Current account sustainability is complex and cannot be achieved by the application of simple formulas.

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In 2022, the governments of emerging market economies modified monetary policy in the face of rising inflation and reduced fiscal support to address growing debt. They are now beginning to reverse this strategy as inflation declines. China’s fiscal stimulus in the wake of the 2007–2009 global financial crisis, India’s macroliberalization in the early 1990s, and Russia’s decision in the mid-2010s to allow the ruble to float to match the movements of the price of oil can all be considered good choices, while the Argentine decision in the 1990s to keep the peso overvalued, Greece’s fiscal profligacy leading to the euro crisis, and the Turkish decision to avoid raising interest rates in 2021 and 2022 to stem rising inflation can be characterized as questionable. The decision of Indonesia’s Parliament in late 2022 to widen the central bank’s mandate to support growth and formalize the direct purchase of government bonds reflects the fact that the Bank of Indonesia had bought more than US$60 billion in bonds from the government in the previous two years to achieve financial sector stability. The recent 2022 and 2023 boom in energy, metal, and agriculture prices is good news for Brazil, Indonesia, Russia, and Saudi Arabia and puts pressure on these governments to manage these commodity windfalls. The plans of the Chinese government to internationalize the renminbi in the long term also reflect reality. The governments of Argentina, Brazil, and India will have to ensure that municipal and state governments do not become overindebted, while the government of China will have to find a balance between local government debt and credit for the private sector.

6.3  Human Development, Fiscal Redistribution, Minimum Wages, and Safety Nets The central element of the EM10 human capital agenda will be the expansion of government support for public health and education and improvements in the quality of expenditure. The empirical evidence suggests that the expansion in social spending has been the key explanatory factor in the reduction in inequality in Latin America in the last two decades. Social expenditure grew 3.4 percent a year in the region between 1993 and 2003, increased to 6.4 percent between 2003 and 2012 because of the commodities boom, and then fell back to 3.5 percent in the 2010s.3 Middle-class concerns will have to be considered in any political settlement. Redistributive policies can reduce inequalities in labor incomes. The

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decision of Brazil’s Senate in December 2022 to support a constitutional amendment to raise the government spending cap, thereby allowing the Lula government to fund an extension of social welfare payments among poor families reflects an attempt to address both fiscal and redistribution concerns. India will have to find ways to support the unemployed after the rate reached more than 8 percent in December 2022. Supportive social policies can help India accelerate pace of poverty reduction, which exacerbated during the pandemic. Chinese cities can relax the residence requirements for rural migrants to reduce social inequalities and support  the latter to purchase houses and support urban economic development.  Raising taxes at the high end of the distribution will be crucial, particularly through income and property taxes. It will also require hard work to prevent capital flight overseas, which is quite rampant because of exemptions, loopholes, and tax havens. The cost to governments of lost tax revenue through tax base erosion and profit shifting has been estimated at between US$500 billion and US$600 billion a year, while the cost of money laundering has been estimated at around US$1.6 trillion a year.4 The capture of fiscal and tax policy by big business interests will have to be curtailed. Income gaps between women and men are widespread in emerging markets, and this will also need to be addressed. This may be accomplished by targeting women through special programs, eliminating any form of discrimination, and ensuring equal wages among men and women for the same work. Gender discrimination in India, Turkey, and Indonesia will need to be overcome. Possible pathways to reach these goals include better legislation, gender quotas, targeted expenditure, special training, and zero tolerance for harassment. According to the WEF Global Gender Gap Report 2022, the gap rankings are as follows: South Africa (20), Mexico (31), Argentina (33), Indonesia (92), Brazil (94), China (102), Türkiye (124), Saudi Arabia (127), and India (135).5 Countries that are ranked higher have made more progress in promoting gender equality. The Ministry of Women, Gender, and Diversity in Argentina launched the Action Plan against Gender-Based Violence in 2020. Universities in Brazil, Russia, and Saudi Arabia now have more women graduates than men. To escape loan sharks who typically charge 10 percent a day in interest, women in India are turning to microfinance. More than 60 million Indian women hold small, collateral-free loans. This affects as many as 300 million families in a country of some 1.4 billion people. The government of India will also have to address the low female labor force participation rate, which fell from 40.0 percent in the early 1990s to 22.5 percent

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in 2011–2012 and to 19.2 percent in 2021. Education, training, and support are necessary to remedy this imbalance. In Indonesia, gender equality is officially enshrined in the country’s Constitution, but implementation challenges persist. Social safety net expansion should continue, especially conditional cash transfers, as mechanisms to help the poor face shocks. Latin America provides the best examples. The experiences of Argentina’s Jefes y Jefas, Brazil’s Bolsa Família, and Mexico’s Prospera can continue to be models for the optimal design of income transfer programs in other emerging markets, such as China, India, Indonesia, and Türkiye.6 The Argentine public safety net program, introduced in January 2002 in response to the severe economic crisis, was rapidly expanded and covered about two million households by late 2002.7 It partially compensated many who had suffered because of the crisis and succeeded in reducing the extreme poverty rate. In general, in these countries, increases in school enrolment rates, immunization rates, and health clinic visits among younger boys and girls should be supported. However, conditional cash transfers are not a magic bullet and should be accompanied by other progressive reform measures, such as minimum wage legislation and tax reform.

6.4  Promoting Sufficient Finance Emerging markets will require more credit from the private sector. The twin elements of successful finance—financial stability and financial inclusion—are sometimes at odds because lax regulations may lead to uncontrolled credit booms, and overly conservative prudential ratios can make obtaining credit difficult in the private sector. In the coming years, central banks will have to find the optimal balance between overregulation and underregulation. It is a challenging task. Emerging markets should also continue to tap into foreign investor capital in the years to come. Major investment banks are noting the  growth potential for emerging market equities and debt.  The twentieth and twenty-first centuries are replete with financial crises. 6.4.1   Banking and Capital Markets Most emerging markets are bank-centric and have only a nascent capital market. The good news is that throughout the EM10, banks have been quite well-capitalized, a testament to solid macroprudential policy.

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However, in India, Russia, and Indonesia, public sector banks will have to become more well-regulated to address the difficult nonperforming asset problem because they are large and because the holdings of these banks in government debt sometimes average close to 20 percent as a share of assets. Banking sector reform will involve decisions on privatization and recapitalization. The Indian government’s 2015 decision to undertake an asset quality review of public sector banks and the recapitalization of stressed banks in 2020  in the aftermath of the pandemic have led to a more vibrant banking sector. Banks will have to update their risk management models to lend more regularly to the private sector. In Mexico, where there is limited competition in the banking system, measures should be adopted to promote greater competition. Now, three banks alone account for more than 50 percent of the system’s total assets. China will have to continue to regulate the country’s massive shadow banking industry, estimated at trillions of dollars, through more detailed supervision, a slowdown in the pace of nonbank credit growth, more discipline in the use of the interbank market for funding, and greater transparency in the composition of shadow assets and liabilities.8 Regulating trusts and asset management companies in China and nonbank financial companies in India is essential. For many corporates in emerging markets, especially in energy, real estate, and finance, borrowing costs have escalated recently, leading to overleveraged balance sheets. In China, where the corporate bond market is the second largest in the world and debt represents 159 percent of GDP, and India, where corporate debt is now more than 60 percent of GDP, the development of the market should continue while refinancing or bankruptcy options should be implemented. China’s bond market can evolve with better regulators and by increasing foreign participation and improving communication.9 It would be wise for emerging markets to avoid accumulating abundant foreign currency debt and, instead, to develop domestic bond markets. Capital markets require regulations, information, legal frameworks, transparency, and accounting standards and an investor base consisting of pension funds, mutual funds, and institutional investors. A local-currency bond market may make an economy more resilient to sudden shifts in foreign capital flows. The market is growing. In a sample of 44 emerging markets, marketable government debt more than doubled in 2011–2019, from US$6.5 trillion to US$13.5 trillion. There was also a substantial rise in the issuance of local-currency debt during this period, from US$5.9 trillion to US$12.1 trillion. Furthermore, the local-currency

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share of total government debt in emerging markets and developing economies increased from 18.9 percent in 2011 to 46.6 percent in 2019.10 Eichengreen, Hausmann, and Panizza find that, although some middle-­ income countries have succeeded in developing markets for local-currency sovereign debt and attracting foreign investors, currency mismatches are still prevalent.11 There is a case for an international initiative to address currency risk in low- and middle-income economies. 6.4.2   SME Finance Policymakers in emerging markets can support the financing needs of SMEs. More than two billion people and 200 million small businesses in emerging markets lack access to credit. They fall into the trap of the missing middle, that is, they are too small to receive credit from banks and too large to receive microcredit. These SMEs usually have fewer than 100 employees, but they account for more than 80 percent of the firms in the EM10. Some are inefficient and not bankable, but many have upside growth potential. In Saudi Arabia, the Small and Medium Enterprises General Authority offers entrepreneurial platforms, such as business incubators and business accelerators, and there are new lines of credit. Türkiye’s 2016 law on using moveable collateral in commercial transactions, coupled with credit guarantees for SMEs, has been helpful. In South Africa, the initiative undertaken by billionaire Johann Rupert to help property owners lease land and help SMEs in disadvantaged communities is noteworthy. Emerging markets are ripe to supply financial support for the new universe of SMEs. The gold standards of SME finance in the EM10 are ANT Group Services in China and Bandhan Bank in India. In China in 2015, Ant Financial launched 3-1-0 Lending, an innovative lending service for SME finance. Based on algorithms and rich customer transaction data, the lending scheme enables borrowers to complete their online loan applications in three minutes, obtain approval in one second, and use zero human touch. The system supports millions of SMEs in China and has an enviable default rate of only 1 percent. Originally, a microfinance institution in West Bengal that helped empower rural women and that was supported by an equity investment of the International Finance Corporation of US$29 million in 2011, Bandhan, was approved to establish a bank by the Reserve Bank of India in 2015. Currently, it serves more than 7 million borrowers in thousands of branches across the country and has been both profitable and financially inclusive.

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6.4.3  Fintech Central banks will have to create a regulatory framework to deal with the nascent fintech industry, including cross-border flows. The global digital cross-border remittance market is booming. It was valued at close to US$6 billion in 2021 and projected to reach close to US$20 billion by 2027.12 Chinese, Indians, Mexicans, and others are sending money from overseas back to their countries. In the old days, Western Union dominated the remittance market, but times have changed. The recent Indonesian decision to seek to tighten the governance of financial regulators and the Reserve Bank of India’s decision to issue guidelines on digital lending in 2022 to protect consumers from unethical business practices are welcome steps. Fintech is full of promise in the EM10. Cryptocurrency is a decentralized digital payment system that does not use banks to make payments but instead uses a shared database called a  blockchain. In essence,  cryptocurrency reflects a  growing discontent with centralized authority. It is used as a medium of exchange, but the industry has faced a significant decline in market capitalization in 2022. However, it is acquiring the reputation of being a murky experiment in exchanges, lending platforms, and multiple funds, as shown by the recent collapse of one of the biggest players, FTX Trading. It is a new and poorly understood industry, as shown by the dramatic oscillations in bitcoin. Nobel laureate Paul Krugman has labeled cryptocurrencies as useless, inefficient, and equivalent to Ponzi schemes and argues that they serve no reliable economic purpose.13 But others, especially digital insiders, praise crypto as the future of finance. The regulatory response has been uneven. China, Nigeria, and other countries have banned crypto, but the appetite for crypto has grown in some economies, especially those emerging markets with cross-border transfers, a large number of unbanked people, and burdensome regulations. Two governments have made bitcoin official currency: El Salvador, a lower-middle-income country, and the Central African Republic, a poor country. 6.4.4   Capital Controls Governments should avoid excessive financialization of the economy, whereby the economy becomes a hostage to finance. Economies should not become too vulnerable to speculators or to the monetary policy in advanced economies. Some analysts suggest that too much finance can be

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counterproductive in that, beyond a certain level of financial development, the positive effect on economic growth begins to decline, while the cost of economic and financial volatility begins to rise.14 There is often a U-shaped relationship between the financial sector and inequality. Emerging market policymakers should seek to attract FDI, while imposing constraints on destabilizing hot money and volatile portfolio flows by instituting selective capital controls, either on inflows or outflows, and partially restricting the ability of citizens to buy foreign assets or of foreigners to buy domestic assets. In 1991, the government of Chile adopted capital controls to reduce the significant flows of foreign investment that were entering the country and undermining exchange rate management. In December 1998, the government of Malaysia adopted controls on international transactions in the ringgit and on portfolio outflows to try to shield the economy from the impact of the 1997 Asian financial crisis. And, in 2015, the government of Greece introduced capital controls on bank transfers from Greek banks to foreign banks, as well as limits on cash withdrawals. Capital controls are a complex topic in international macroeconomics. The Tobin tax, which is a duty on short-term speculative capital, has been respected by many economists. Even economists of neoclassical persuasion have been shifting positions. The conventional IMF view recognizes that there is no one-size-fits-all response to capital flow volatility and that macroprudential measures and foreign exchange interventions are important, but it does not propose the indiscriminate use of tools.15 However, a more progressive view recognizes that emerging market policymakers will need ample policy space to protect the economy more effectively from capital reversals.16 Capital controls can allow domestic savings to stay within borders and prevent financial instability. Jayati Ghosh has argued that, faced with a debt crisis that is partly the result of unregulated and volatile portfolio flows, low- and middle-income economies must impose more effective capital controls.17 Another problem is that capital account liberalization in emerging markets typically benefits elites more than the middle class. A challenge relates to dollar hegemony. The dollar has long been considered a safe asset, the world’s reserve currency, and the currency of choice in trade finance. “The dollar is our currency, but it’s your problem,” US Treasury Secretary John Connally famously said.18 Not a huge amount has changed since that day in 1971. While dollar hegemony is good for the international financial system because it provides stability, there are costs in some

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emerging markets, especially if the dollar becomes too strong. Central banks have started diversifying portfolios to decrease dollar reserves, which have fallen from more than 80 percent a few decades ago to less than 60 percent currently. At a recent 2023 BRICS summit in Johannesburg, emerging market members discussed de-dollarization and the use of alternative currencies for trade and investment, including the increased use of local currencies for bilateral trade. The government in China is trying to internationalize the renminbi and use the currency for cross-border trade. The Saudis are considering selling oil to China in renminbi, while the government of India is exploring options for using the currency for its significant energy purchases. In 2022, Russia signed an agreement to switch payments for gas supplies to China to yuan and rubles instead of dollars. Kenneth Rogoff has argued that a modernization of China’s exchange rate arrangements could deal the dollar’s status a painful blow. However, realizing that move would require many years.19

6.5  State Capacity and Effective Institutions Institutions are the glue that promotes cohesion and binds countries, especially large, heterogeneous countries. Emerging markets are characterized by growing institutions and discretionary behavior. Some emerging markets have made greater progress than others in developing regulatory agencies. But authoritarian models of governance have persisted in several EM10, for example, China and Russia. There are also elements of authoritarianism in Mexico and Türkiye, with potentially adverse implications for institutions. Acemoglu and Robinson find that inclusive economic and political institutions do not emerge in isolation but they are often the outcome of significant conflict between elites that are resisting economic growth and political change and others who wish to limit the economic and political power of the elites.20 Authoritarian models may derive legitimacy if they are effective in performance and in service delivery, as may be observed in East Asia. However, authoritarian regimes sometimes descend into corruption, bad governance, and poor response to middle-class demands, and authoritarian regimes are sometimes the result of the failure of liberal democracy to deliver to middle-­ class and lower-income voters, which may explain the resurgence of populism in Brazil and Mexico. Emerging markets are in the middle of an institutional and political transition. Many perspectives have been articulated over the years on the

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possible transition paths. The expansion of authoritarian rule has been a notable development across some of  the developing world, including China and Russia. By contrast,  Mexico, Indonesia, Türkiye,  India, Argentina, and Brazil have had democratic transitions from either military or dynastic leadership. Economic liberalization has contributed to crony capitalism in some of the emerging markets due to the absence of sufficient institutional safeguards. In one assessment of possible development trends in emerging market political models after the neoliberal era, Derviş, Conroy, and Gertz note three key themes: (1) state capture, corruption, and incomplete political transitions that allow a small group of individuals to wield disproportionate political power; (2) electoral mechanisms as an imperfect means of achieving accountable and legitimate government; and (3) the rise of identity-based politics and organizations.21 The coming years will witness shifts in models of governance as states, big firms, and citizens each play a role in defining the political equilibrium in emerging markets. A central focus of state capacity should be the protection of national interests while complying with international norms. State capacity is realized in policy formulation, the definition of mandates, linking plans to results, and monitoring and evaluation. There are states that function well and states that do not. A recent policy brief of the United Nations Conference on Trade and Development finds that state capacity has been a crucial element of all successful development experiences and that it has been eroded in the least developed countries since the 1980s, especially because of external economic and political pressures.22 How does one create effective institutions and build capacity? How does one prevent predatory state capture? Competent and independent bureaucrats and visionary leaders help. The experience of emerging markets is replete with examples of good technocrats steering policy favorably: Cardoso, his team, and the Real Plan in Brazil; the Chinese reformers, including Deng and Zhao Ziyang; Manmohan Singh, Narashima Rao, and the Indian reformers of the 1990s. The secret to good institutions is no secret at all: fund them, give them a clear mandate, staff them with good people, establish rules and systems to avoid corruption and discretionary acts; and promote democratic accountability, institutional upgrading, and mechanisms to monitor front-line service delivery. Brazilian municipalities that deliver Bolsa Família, the respected Indian Supreme Court, and the modernized People’s Bank of China are first-rate institutions. Transforming informal institutions into formal ones is more art than science, and it is a vital ingredient of development success.

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6.6   Competitiveness, Industrial Policy, and Productivity 6.6.1   The Role of the State In a world of chaos, post-pandemic stress, and fragmentation, the state is coming back. China, France, India, the United States, all countries are launching new policies with government support and incentives for industry. Emerging market policymakers should focus on competitiveness and balancing the state and markets. Smart industrial policy can help countries escape the middle-income trap. Governments and entrepreneurs must become strategic visionaries. Governments must support promising industries and stop protecting zombie firms. State entrepreneurialism rather than free-market policies can generate more economic growth and more effective industrial diversification. Debate is increasing across emerging markets on the role of the state, and industrial policy has been a subject of intense discussion among stakeholders for decades. Neoliberals believe the government should stay away from industrial policy and let the market work, while state capitalists believe governments should organize and manage economies. The evidence points somewhere in the middle. Neoliberals do not notice the successes of industrial policy, including Airbus and the iPhone, even in the West. State capitalists believe that governments will always pick winners, and they ignore government resource misallocations, political capture and corruption. The truth is that markets are not magic. Pollution and inequality exist. No industry emerges from nowhere. Industrial policy is a process of trial and error. It relies on tools such as financial support for firms, cooperation between the public and private sectors, subsidized investments in nontraditional industries, and technology transfers. For example, in the US and other industrial countries, there is currently an increase in industrial policy to increase competitiveness, expand manufacturing jobs, reduce greenhouse gas emissions, and foster technological innovation. Private firms do not always innovate.23 The entrepreneurial spirit and market realities must occupy the same space at the same time. Industrial policy has a mixed record. It has worked well in East Asia and Europe, but not so well in Africa and Latin America. Despite the volatility of the past few decades, the government and stakeholders in Argentina have been able to develop pockets of success in high-end research and in

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frontier productive sectors, such as biotechnology and the knowledge economy, and they can continue to exploit them through PPPs, targeted investments, and an enabling business environment. In Brazil, the Ministry of Science and Technology has invested US$170 million in more than 500 projects linked to digital transformation. The government of China has supported renewable energy by providing subsidies and above-market prices for solar and wind developers. It invested US$380 billion in clean energy in 2021. The program Made in China 2025, which involves investment in robotics, electronics, and medical devices, appears promising. China also accounted for nearly one-fifth of global private investment funding in 2021, attracting US$17 billion for start-ups in artificial intelligence. The government of India developed a production-linked incentives scheme in November 2020 to provide fiscal incentives for the sale of products manufactured in 14 sectors in India, including automotives, pharma, and electronics. The initiative is promising, but there have been some concerns that the benefits may go to large politically connected firms in capital-­intensive industries. Special economic zones and industrial parks in Bangladesh and Vietnam and the development of Chile’s horticulture industry are likewise prime examples of success. Industrial policy can be used to help firms become more successfully integrated in global value chains, with a focus on increasing the domestic content of exports. Meanwhile, to be effective, competition policy should allow new firms to enter and weak firms to exit through appropriate regulatory schemes. The excessive coddling of firms can lead to inefficient SOEs and become a serious obstacle to the ability of new private firms to compete. State capture, whereby the private sector or private actors control the state, as in South Africa during the Zuma era, or state dominance, as in the Russian economy under Putin, are two extremes that can be avoided. Indian and Turkish conglomerates will have to play against new firms on a more level field. Competition laws, which may look juicy in the policy books, have to be enforced. 6.6.2  Productivity Productivity growth must be maintained. It is driven by three factors: an increase in the labor force, an increase in the capital stock, and an increase in efficiency (TFP). The scope for policy intervention is therefore significant. Figure 6.1 shows the current relevant investment expenditure rates by country and the potential demographic dividend. Türkiye, India,

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Turkey South Africa Saudi Arabia Russia Mexico Indonesia India China Brazil Argentina 0

5

10

15

20

Median age

25

30

35

40

45

50

Investment/GDP

Fig. 6.1  Investment and median age, 2022 (% and years). (Note: The figure refers to the latest year for which data are available. Sources: Average age in global comparison (dashboard), WorldData.info, eglitis-media, Oldenburg, Germany, https://www.worlddata.info/average-­age.php; WEO (World Economic Outlook Databases) (dashboard), International Monetary Fund, Washington, DC, https:// www.imf.org/en/Publications/SPROLLS/world-­e conomic-­o utlook-­ databases#sort=%40imfdate%20descending) 3 2.5 2 1.5 1 0.5 0

Argentina

Brazil

China

India

Indonesia

Mexico

Russia

Saudi Arabia

South Africa

Turkey

Fig. 6.2  Research and development expenditure (% of GDP). (Source: WDI (World Development Indicators) (dashboard), World Bank, Washington, DC, https://datatopics.worldbank.org/world-­development-­indicators/)

Indonesia, and China exhibit the highest relevant investment rates. Russia, Brazil, Mexico, and Argentina are aging more quickly than they are investing. Saudi Arabia remains a mystery. South Africa has a young population and a low investment rate. Figure 6.2 shows the investment in innovation through research and development. Brazil, China, Russia, and Türkiye are

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in the lead. They are now among the top 15  in the world in terms of spending on research and development. The South is innovating, not merely imitating. Potentially effective policy measures include greater public investment in job training programs and skills upgrading; removing microeconomic distortions in land and credit markets; supporting sector-specific policies in agriculture, services, and industry; and assisting exporting firms in acquiring new technology and management skills. A World Bank study finds that differences in TFP explain a large part of the persistent income gap in Latin America and the Caribbean and that, if the average efficiency gap in the region relative to the United States were closed, the average income per worker in the region would double without any additional accumulation of capital.24 The two proposed channels for such an improvement are the adoption of technologies and the allocation of resources that can support labor productivity growth in services and manufacturing.

6.7  Infrastructure Development and Climate Change Infrastructure is central to the future of the EM10. Some emerging markets exhibit imperfect transit facilitation regimes and large infrastructure gaps. These should be bridged. China and Türkiye seem to be on the right track. The Indian government must modernize roads and restart stalled infrastructure projects. The government of Indonesia should upgrade ports and airports and reduce logistics costs, which represent more than 20 percent of GDP. Russia should spend the US$6.8 billion it allocated for infrastructure in 2022, even though the war has led to the transfer of resources to the security sector. Saudis will have to accelerate road network improvement and ensure the viability of the country’s new cities. In South Africa, the Eskom problem will have to be addressed. The Latin American trifecta—Brazil, Argentina, and Mexico—should modernize transport networks. The governments of all the emerging markets should honor their commitments under the 2015 Paris Agreement and refocus on renewables and wean their countries from coal and oil. The price of solar panels has fallen more than 80 percent in the last decade, and wind turbines have become cheaper, making renewable energy more economical and less polluting than coal and fossil fuel. In 2022, wind and solar powers generated more than 10 percent of the world’s electricity. However, the problems of scale and intermittent supply of solar and wind energy, coupled with the

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political economy of fossil fuels, makes this a complex energy transition. Green hydrogen, well-managed nuclear and hydropower offer promising alternatives to oil and gas. The world of the 2030s–2050s will be a vastly different world if the increase in temperatures is allowed to wreak havoc on the fragile global ecosystem. A recent report of the United Nations Environment Programme finds that there is no credible pathway to realizing the pledges undertaken at the 2015 Paris Climate Conference to prevent a rise in average temperatures by more than 1.5 °C above preindustrial levels.25 According to the assessment, current policies will lead to a rise in temperature by 2.8 °C by the end of the century. The realization of the current pledges can cause the temperature to rise by 2.4 °C–2.6 °C by the end of the century. Moreover, the global population is expected to be close to 10 billion in 2050. To meet the growing demand, food production must increase by 50 percent. The Food and Agriculture Organization of the United Nations has expressed concern that the transformation of agrifood systems required to deal with the new challenges may not be achieved.26 This must be accomplished in a way that does not jeopardize the environment despite the depletion of land and water resources. Several actions should be undertaken to support the realization of net zero by 2050, as follows: • Mitigate climate change by scaling up investment in renewables, especially wind, solar, and hydro, which will allow countries to achieve an accelerated transition from fossil fuels. This is particularly important in China and India, the two largest emitters in emerging markets. Emerging markets must contribute to the fossil fuel phaseout. Given the large projected growth in electricity demand in emerging markets, which may account for more than three-fourths of the growth in global electricity demand in the coming decades, this will be a major challenge. China’s wind and solar generation mix may increase from less than 10 percent in 2020 to over 30 percent in 2030 and help achieve net-zero carbon emissions by 2060.  China has more solar capacity than the rest of the world combined, and Chinese manufacturers supply more than 50 percent of installed wind capacity worldwide. India has emerged as a leader in renewable energy investments, and in 2023 the Government has promised to invest more than US$4 billion in green technology.

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• Adapt by promoting climate-smart irrigation and supporting farmers through technology, extension, fertilizer, and credit. This can be useful in India and Indonesia. • Fight deforestation, as President Lula is doing in Brazil through a plan to reduce deforestation in the Brazilian Amazon by 2030 by cracking down on illegal logging and gold mining. A recent World Bank study proposes a new development model for the Amazon that promotes urban and rural productivity, forest protection, and sustainable rural livelihoods. Focus on land and forest governance in the Amazon is needed.27 • Develop a strategy to address internal political economy challenges to the transition away from fossil fuels and to manage fiscal concerns and vested interests, especially in Russia and Saudi Arabia, the dominant oil economies in the EM10. • Institute fiscal transition strategies to ensure the removal of subsidies and increase taxes on fossil fuels, while actively exploring new revenue streams. This will be crucial to protecting vulnerable populations. • Mobilize more private climate financing to help curb greenhouse gas emissions and reduce the adverse effects of climate change. Even though private finance can be costly and volatile, it will have to be coordinated with public financing. It will have to be monitored to avoid greenwashing, where there is a gap between stated goals and concrete environmental impacts. Green finance, whether through multilateral development banks, pension funds, corporates,  or  via green bonds and  voluntary carbon credits, will require seven  elements to be effective: adequate oversight and regulations by international organizations and governments; accurate  environmental, social, and governance disclosures; data transparency;  finance compatible with long-term investments in the energy grid; bankable eco-­ friendly projects in emerging markets; pricing advantages over conventional funds; and clear monitoring and evaluation frameworks linking investments to results. Emerging and developing economies must collectively invest at least US$1 trillion in energy infrastructure by 2030 and US$3  trillion to US$6  trillion across all sectors each year by 2050 to mitigate climate change by substantially reducing greenhouse gas emissions.28 The recent US$8.5  billion climate finance deals, including money from France, Germany, the United Kingdom, and the United States, being offered to South Africa to help retire coal, are potentially transformative. India’s maiden green

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bond initiative of US$1 billion in early 2023 is the wave of the future. Blended finance, whereby the private and public sectors work together, has shown potential. An additional US$140  billion to US$300 billion a year by 2030 will be needed to help these countries adapt to the physical consequences of climate change, such as drought and rising seas.29 The United Nations Climate Change Conference agreement to provide loss and damage funding for vulnerable countries severely affected by climate disasters represents a great opportunity for climate support.30

Notes 1. Gertz and Kharas (2019, 82). 2. Montiel and Servén (2004). Zagha et al. (2006) offer another contribution along these lines. 3. UNDP (2021). 4. See “COVID-19 Response, Discussion Group VI: Illicit Financial Flows,” United Nations, New  York, https://www.un.org/en/coronavirus/ illicit-­financial-­flows. 5. WEF (2022). 6. Cecchini and Atuesta (2017). 7. Galasso and Ravallion (2004). 8. Elliott et al. (2015). 9. Schipke et al. (2019). 10. Hashimoto et al. (2021). 11. Eichengreen et al. (2003). 12. Industry Research (2022). 13. Mohamed (2022). 14. Sahay et al. (2015). 15. Adrian et al. (2020). 16. Korinek et al. (2022). 17. Ghosh (2022). 18. Hebner (2007). 19. Rogoff (2021). 20. Acemoglu and Robinson (2012). 21. Derviş et al. (2019). 22. UNCTAD (2022). 23. Mazzucato (2013). 24. Araujo et al. (2015). 25. UNEP (2022).

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26. Myers (2023). 27. World Bank (2023). 28. Ehlers et al. (2022). 29. Chapagain et al. (2020). 30. UNFCCC (2022).

References Acemoglu, Daron, and James A. Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown Business. Adrian, Tobias, Gita Gopinath, and Ceyla Pazarbasioglu. 2020. Navigating Capital Flows: An Integrated Approach. Integrated Policy Framework (blog), December 9. https://www.imf.org/en/Blogs/Articles/2020/12/09/blog-­navigating­capital-­flows-­an-­integrated-­approach. Araujo, Jorge Thompson, Ekaterina Vostroknutova, Konstantin M. Wacker, and Mateo Clavijo, eds. 2015. Understanding Latin America and the Caribbean’s Income Gap. Report 97885-LAC, July. Washington, DC: World Bank. Cecchini, Simone, and Bernardo Atuesta. 2017. Conditional Cash Transfer Programmes in Latin America and the Caribbean: Coverage and Investment Trends. Social Policy Series 224, September. Santiago: United Nations Economic Commission for Latin America and the Caribbean. Chapagain, Dipesh, Florent Baarsch, Michiel Schaeffer, and Sarah D’haen. 2020. Climate Change Adaptation Costs in Developing Countries: Insights from Existing Estimates. Climate and Development 12 (10): 934–942. Derviş, Kemal, Caroline Conroy, and Geoffrey Gertz. 2019. Politics Beyond Neoliberalism: History Does Not End. In Beyond Neoliberalism: Insights from Emerging Markets, ed. Geoffrey Gertz and Homi Kharas, 74–81. Report, April. Washington, DC: Global Economy and Development, Brookings Institution. Ehlers, Torsten, Charlotte Gardes-Landolfini, Fabio Natalucci, and Prasad Ananthakrishnan. 2022. How to Scale Up Private Climate Finance in Emerging Economies. Climate Finance (blog), October 7. https://www.imf.org/en/ Blogs/Articles/2022/10/07/how-­t o-­s cale-­u p-­p rivate-­c limate-­f inance­in-­emerging-­economies. Eichengreen, Barry, Ricardo Hausmann, and Ugo Panizza, 2003. “Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters,” NBER Working Paper No. 10036, October 2003. Elliott, Douglas J., Arthur R. Kroeber, and Qiao Yu. 2015. Shadow Banking in China: A Primer. Economic Studies, March. Washington, DC: Brookings Institution. Galasso, Emanuela, and Martin Ravallion. 2004. Social Protection in a Crisis: Argentina’s Plan Jefes y Jefas. Policy Research Working Paper 3165. Washington, DC: World Bank.

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Gertz, Geoffrey, and Homi Kharas, eds. 2019. Beyond Neoliberalism: Insights from Emerging Markets. Report, April. Washington, DC: Global Economy and Development, Brookings Institution. Ghosh, Jayati, 2022. “Financial Globalization Must Come Next,” Project Syndicate, December 19, 2022. Hashimoto, Hideo, Yen Mooi, Guilherme Pedras, Arindam Roy, Kay Chung, Tadeusz Galeza, Michael G. Papaioannou, et al. 2021. Developing Government Local Currency Bond Markets. Guidance Note 2012/001. Washington, DC: World Bank and International Monetary Fund. Hebner, Kevin. 2007. The Dollar Is Our Currency, But It’s Your Problem.” IPE Magazine, October. https://www.ipe.com/the-­dollar-­is-­our-­currency-­but-­its-­ your-­problem/25599.article. Industry Research. 2022. Global Digital Cross-Border Remittance Industry Research Report: Competitive Landscape, Market Size, Regional Status, and Prospect. Pune: Industry Research. https://www.industryresearch.biz/ global-­digital-­cross-­border-­remittance-­industry-­research-­report-­competitive-­ landscape-­market-­21978207. Korinek, Anton, Prakash Loungani, and Jonathan D.  Ostry. 2022.The IMF’s Updated View on Capital Controls: Welcome Fixes but Major Rethinking Is Still Needed. Up Front (blog), April 18. https://www.brookings.edu/blog/ up-­f ront/2022/04/18/the-­i mfs-­u pdated-­v iew-­o n-­c apital-­c ontrols-­ welcome-­fixes-­but-­major-­rethinking-­is-­still-­needed/. Mazzucato, Mariana. 2013. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Anthem Other Canon Economics Series. London: Anthem Press. Mohamed, Theron. 2022. Nobel Prize-Winning Economist Paul Krugman Has Trashed Bitcoin as Useless, Inefficient, and Largely a Ponzi Scheme: Here Are His 12 Best Quotes about Crypto from the Past Decade. Currencies (blog), December 27. https://markets.businessinsider.com/news/currencies/paul-­krugman­nyt-­bitcoin-­crypto-­digital-­payments-­fraud-­ponzi-­scheme-­2022-­9. Montiel, Peter, and Luis Servén. 2004. Macroeconomic Stability in Developing Countries: How Much Is Enough? Policy Research Working Paper 3456. Washington, DC: World Bank. Myers, Joe. 2023. These Are Trends Shaping the Future of Food. Forum Agenda (blog), January 3. https://www.weforum.org/agenda/2023/01/future-­food-­ farming-­fao-­agrifood/. Rogoff, Kenneth S. 2021. The Dollar’s Fragile Hegemony. Economics (blog), March 30. https://www.project-­syndicate.org/commentary/flexible-­ renminbi-­could-­threaten-­global-­dollar-­hegemony-­by-­kenneth-­rogoff-­2021-­0 3?barrier=accesspaylog.

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Sahay, Ratna, Martin Č ihák, and Papa N’Diaye. 2015. How Much Finance Is Too Much: Stability, Growth, and Emerging Markets. Financial Crises (blog), May 4. https://www.imf.org/en/Blogs/Articles/2015/05/04/how-­much-­ finance-­is-­too-­much-­stability-­growth-­emerging-­markets. Schipke, Alfred, Markus Rodlauer, and Longmei Zhang. 2019. The Future of China’s Bond Market. Washington, DC: International Monetary Fund. UNCTAD (United Nations Conference on Trade and Development). 2022. The Least Developed Countries Need to Strengthen and Broaden State Capacity to Operationalize Policy Space and Achieve Development Goals. UNCTAD Policy Brief 95, February. Geneva: UNCTAD. UNDP (United Nations Development Programme). 2021. Regional Human Development Report 2021; Trapped: High Inequality and Low Growth in Latin America and the Caribbean. New York: UNDP. UNEP (United Nations Environment Programme). 2022. Emissions Gap Report 2022: The Closing Window, Climate Crisis Calls for Rapid Transformation of Societies. Nairobi, Kenya: UNEP. https://www.unep.org/resources/emissions­gap-­report-­2022. UNFCCC (United Nations Framework Convention on Climate Change). 2022. COP27 Reaches Breakthrough Agreement on New ‘Loss and Damage’ Fund for Vulnerable Countries. UN Climate Press Release, November 20. https:// unfccc.int/news/cop27-­reaches-­breakthrough-­agreement-­on-­new-­loss-­and­damage-­fund-­for-­vulnerable-­countries. WEF (World Economic Forum). 2022. Global Gender Gap Report 2022. Insight Report, July. Geneva: WEF. World Bank. 2023. A Balancing Act for Brazil’s Amazonian States: An Economic Memorandum. Edited by Marek Hanusch. Washington DC. Zagha, Roberto, Gobind Nankani, and Indermit Singh Gill. 2006. Rethinking Growth. Finance and Development 43 (1): 7–11.

CHAPTER 7

Conclusion: What Can Emerging Markets Do to Favor the Future?

Abstract  The path forward among emerging markets is long, and many challenges await. In 2023, the population of the 10 emerging market economies (EM10) was several times higher than Western populations. By 2050, 8 out of the 10 largest economies are projected to be emerging markets and the middle classes will be mostly concentrated in these countries. There is a changing world order and an evolving global monetary and financial system, with a changing role of the dollar, and there is uncertainty regarding geopolitics and climate. The EM10 will be major drivers of global growth and consumption. China will continue to rise despite challenges, while India will continue to be a strong economy, though it will not be the next China. Indonesia is promising. The growth and development prospects for Saudi Arabia, Brazil, Turkey, and Mexico are positive with some obstacles. Russia may remain somewhat resilient but decline as sanctions continue. South Africa and Argentina can continue to face governance and macro pressures but have the potential for change. Success will be contingent on reforms and the right policy mix to avoid the middle-­income trap. Emerging markets should also contribute to global public goods and to multilateralism more generally even though they are not a homogenous bloc with a mix of converging and diverging interests. There is a case for a more optimistic reading of the future than many pessimistic scenarios. Humanity has overcome challenges in the past and can do so in the future. Keywords  Global growth • BRICS • Debt • Climate change © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0_7

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The path forward among emerging markets is long and promising, and many challenges await. In 2023, the population of the EM10 was several times higher than Western populations. In 2023, the combined nominal GDP of the EM10 is more than 30 percent of the total global GDP. By 2050, 8 out of the 10 largest economies will be emerging markets, and the middle classes will be mostly concentrated in these countries. The EM10 will be major drivers of global growth and consumption, especially in China and India. It seems premature to speak about a lost decade of development between 2023 and 2030. Success will be contingent on reforms, ability to navigate the trifecta of commodity, climactic, and interest rate shocks, and the right policy mix.  The GEMINI framework provides a growth recipe for navigating the pitfalls of a potential middle-income trap.  The world seems to have settled down after the shock of the pandemic, and in some countries, GDP growth rates, tourism, and freight costs are showing movement back toward pre-pandemic levels. Although investment levels have receded, emerging markets have dynamism and entrepreneurial energy, and there are a growing number of success stories. Emerging market equities have significant upside potential. In countries ranging from China to India, Brazil to Saudi Arabia, Turkey to Indonesia, promising sectors are emerging—mobile money, renewables, infrastructure, and pharmaceuticals in India, finance, electric vehicles, healthcare, and tech in China, health care and infrastructure in Turkey, readymade garments, electric vehicles, and digital technology in Indonesia, fintech and agribusiness  in Brazil and Mexico, and renewables across the board. The Asian and Latin American innovation ecosystems will be spaces to watch. Younger populations can be an asset, provided they are skilled and supported. China will continue to emerge although more slowly than in past, supported by good economic fundamentals, a deep-rooted supply chain, and a sizeable domestic market. Despite weakening growth, property sector malaise, and a recent cooling of domestic and foreign investor sentiment, China’s considerable assets and pragmatic policymaking should enable it to address its complex challenges as it moves towards a new development model favoring consumers over exporters and state firms. It is premature to declare the end of the Chinese miracle. India will rise also, with a strong domestic market and vibrant service sector, but it will not be able yet to be another China. Saudi Arabia is on the ascent with its oil-managed economy and its global investments, but it faces challenges in a post-oil world. Indonesia will be the great surprise, as it will finally punch at its weight and capitalize on ASEAN geography and stability. Brazil will continue to be an agricultural powerhouse and coast on commodity booms, despite being

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mired in a difficult political economy. Argentina’s macroeconomic imbalances will last for a while, partly offset by social safety nets and competitive agribusiness, but it will have to restore competitiveness. Mexico’s increasing trade integration with North America and benefits from reshoring will be offset by crises in governance. Türkiye will have potential, with its dynamism offset by its vulnerability to capital outflows and inflation. Russia can slowly decline due to the combined weight of sanctions and isolation from the West but maintain resilience due to its oil and gas reserves, its large land mass, and its growing trade relationships with Asia and the Middle East. South Africa has strong economic potential in terms of agriculture, finance, and mining, but the unsettled political equilibrium can jeopardize some of that. A GEMINI perspective teaches us that these countries should tackle the binding constraints that ail them rather than focus on structural reforms across the board. Each country has its own idiosyncrasies. Escaping the middle-income trap will not be easy, especially in a challenging and competitive global environment and one where demography can be both an asset and a cost, but it is possible. The reforms should encompass a mix of market-based solutions and state support. Select reforms should be undertaken by all countries, especially sound macroeconomic management and the avoidance of crazy policy decisions or abrupt reversals. Some reforms are country-specific. The EM10 countries should all continue investing in human capital and skills training, but safety net expansion may be more fiscally sustainable in one country rather than others. Financial sector liberalization may require a different pace in each country. Moving up the technology ladder is always a positive. Achievement of the Sustainable Development Goals (SDGs) will be commendable. Argentina and Türkiye must deal with macroeconomic  imbalances, high inflation, and currency stability plus development of domestic savings and long-term finance; Brazil and Mexico, with institutional crises, inadequate human capital development, and a cumbersome tax and business environment; China, with an aging population, a move towards greater domestic consumption in the face of declining exports, property market slumps, youth unemployment, and local government debt; India, with infrastructure gaps, distorted land and credit markets, poverty and social exclusion, and a low female labor force participation rate; Indonesia, with infrastructure and trade bottlenecks; Russia, with its growing isolation in finance and technology and with its endemic corruption and security state; Saudi Arabia, with diversification and jobs; and South Africa, with the

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energy sector and skills development. Building state capacity, as in New Zealand and Singapore, will be critical in all these countries. Reforms to boost productivity will help the EM10 catch up with the advanced countries, and measures to better quantify productivity in the new service sectors—healthcare, finance, fintech, and logistics services—will need to be developed. A creative partnership between the state and the private sector will become common in the future, with the risk of political capture by businesses. Spending smarter and accelerating private sector investment will be key. Improving the status of women will apply across the board for all the EM10. Mastering technology and supporting digital transformation will be paramount for all the emerging economies. Economic health in the rest of the twenty-first century will depend on decisions made in both advanced economies and emerging markets, especially China and India. Because of China–United States tensions and the Russia–Ukraine war, there is a risk that the world economy will become fragmented, which would hurt all countries. United Nations Secretary-­ General Antonio Guterres has condemned the senseless war and has called for everything possible to be done in 2023 to halt the most devastating conflict in Europe since World War II.1 There will be the rise of a new world order, but its contours are still imprecise. The recent October 2023 summit in Beijing marking the 10th anniversary of the Belt and Road Initiative may signal the beginning of a new order. First, the BRICS is a geopolitical bloc born of a perception by emerging economies that they are not fully involved in the governance of the  global institutional and financial  architecture, especially at the G-7, IMF, and World Bank. The bloc has recently decided to bring in six new members in 2024: Argentina, Egypt, Saudi Arabia, Iran, Ethiopia, and the United Arab Emirates. Second, the grouping is an attempt to provide a voice to emerging markets on macroeconomic issues,  development finance,  and  the  weaponization of the dollar through sanctions.  Third, there are strong fault lines within the bloc between democracies and less democratic countries, between oil exporters and importers, between China and India, between those who are close to the West and those who are not. Fourth, it  will be challenging  to gauge  how unified and effective the bloc can be given these divergences. Finally, the hyper-globalized world will be replaced by a world of geopolitical blocs, but it may be premature to argue that we are moving to more regionalism and a permanent reorientation of supply chains. Reshoring is easier said than done. The dollar will remain the global currency for the foreseeable future, partly due to inertia, partly due to the strength of the American economy, and partly

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due to the lack of a credible alternative. But there will be greater efforts, particularly among the BRICS nations, to de-dollarize and create regional currencies. Bilateral trade will be increasingly invoiced in currencies of the bilaterals. The Shanghai-based New Development Bank will provide development finance (a mix of foreign and local currency)  to members. The Bretton Woods system that dominated the landscape from 1945 to the early 2000s is being replaced with a new global system with competing centers of power. The emerging markets will have greater geopolitical and economic clout. Haico Ebbers speaks of an emerging market century.2 In this world of slower growth and unpredictable shocks, the emerging markets will have to play their part to forge peace with the West. They will have to work to become free, open, and inclusive societies.  The great challenges of the twenty-first century—climate change, international terrorism, tax evasion and tax havens, debt relief for poor economies, inequality, African poverty, and technological innovation—will require an effective international coalition. Emerging Asia should take a prominent leadership  role in finding solutions to the climate crisis and work closely with advanced economies and the United Nations. China and India can and should accelerate their energy transitions away from coal to renewables. Currently,  China and India account for 60 percent of coal use, and it is the largest single fuel in their energy mix, and coal and the industry provides 13 million jobs in the poor regions of India and more than 6 million jobs in China. Oil economies such as Russia and Saudi Arabia will eventually have to adjust to a world weaned off fossil fuels. The richer emerging markets must help promote international development. China can help offer swaps to many liquidity-constrained central banks and debt relief to Africa and transition from a commercial lending model to one that is more developmental. It will also compete with the IMF to provide financing support to countries facing balance of payments crises. Emerging countries such as Brazil, China, and India, which have experienced rapid growth, have a great opportunity to contribute to global food security by feeding their own people and increasing trade, financial links, technological innovation, and knowledge exchanges with developing countries.3 China and India, the two leading emerging markets, will have to accelerate efforts to build bridges with the advanced countries. Western countries and institutions will have to continue to engage individually and collectively with the EM10. The fate of the future hangs in the balance. The spirit of Cordell Hull, the Tennessee mountaineer, US secretary of state, and Nobel laureate, who helped create the United Nations and who understood the nexus between peace and development better than most,

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might inspire the calm and reflection necessary to take appropriate action to advance the cause of humanity in these turbulent times at the dawn of a new era of geopolitical tension. In the wake of Israel/Gaza, Ukraine/ Russia, Sudan, and myriad other conflicts, it is important for the global community to work together to try to find solutions that bring peace and prosperity to all. It is better to light a candle than to curse the darkness.

Notes 1. Lederer (2022). 2. Ebbers (2022). 3. Fan and Brzeska (2010).

References Ebbers, Haico. 2022. The Rise of the New Economic Powers and the Changing Global Landscape. Singapore: World Scientific. Fan, Shenggen, and Joanna Brzeska. 2010. The Role of Emerging Countries in Global Food Security. IFPRI Policy Brief 15, December. Washington, DC: International Food Policy Research Institute. Lederer, Edith M. 2022. UN Chief Strongly Hopes War in Ukraine Will End in 2023. AP News, December 19. https://apnews.com/article/iran-­europe-­ israel-­united-­nations-­antonio-­guterres-­1d83efec6173f3a0f0a1fdafad6554fa.

Annex

Table 1   Emerging markets comparison 2022 Country

GDP GDP (USD per billions) capita (PPP 2017)

Popula­tion Female (millions) labor force partici­ pation rates (%)

Annual growth rate of real GDP per worker (% from 2000 to 2022)

CO2 emissions (MT per capita)

Poverty Economic head­ complexity count index at USD 2.15 (2017 PPP) (%)

Argentina Brazil China India Indonesia Mexico Russia Saudi Arabia South Africa Türkiye

632.2 1924.1 18,000 3386.4 1318.8 1414.1 2215.3 1108.2

22,415 15,192 18,117 7054 12,439 19,247 28,171 52,346

46.3 213.9 1412.6 1423.3 274.9 130.1 143.3 34.8

51 54 61 24 53 46 55 28

0.3 0.7 8.1 4.5 3.2 −0.2 3.0 −0.5

3.4 1.9 7.8 1.6 2.1 3.0 11.2 14.3

1.0 5.8 0.1 10 2.5 3.1 0 NA

0.07 0.33 1.07 0.61 0.04 1.09 0.46 0.9

405.7

13,312

60.6

51

1.7

6.7

20.5

0.1

905.5

33,284

85.3

34

3.3

4.8

0.4

0.61

Source: IMF WEO, World Bank World Development Indicators. Data is most recent available Note: Economic complexity index ranks countries based on the diversity and sophistication of their export baskets. A higher score indicates more complexity

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0

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Index

NUMBERS AND SYMBOLS 2G spectrum allocation, 44, 48 2015 Paris Climate Conference, 180 A Acemoglu, Daron, 126, 174 African National Congress, 93 Afrikaner, 92 Agribusiness, 54 Agtmael, Antoine van, 3 Alibaba, 78 Alipay, 24 Al-Waleed bin Talal, 78 Amul, 45 Anatolia, 85 Anglo American, 92 ANT, 125, 171 Ant Alipay, 24 Ant Group, 37 Apartheid, 93 Aramco, 78 Argentina, 65–69, 149

Asian financial crisis, 89 Association of Southeast Asian Nations (ASEAN), 68, 88 Atatürk, Kemal, 83 Atlee, Clement, 41 Authoritarian populism, 157 B Balance of payments crisis, 43 Bandhan Bank, 171 Bangalore, 40, 46 Basu, Kaushik, 46 Belt and Road Initiative, 132 Berkeley Mafia, 89 Berlin Wall, 6 Biden, Joseph, 63 Bihar, 41 Bolsa Família, 58 Bolsonaro, Jair, 53 Bombardier, 57 Borlaug, Norman, 45 Brasília, 51

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. Zafar, Emerging Markets in a World of Chaos, https://doi.org/10.1007/978-3-031-29949-0

213

214 

INDEX

Brazil, 147 Brazil, Russia, India, China, and South Africa (BRICS), 2, 3 Bremmer, Ian, 5 Brookings, 64 C Capital controls, 173 Cardoso, Fernando Henrique (President), 53 Caste, 41 Chang, Gordon, 26 Chevron, 79 Chiang Kai-Shek, 27 China, 23–38, 143–144 China Banking and Insurance Regulatory Commission, 132 China National Petroleum, 24 China State Construction Engineering, 24 Churchill, Winston, 42 Climate change, 134, 159 Communist, 71, 72 Competitiveness, 128 Conglomerates, 82 Connally, John, 173 Coutinho, Luciano Galvão, 56 COVID-19, 19 Cryptocurrency, 172 Current account, 119 Custo Brasil, 54 D de Klerk, F. W., 93 Decentralized, 69 Decoupling, 155 Demography, 14 Deng Xiaoping, 27, 175 Derviş, Kemal, 84, 155 Desert kingdom, 77

Digital banking, 123 Djankov, Simeon, 74 Dollar, David, 37 Dollar hegemony, 173 Dual circulation, 36 Dyson, James, 5 E East Asia, 2 Eastern Europe, 73 The Economist, 17 Economist Intelligence Unit, 153 Eichengreen, Barry Julian, 171 EM10, 10 Embraer, 50, 57 Embrapa, 52, 57 Emerging markets, 5, 7 Equity, 14 Erdogan, Recep Tayyip (President), 82 Eskom, 96 Estado Novo, 51 European Central Bank, 9 Evergrande, 34 F Faisal, King, 79 Felman, Josh, 145 Ferguson, Niall, 158 Finance, 15 Financialization, 172 Financial Times, 35, 96 Fintech, 125, 154, 172 Fortune Global 500, 24 Fraga, Arminio, 56 Fukuyama, Francis, 26 G Gaidar, Yegor, 73 Gandhi, Indira, 42

 INDEX 

Gandhi, Mahatma, 42 Gazprom, 70, 76 GEMINI analytical framework, 14 Gender, 14, 156 Georgieva, Kristalina, 142 Gertz, Geoffrey, 165 Ghosh, Jayati, 173 Gill, Indermit, 17 Gini coefficient, 95 Global financial crisis, 93, 117 Global Gender Gap Report, 68, 168 Global integration, 15 Global value chains (GVC’s), 82 Goldman Sachs, 34 Goods and services tax, 44 Gorbachev, Mikhail, 72 Governance, 15 Green Revolution, 45 Growth, 14 Growth Commission, 18 Grynspan, Rebeca, 142 Guanxi, 29 Guriev, Sergei, 74 Guterres, Antonio, 190 Guzmán, Martín, 155 H Halliday, Fred, 78 Hanson, Gordon, 130 Hausmann, Ricardo, 171 Heterodox, 165 Hillbrow, 92 Hukou system, 37, 38 Hu line, 32 Human capital, 14 Human capital index, 41, 121 Human Development Report, 121 Human development index (HDI), 71, 154 Hyderabad, 46

215

I Ibn Saud, King Abdul Aziz, 79 Import licensing system, 43 Import substitution, 66 Income distribution, 156 India, 38–49, 144–145 Indian civil service, 127 Indian IT industry, 46 Indian Supreme Court, 44 Indonesia, 145–146 Inequality, 122, 156 Inflation, 119 Infrastructure, 179 Infrastructure energy, 15 Insolvency and Bankruptcy Code (IBC), 44 Institutions, 15, 174, 175 Instituto Tecnológico de Aeronáutica, 57 International Maize and Wheat Improvement Center, 45 International Monetary Fund (IMF), 3 International Rice Research Institute, 89 Investment, 177 Istanbul Chamber of Industry, 87 J Jakarta, 88 Japan, 1 JBS, 54 Jefes y Jefas, 169 Job training programs, 179 Jokowi, 90 K Kaliningrad, 70 Kapur, Devesh, 127 Kerala, 41

216 

INDEX

Keynes, John Maynard, 128 Kharas, Homi, 17, 165 Kirchner, Cristina, 66 Kirchner, Nestor, 66 Koç Holding, 86 Krugman, Paul, 172 Kubitschek, Juscelino, 51 Kuijs, Louis, 144 Kurien, Varghese, 45 L Latin America, 17, 64, 128 Latin American, 10 Le Pen, Marine, 130 Levy, Santiago, 64 Li, David, 34 Lin, Justin, 155 Local-currency bond market, 170 Local government debt, 34 Local government financing vehicles, 33 Lula da Silva, Luiz Inácio (President), 53 M Ma, Jack, 30, 37 Macroeconomic policy, 14 Macroprudential measures, 173 Mahalanobis, Prasanta Chandra, 42 Mandela, Nelson, 92, 93 Mao Zedong, 27 Massachusetts Institute of Technology, 57 Mazzuca, Sebastián, 128 Meloni, Giorgia, 130 Mercosur, 68 Mexico, 148 Mohammed bin Salman (Crown Prince), 80 Monetary policy, 156 Monetary tightening, 9

Money, 15 Montenegro, Casimiro, 57 Morgan Stanley Capital International (MSCI), 3, 124 Mountbatten, Lord, 42 Mumbai, 46 N Nabiullina, Elvira, 155 National competitiveness, 15 National Wealth Fund, 74 Nehru, Jawaharlal, 42 New Zealand, 190 Nobel Peace Prize, 45 Nord Stream 1, 75 Nord Stream 2, 75 North American Free Trade Agreement (NAFTA), 63 O Obama, Barack, 63 Odebrecht, 53 O’Neill, Jim, 3 Oportunidades, 62 Organization of the Petroleum Exporting Countries (OPEC/ OPEC+), 70, 78, 146 Ottoman Empire, 83 P Pamuk, Şevket, 83 Panizza, 171 Paris Agreement, 135 Partition Plan, 41 Pei, Minxin, 127 People’s Bank of China, 31, 32 Peronism, 66 Peterson Institute for International Economics, 25 Petrobras, 52

 INDEX 

Pettis, Michael, 34 Plug-and-play industrial parks, 32 Ponzi, 172 Portugal, 50 Poverty and inequality, 59 Powertis, 55 Pretoria, 92 PricewaterhouseCoopers, 142 Pritchett, Lant, 17 Productivity, 15, 130 Prospera, 169 Public distribution system, 45 Public Investment Fund, 79 Public–private partnership (PPP), 131, 133 Putin, Vladimir, 73, 177 Q Qiaotou, 25 Qing dynasty, 27 R Radcliffe, Cyril, 42 Raiser, Martin, 25 Rajan, Raghuram, 44, 155 Real Plan, 53 Recession, 20 Reid, Michael, 56 Renewables, 155 Reserve Fund, 74 Rio de Janeiro, 50 Robinson, James, 126, 174 Rodrik, Dani, 5, 86, 129 Rogoff, Kenneth, 174 Ronaldo, Cristiano, 81 Roosevelt, Franklin Delano, 79 Rosneft, 70 Roussef, Dilma (President), 53 Ruble, 76 Russia, 150–151

217

S Sachs, Jeffrey, 73 Sanctions, 75 Sandton, 92 São José dos Campos, 57 São Paulo, 50 Saudi Arabia, 146 Saudi Aramco, 24 Saudi Basic Industries Corporation, 79 Saudi Public Investment Fund, 146 Semiconductor, 36 Shenzhen, 27 Singapore, 190 Singh, Manmohan, 175 Sinopec Group, 24 Skills upgrading, 179 South Africa, 151–152 Soviet Union, 73 Soweto, 92 Sri Mulyani, 155 Stanley, Morgan, 49 Stanovaya, Tatiana, 157 State capacity, 15 State Grid, 24 State-Owned Assets Supervision and Administration Commission of the State Council, 24 Stiglitz, Joseph, 55, 129 Subramanian, Arvind, 145, 155 Sub-Saharan Africa, 19 Suharto, 89 Summers, Larry, 17, 127 Sun Yat-sen, 27 Sustainable energy, 15 T Technocrats steering policy favorably: Cardoso, his team, and the Real Plan in Brazil, 175 Tequila crisis, 61 Texaco, 79

218 

INDEX

Theft of intellectual property, 35 Total factor productivity (TFP), 32 Treaty of Tordesillas, 50 Trump, Donald, 130 Turkish Airlines, 85 Türkiye, 148–149 U Ukraine, 70 Ukraine-Russia conflict, 9 UNCTAD World Investment Report 2022, 49 United Nations, 190 United States, 1 United States–Mexico–Canada Agreement, 63 US Federal Reserve Board, 9 US manufacturing, 36 US$500 billion, 79 Uttar Pradesh, 41 V Vajpayee, Atul Bihari (Prime Minister), 46 Valuations, 154

Vargas, Getúlio (President), 51 Vision 2030, 81 Vladivostok, 70 W Washington Consensus, 165 Weakness of the state, 128 Western Europe, 1 Western Union, 172 White, Harry Dexter, 128 World Bank, 17, 64 World Trade Organization (WTO), 28 X Xi Jinping (President), 37 Y Yeltsin, Boris, 70 Z Zhao Ziyang, 175 Zondo Commission, 93 Zuma, 177