Choppy waters ahead for emerging markets
Claire Bisseker talks to HSBC’s London-based chief economist, Stephen King, and its local economist David Faulkner about the challenges facing emerging markets at a time when US disengagement with the world, trade protectionism and automation create new risks
Stephen, one of your pet subjects is the rise of emerging markets (EMs) and the decline of the West. Do you still hold this view despite the shift towards trade protectionism and automation?
Stephen King: There’s no doubt EMs have done incredibly well over the past 30 to 40 years. Where we have problems now is in the relationship between the US and China. This reflects a profound difference in terms of political values.
The American view has been that any economically successful country would gravitate towards liberal democracy. China has not done that and yet threatens to become the biggest economy in the world. So, the US perspective of China has shifted to one that views China as a potential rival, economically and in terms of its political system. I think [US President Donald] Trump’s position is reflective of a broader Washington consensus on how to think about China today.
I’ve argued that we’re heading towards a multipolar world, with countries strong in their regions but potential rivals to each other. George Orwell’s Nineteen Eighty-Four talks about Oceania, Eurasia and Eastasia. If you change the names to the US, Russia and China it’s not a million miles away from what’s beginning to emerge.
Artificial intelligence (AI) and robotics threaten the future of global supply chains because products that could be made more cheaply abroad, because of cheap labour, can arguably now be made even more cheaply at home, because of robotics. So, whereas the late 21st century was a story of globalisation through capital mobility in pursuit of cheap labour, it may be that AI, robotics and reshoring could lead to a new type of globalisation involving the movement of people to where the opportunities are. If capital isn’t going to Africa, then the people in Africa will have to go somewhere else. The stories of people travelling across the Mediterranean to try to get to Europe could become more prevalent in the years ahead.
How do US rates and US economic prospects affect EMs?
SK: The consensus is that the US economy will naturally slow down into 2019 so the Federal Reserve won’t have to go too far in terms of interest rates. The challenge to that view comes from the fact that the Fed is putting its foot on the brake, but the US Congress is putting its foot on the accelerator. This raises the risk of a policy error.
The probability of a US recession is high, partly because unemployment is so low, partly because the Fed is tightening, and partly because policymakers are pulling in different directions. The position we’re in would suggest there are some choppy waters ahead.
Will US disengagement from the world be a longer-term theme that outlives Trump?
SK: On trade and international relations, Trump has considerable bipartisan support because there’s a sense in the US that the world isn’t quite working for it in the way it once did, and that some of America’s problems are caused by events beyond its borders. Therefore, something has to change elsewhere to make the US a better place.
I think it’s a dangerous view and not necessarily right.
There are a lot of reasons why inequality has risen in the US. The hollowing out of US manufacturing started before China joined the World Trade Organisation. Also, the US is down to about 40 or 50 in the global rankings of numeracy, literacy and scientific knowledge among the youth. The countries that excel are mostly in East Asia.
So there are things that could be done on education reform regardless of what’s happening elsewhere, but it’s easier to blame other countries.
How badly has the move to amend the constitution to allow for land expropriation without compensation dented confidence and foreign investment in SA?
David Faulkner: It appears to have weighed on business confidence, given the concerns this has generated over property rights. But other factors have also played a role, including subdued domestic demand, tax hikes, rising fuel costs, a weaker rand, a deteriorating fiscal position and the shift in sentiment against EMs. The long-term impact will depend on the precise wording of the constitutional amendment. In the interim, uncertainty over the outcome and implications for property rights are likely to weigh on confidence, the agricultural sector, and investment more broadly.
What should SA do to get growth going?
DF: In the near term, from the reforms outlined in the president’s economic plan, tourism could experience the biggest gains. However, a much bigger payoff could come from long-term initiatives to alleviate structural impediments to growth, like making high-skill immigration easier and through spectrum allocation to boost internet speeds.
For us to be more confident about SA’s prospects, the economic reform plans would have to go further, centred on an agenda that places more emphasis on deregulation and liberalisation. This would include a critical reassessment of the network infrastructure sectors and the dominance of state monopolies, easing labour market rigidities, and institutional reforms to improve the quality of education.