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Emerging markets have not been immune to the slowdown in West: Chidambaram

Apr 18, 2013

India’s Finance Minister, P Chidamabarm delivered a speech on Tuesday at the South Asian Institute and Mahendra Humanities Center at Harvard University. Excerpts from his speech.

P Chidamabarm

East is East and West is West, and never the twain shall meet. “Thus, in the year 1889, wrote Kipling in his famous Ballad of East and West. Little did he know that globalization was only less than a hundred years away.

The rise of once-upon-a-time poor countries has been the central economic story of our time. More than the growth, it is the pace of the growth that tells a more fascinating story. It took Britain 150 years, after the Industrial Revolution, to double its economic output per person. The United States, the emerging market of its time, took 50 years to do so in its period of fast development.

When China and India began their period of high growth in recent decades, they took 12 and 16 years, respectively, to double per capita GDP. And while Britain and United States embarked on their take-off with a population of 10 million, China and India started out with a population of a billion or so each. So, in terms of force, as a McKinsey report on emerging markets suggests, the two leading emerging economies in the East are experiencing roughly 10 times the economic acceleration of the Industrial Revolution at 100 times the scale.

Going forward, China and India will continue to be drivers of world growth, with China growing at 8-8.5 percent and India at 6.1-6.7% between 2013 and 2014. ASEAN-4 (Indonesia, Malaysia, Philippines and Thailand) is also projected to grow at more than 5.5 percent. China is reported to have already overtaken the United States in economic size (measured by real per capita GDP in purchasing power parity terms) by 2012-13.

I do not wish to numb you with numbers. But let me mention one other well-known difference between a number of emerging markets and industrial countries: it is the demographics. A lot of the growth in the East is still to come as it reaps its demographic dividend. For instance, India’s share of the working age population will continue to rise. Nearly one-half the additions to the Indian labour force over the period 2011-30 will be in the age group 30-49, even while the share of this group in advanced countries will decline. This means greater production, savings and investment in India as the demographic dividend is reaped.

So what do these changes in the locus of global demand mean? Before I turn to that, let me first say that not all the patterns we had seen emerge in global savings and investment, before the global financial crisis of 2008, were sustainable. Indeed, the financial crisis could be seen as evidence that the imbalances that were building up were unsustainable.

Simply put, the industrial world, even as its population was ageing and as promised entitlements were becoming due, increased spending, and financed the spending with huge amounts of debt. Many emerging markets built up substantial trade surpluses as they gleefully catered to industrial countries’ demand. And, ironically, they financed industrial countries’ consumption by investing their savings in industrial countries’ paper.

This served both industrial countries and emerging markets while it lasted. For industrial countries, strong consumption growth papered over looming fiscal problems. Emerging markets too benefited as net exports grew . But it could not last. Sovereign debt, bank debt, and household debt in the industrial world increased to the point that investors were reluctant to buy more paper. Hence, the industrial world is being forced into austerity.

Emerging markets too have not been immune to the resulting slowdown. Even though, unlike other emerging markets, India has been a net importer of goods and capital, it too has become more open over this period – the sum of Indian goods and services traded exceeded 55 percent of GDP in 2011-12. The slowdown in industrial countries has affected India, especially exports.

The world has to adjust. Industrial countries have to save more while emerging markets have to spend more. Such an adjustment will help industrial countries pay down heavy debt loads, even while leaving global demand to be supported by the emerging markets. Of course, the nature of spending will vary across emerging markets. China probably has to consume more, while India has to invest more. But as the world moves towards one where consumption and investment shifts towards the emerging markets, especially in Asia, and ageing industrial countries will learn to save more.

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