Searching for sustainable optimism in the developing world

Western readers of this blog tend to bemoan the status of their national economic fortunes on a regular basis.  It’s worth noting, then, that the traditional economic basket cases of the world have weathered the Great Recession remarkably well, thank you very much.  First, there’s Africa.  Last month the McKinsey Global Institute released a report ...

By , a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast.

Western readers of this blog tend to bemoan the status of their national economic fortunes on a regular basis.  It's worth noting, then, that the traditional economic basket cases of the world have weathered the Great Recession remarkably well, thank you very much. 

Western readers of this blog tend to bemoan the status of their national economic fortunes on a regular basis.  It’s worth noting, then, that the traditional economic basket cases of the world have weathered the Great Recession remarkably well, thank you very much. 

First, there’s Africa.  Last month the McKinsey Global Institute released a report noting "Africa’s increased economic momentum" and that momentum’s likely staying power.  Some of their figures: 

Africa’s growth acceleration was widespread, with 27 of its 30 largest economies expanding more rapidly after 2000. All sectors contributed, including resources, finance, retail, agriculture, transportation and telecommunications. Natural resources directly accounted for just 24 percent of the continent’s GDP growth from 2000 through 2008. Key to Africa’s growth surge were improved political and macroeconomic stability and microeconomic reforms.

Future economic growth will be supported by Africa’s increasing ties to the global economy. Rising demand for commodities is driving buyers around the world to pay dearly for Africa’s natural riches and to forge new types of partnerships with producers. And Africa is gaining greater access to international capital; total foreign capital flows into Africa rose from $15 billion in 2000 to a peak of $87 billion in 2007.

Read the whole thing here

[Um…. doesn’t McKinsey have an incentive to pump up Africa to gain more business?–ed.  Perhaps, but that incentive is revealing — if McKinsey thinks there’s profit to be made from consulting in sub-Saharan Africa, that’s very good news for sub-Saharan Africa.   It’s also not just McKinsey:  the Boston Consulting Group is also clearly interested in Africa’s "lions."]

Meanwhile, Simon Romero reports in today’s New York Times that Latin America has also had a surprisingly good global economic crisis

While the United States and Europe fret over huge deficits and threats to a fragile recovery, this region has a surprise in store. Latin America, beset in the past by debt defaults, currency devaluations and the need for bailouts from rich countries, is experiencing robust economic growth that is the envy of its northern counterparts.

Strong demand in Asia for commodities like iron ore, tin and gold, combined with policies in several Latin American economies that help control deficits and keep inflation low, are encouraging investment and fueling much of the growth. The World Bank forecasts that the region’s economy will grow 4.5 percent this year.

Let’s step back a bit and acknowledge the great news here.  First, in the fall of 2008, as private capital was developing an extreme home bias, there was a lot of fretting that the developing world was about to get royally screwed.  Instead, it appears that the world’s traditional basket cases have found a way to survive and thrive even during tough times.   The robustness of these economies is sufficient enough to be optimistic that the United Nations thinks the Millennium Development Goals still look doable.

Second, contrary to claims about the Beijing Consensus, the manner in which these countries are prospering has little to do with either state-run capitalism or economic isolation.  Indeed, as Romero notes/links, the Latin American boom has bypassed Chavez’s Venezuela — it’s economy shrank by 5.8% in the first quarter of this year.  The state is still very important to these growth spikes — but mostly by doing things like not starting wars and running prudential macroeconomic policies. 

Third, if this is right, it suggests that some modest economic decoupling is taking place —  i.e., the entire global economy does not rise and fall with the American consumer.  Maybe a world without the West really is possible. 

Here’s the thing, though:  I’m not completely convinced about any of this.  To be fair, neither are the linked articles.  McKinsey notes that Africa experienced surges in the past, with nothing remotely resembling takeoff before.  And as Romero notes, an awful lot of this boom has to do with China: 

Some scholars of Latin America’s economic history of ups and downs say the robust recovery may be too good to last, pointing to volatile politics in some places, excessive reliance on commodity exports and the risks of sharply increasing trade with China.

Michael Pettis, a specialist at Peking University in Beijing on China’s financial links with developing countries, said the region was especially exposed to Chinese policies that had driven up global demand for commodities, including what appears to be Chinese stockpiling of commodities.

“Within China there is a ferocious debate over the sustainability of this investment-driven growth,” Mr. Pettis said. “I’m worried that too few policy makers in Latin America are aware of the debate and of the vulnerability this creates in Latin America.”

Other economists, including Nicolás Eyzaguirre, director of the Western Hemisphere department of the International Monetary Fund, suggest that low international interest rates, another factor supporting Latin America’s growth, will not last much longer. 

China’s domestic consumption has undoubtedly increased, but let’s face it, much of China’s growth in demand comes from its exports to the developed world.  With the OECD economies continuing to experience sluggish growth, China’s manufacturing boom is starting to run out of steam.  The knock-on effects of this downturn will be reduced demand for Latin American and African imports. 

It’s the knock-on effects of that reduction which what have me fretting about Latin America and Africa.

Developing….

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner

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