Emerging Markets Lose Their Punch

guillen feature

It’s been a good 10-year run for fast-growing emerging markets. But now many of them face severe economic imbalances and slowing growth built up during the go-go years. Those structural flaws could be papered over in good times, but they have finally undermined sustainable strong growth, and the cracks are starting to show. In this video interview, Wharton management professor Mauro F. Guillen discusses how formerly hot emerging market countries are passing the growth engine baton back to developed countries.

An edited transcript of the conversation appears below.

Knowledge@Wharton: Can you discuss what’s been happening in emerging economies? A lot of money has been flowing out. Their growth rates look like they’re slowing. It’s hard to generalize, but it is happening in a lot of countries, perhaps for different reasons. And one of the explanations for this is that the Fed’s so-called tapering off is a worry because that may mean that U.S. interest rates would go up and look relatively more interesting than the returns that investors are getting on their so-called hot money in these emerging economies. So it’s about these financial flows rather than foreign direct investments in bricks and mortar and that sort of thing.

Guillen: You’re absolutely right. The fact that investors are anticipating that the Federal Reserve will change its policy in the near future is obviously putting some pressure on those short-term hot money flows into emerging economies, and people of course don’t want to be caught in the middle. And they tend to move their money to where it can get the highest possible yield. I think that’s a very important background factor. I don’t think it’s the only one.

What we see in many emerging economies, speaking broadly, is that the current model of growth is becoming exhausted, which has been, in many of these emerging economies, export-led. So we’ve seen very little progress in most of these countries — China, India, Brazil — in terms of the development of a domestic market that would compensate for slower growth in terms of exports. There’s been some progress, but not enough to essentially keep the economy going at a very fast pace, which is what happened throughout the last few years.

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Originally Published October 22, 2013