Growth in emerging markets

Unrest and economic underperformance haunt the emerging world

The key to better times remains openness


At the start of the century, developing economies were a source of unbounded optimism and fierce ambition. 

Today South Africa is reeling from an insurrection, Colombia has suffered violent protests and Tunisia faces a constitutional crisis. 

Illiberal government is in fashion. 

Peru has just sworn in a Marxist as its president and independent institutions are under attack in Brazil, India and Mexico.

This wave of unrest and authoritarianism partly reflects covid-19, which has exposed and exploited vulnerabilities, from rotten bureaucracies to frayed social safety-nets. 

And as we explain this week, the despair and chaos threaten to exacerbate a profound economic problem: many poor and middle-income countries are losing the knack of catching up with the richest ones.

Our excess-mortality model suggests that 8m-16m people have died in the pandemic. 

The central estimate is 14m. 

The developing world is vulnerable to the virus, especially lower-middle-income countries where remote working is rare and plenty of people are fat and old. 

If you strip out China, non-rich countries have 68% of the world’s population but 87% of its deaths. 

Only 5% of those aged over 12 are fully vaccinated.

Alongside the human cost is an economic bill, since emerging markets have less room to spend their way out of trouble. 

Medium-term gdp forecasts for all emerging economies are in aggregate 5% lower than before the virus struck. 

People are angry and, even though protesting during a pandemic is risky, violent demonstrations around the world are more common than at any time since 2008.

Rich places, such as America and Britain, are no strangers to incompetence and turmoil. 

But disappointment has hit emerging economies especially hard. 

In the early 2000s they buzzed with talk of “catch-up”: the idea that poorer countries could prosper by absorbing foreign technology, investing in manufacturing and opening up their economies to trade, as a handful of East Asian tiger economies had done a generation earlier. 

Wall Street coined the term brics to celebrate Brazil, Russia, India and China—the world economy’s new superstars.

For a while, catch-up worked. 

The proportion of countries where the level of economic output per head was growing faster than in America rose from 34% in the 1980s to 82% in the 2000s. 

The implications were momentous. 

Poverty fell. 

Multinational companies pivoted away from the boring old West. 

In geopolitics catch-up promised a new multipolar world in which power was more evenly distributed.

This golden age now looks as if it has come to a premature end. 

In the 2010s the share of countries catching up fell to 59%. 

China has defied many doomsayers and there have been quieter Asian success stories such as Vietnam, the Philippines and Malaysia. 

But Brazil and Russia have let down the brics and, as a whole, Latin America, the Middle East and sub-Saharan Africa are falling further behind the rich world.

Even emerging Asia is catching up more slowly than it was.

Bad luck has played a part. 

The commodity boom of the 2000s fizzled out, global trade stagnated after the financial crisis and bouts of exchange-rate turbulence caused turmoil. 

But so has complacency as countries have come to think that fast growth was preordained. 

In many places basic services such as education and health care have been neglected. 

Crippling problems have been left unfixed, including South Africa’s idle power plants, India’s rotten banks and Russia’s corruption. 

Instead of defending liberal institutions, such as central banks and the courts, politicians have used them for their own gain.

What happens next? 

One risk is an emerging-market economic crisis as interest rates in America rise. 

Fortunately most emerging economies are less brittle than they were, because they have floating exchange rates and rely less on foreign-currency debt. 

Long-running political crises are a bigger worry. 

Research suggests that protests suppress the economy, which leads to further discontent—and that the effect is more marked in emerging markets.

Even if emerging economies avoid chaos, the legacy of covid-19 and rising protectionism could condemn them to a long period of slower growth. 

Many of their people will remain unvaccinated until well into 2022. 

Long-term productivity could be lowered as a result of so many children having missed school.

Trade may also become harder. 

China is turning inward, away from the broadly open policies that made it richer. 

If that continues, China will never be the vast source of consumer demand for the poor world that America has been for China in recent decades.

The West’s increasing protectionism will also limit export opportunities for foreign producers which, in any case, will be less advantageous as manufacturing becomes less labour-intensive. 

Unfortunately, rich countries are unlikely to make up for it by liberalising trade in services, which would open up other paths to growth. 

And they may fail to help exposed economies such as Bangladesh—a success story—adapt to climate change.

Faced with this grim landscape, emerging markets may themselves be tempted to abandon open trade and investment. 

That would be a grave error. 

An unforgiving global environment makes it even more important for them to stick to policies that work. 

Turkey’s notion that raising interest rates causes inflation has been disastrous; Venezuela’s pursuit of socialism has been ruinous; and banning foreign firms from adding customers, as India just has with Mastercard, is self-defeating. 

When catching up is hard, those emerging markets which stay open will have the best chance.

Catch up, don’t give up

Some rules have changed: universal access to digital technologies is now vital, as is an adequate social safety-net. 

But the principles of how to get rich remain the same today as they ever were. 

Stay open to trade, compete in global markets and invest in infrastructure and education. 

Before the liberal reforms of recent decades, economies were diverging. 

There is time yet to avoid a return to the needless hardship of old.

Joe Biden’s Afghan pullout could end in tragedy

The country’s women will suffer from the Taliban’s resurgence and so will US interests

Gideon Rachman

© James Ferguson

On his recent trip to Europe, Joe Biden lost no opportunity to proclaim “America is back”. 

But actions speak louder than words. 

In Afghanistan, America is out. 

The consequences could be tragic for the country and dangerous for the US and the wider world.

The US president is not even pretending that America is leaving behind a stable and successful Afghanistan. 

Talking to the press earlier this month, Biden conceded that the Taliban is “at its strongest militarily since 2001” — when US and allied forces invaded Afghanistan and ejected the Taliban government from Kabul.

Biden insists that it is “highly unlikely” that the Taliban will now reconquer the whole country. 

But Mark Milley, America’s most senior general, sounds less confident. 

His verdict last week was simply that “a Taliban automatic takeover is not a foregone conclusion”.

If the Taliban were to reconquer Afghanistan, it would be a disaster for the people of the country, in particular women, and a humiliation for the US. 

The baffling thing is the Biden administration could have avoided this risk, at a relatively low cost.

The US president has spoken movingly of the 2,448 Americans who have lost their lives over the course of a 20-year war, and the more than 20,000 who were wounded, as well as the mental toll on veterans of the war. 

America’s allies have also taken heavy losses, with the UK alone losing 457 troops.

But no American has been killed in Afghanistan for 17 months. 

Biden argues that this low level of casualties is a consequence of the fact that the US has been engaged in peace talks with the Taliban — posited on American withdrawal from the country. 

He believes that if the US announced that it intended to stay after all, the Taliban would resume assaults on US troops and casualties would rise again.

But direct talks between the US and the Taliban only really got under way in 2018 — and US casualties have been relatively low since 2015, with fewer than 100 US troops killed over the past five years.

The reality is that the few thousand US and Nato troops left in Afghanistan have not been engaged in direct combat for some years. 

The real fighting has been left to the Afghan army. 

However, the withdrawal of American and other Nato troops has had a disastrous effect on the morale of the Afghan government and military. 

Western experts speak of a surge of contacts from prominent Afghans, looking for any opportunity to get out of the country.

The Taliban, by contrast, sound triumphant and are making rapid gains on the battlefield. 

The Islamist militants have seized control of vital border crossings and now control roughly half of Afghanistan’s 419 districts. 

They have not captured any provincial capitals yet. But attacks on major towns could occur within weeks — with the capture of the capital, Kabul, the Taliban’s ultimate goal. 

Even if the Taliban prove incapable of holding major cities, Afghanistan is clearly in for a period of intensified civil war.

The human rights consequences of the Taliban’s advance are likely to be appalling. 

There are already reports that the organisation is carrying out summary executions and forcing girls into sex slavery in areas that it has recaptured. 

Prominent Afghan women have often been targeted in Taliban attacks.

In the 20 years since the fall of the Taliban, millions of Afghan girls have been able to go to school. 

Women make up over a quarter of the members of the Afghan parliament. 

If the Taliban retake power, all of these gains will be lost. 

This unfolding tragedy makes a mockery of the Biden team’s proclamation that it will be a “champion for women and girls around the world”.

The US president is not blind to all this. 

He recently described a “heartbreaking” encounter he had in Afghanistan with a schoolgirl, who wanted to be a doctor, and begged him to keep US troops in the country. 

But the US president believes that he cannot ask American soldiers to keep fighting and dying for the rights of people on the other side of the world.

It is true that Biden’s first moral duty is to the American people. 

But that does not mean that, after a 20-year presence, the US has no continuing moral obligation to the people of Afghanistan. 

And, with troop losses at low levels, there was no real domestic pressure to pull out of the country completely.

There are also direct American national interests still at stake. 

The terrorist threat that drew the US into Afghanistan has not disappeared. 

If the Taliban once again controlled the country, it might well become a safe haven for the likes of al-Qaeda and Islamic State. 

Jihadis all over the world will also draw heart from the spectacle of the defeat of Nato in Afghanistan.

The resurgence of the Taliban is also likely to cause a new refugee crisis, as millions of Afghans seek to leave the country. 

European governments now fear that 500,000 or more Afghans may arrive at the borders of the EU within months.

Biden may believe that drawing a line under the Afghan war will allow the US to concentrate on more urgent problems. 

Sadly, he may just have created a new Afghan crisis that will come back to haunt him.

Swiss central bank’s reserves pass SFr1tn for first time

Bank now has an investment portfolio larger than most of the world’s biggest sovereign wealth funds

Sam Jones in Zurich

The SNB has aggressively intervened in financial markets since 2015 © Bloomberg


Switzerland’s central bank made more than SFr43bn ($47bn) in the past six months, as soaring US equity prices pushed its reserves to more than SFr1tn in value for the first time.

The SNB’s huge gains mean the bank now has an investment portfolio larger than most of the world’s biggest sovereign wealth funds — comparable to the holdings of the China Investment Corporation and considerably larger than the Swiss economy itself, which reported gross domestic product of $824bn in April.

Unlike the state-linked holdings of its peers, however, Switzerland’s fast-growing foreign investment portfolio is the result of unorthodox monetary policy rather than bounty from natural resources or government largesse. 

Since 2015, the SNB has aggressively intervened in financial markets, purchasing blocks of foreign currency-denominated securities to try to curb the rising value of the franc. 

Quantitative easing and ultra-low interest rates in the US and the surrounding eurozone have put sustained pressure on the franc, a problem compounded by Switzerland’s status as a safe haven during bouts of financial turbulence. 

Over the past five years the franc has appreciated more than 6.5 per cent against the dollar and 1.5 per cent against the euro, despite the SNB’s interventions.

While the SNB is not alone among central banks in expanding its balance sheet in recent years, it stands out because it invests almost a quarter* of its reserves in foreign equities rather than government bonds.

The policy means the SNB is one of the largest foreign investors in US companies such as Apple, Facebook and Microsoft. 

So far, these investments have stood the SNB in good stead: rising equity valuations and dividends propelled the bank to its outsized profits in the first half of 2021 despite SFr11.8bn in bond market losses.

The SNB’s reserves were worth SFr1.04tn at the end of June.

“The SNB’s financial result depends largely on developments in the gold, foreign exchange and capital markets. 

Strong fluctuations are therefore to be expected, and only provisional conclusions are possible as regards the annual result,” the bank said.

The SNB’s bumper profits have put the bank under pressure in Switzerland to distribute some of its earnings to the Swiss government. 

In January it agreed to increase the ceiling on its annual payout to Bern — dependent on its financial performance — to SFr6bn from SFr4bn. 

But the bank’s governors have otherwise staunchly resisted more distributions, arguing that the bank’s profits are highly uncertain and large reserves are needed to cope with the likelihood of large future losses if markets move against the bank. 

The SNB is not targeting a financial return, they stress, but merely a policy to manage the stability of the franc.

With the US Federal Reserve now signalling a rise in interest rates in the months ahead, the SNB’s monetary policy experiment will be closely watched. 

Rising yields on assets in the US and Europe may reverse the franc’s appreciation, raising questions about whether the SNB will have to sell assets to avoid any shock fall in the currency. 

The SNB also stands apart from its peers by having a stock market listing. 

Its shares, which are quoted on the Swiss stock exchange, have risen almost 16 per cent this year, giving the central bank a market value of $590m.