Indian currency notes of different denominations are seen in this file picture illustration taken in Mumbai on April 30, 2012. India raised import taxes on gold and silver on Aug. 13, 2013, as policy makers scrambled to narrow a gaping current account deficit.Reuters
Think emerging market economies are two small to worry about? Think again. Think the turbulence within emerging markets is going to affect the global economy? Think again, again.
Okay, that's a lot of thinking. But Ed Yardeni at Yardeni Research makes the point that emerging markets aren't what they used to be: "The last major emerging markets crisis was in 1997, when East Asian economies had a financial meltdown, and again in 1998, when Russia hit the fan. But collectively, they were relatively tiny and had no significant impact on the U.S. and global economies."
He rolls out a few statistics to illustrate his point. In 1995, industrial output in emerging economies lagged developed economies by 29 per cent; it has since flipped around so that output exceeds developed economies by 61 per cent. At the start of 1987, oil demand in the United States, Western Europe and Japan accounted for 55 per cent of the global total; it fell to 41 per cent last year. The share of U.S. merchandise exports to emerging markets has grown from 36 per cent in 1990 to 54 per cent today.
However, the rising importance of emerging markets to the global economy means that a widespread crisis – and one that spreads to the global economy – is less likely.
"Capital flows aren't likely to dry up to companies operating in emerging markets that are doing more and more business in those economies and the rest of the world," he said. "Therefore, the current emerging markets crisis shouldn't morph into a global contagion and recession. It is likely to remain contained mostly to the EMs that are currently most vulnerable to capital outflows, i.e., the Fragile Five" – referring to Brazil, India, Indonesia, South Africa, and Turkey.
As for the Fragile Five, the impact should be relatively limited and most likely not much more disruptive than the turbulence centred in Europe in recent years – when the problems of Portugal, Italy, Ireland, Greece and Spain (or PIIGS, as they were called at the time) threatened to dismantle the euro zone.
David Berman