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Dear Clients,


The robust growth of emerging market countries during the past two
decades, and the expected continued outperformance relative to advanced
economies in the decades ahead, is one of the most important economic
developments of our time. Attached you will find our latest report, “The
Rise of the Emerging Markets,” which tracks the ascendancy of emerging
markets in a multitude of ways and explores what the implications of
this ascendancy are for the global economy. Key conclusions include:

Latin America and Africa are set to benefit dramatically from
demographic and population trends, while Europe and Asia, excepting
India, will be hamstrung

As China becomes a global power and as incomes rise, calls for further
democratization in the country are inevitable

Asia could be responsible for over half of global output by 2050 after
accounting for less than one-fifth of total output in 1950

It is only a matter of time before an emerging market citizen heads the
IMF

BRIC countries will see a growth slowdown in 2012, but for myriad
reasons

Existing global powers will have to adapt to a world that will soon see
dominant regional powers as opposed to one or two global powers


As always we welcome any questions or comments.


Best regards,

David Hale

Chairman


David Hale Global Economics, Inc.


847-386-6009 (tel)

847-386-6011 (fax)

davidhale@davidhaleweb.com

http://davidhaleweb.com

http://davidhaleweb.com

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Copyright 2012, David Hale Global Economics Inc. All rights reserved.
This document is not for attribution in any publication, and you should
not disseminate, distribute or copy this e-mail without the explicit
written consent of David Hale Global Economics, Inc.


July 2012 • Volume 09.12

The Rise of the Emerging Markets

By David Hale


KEY CONCLUSIONS

The rise in economic prominence of emerging markets during the past two
decades has been truly incredible

Latin America and Africa are set to benefit dramatically from
demographic and population trends, while Europe and Asia, excepting
India, will be hamstrung

As China becomes a global power and as incomes rise, calls for further
democratization in the country are inevitable

Asia could be responsible for over half of global output by 2050 after
accounting for less than one-fifth of total output in 1950

It is only a matter of time before an emerging market citizen heads the
IMF

BRIC countries will see a growth slowdown in 2012, but for myriad
reasons

Existing global powers will have to adapt to a world that will soon see
dominant regional powers as opposed to one or two global powers


GLOBAL LANDSCAPE HAS SHIFTED DRAMATICALLY IN TWO DECADES


There can be little doubt that the economic take-off of the emerging
market countries has become the new defining event of the global
economy. They have accounted for 63% of the growth in the global economy
during the past decade. They now account for 38% of the nominal value of
the global economy compared to 19% in 1990. Their PPP adjusted share is
54%. They accounted for over half of global exports in 2010 compared to
27% in 1990. Their share of world imports is 47%. Their share of world
capital spending is now 50% compared to 26% in 2000. They now account
for 52% of auto sales compared to 22% in 2000. This economic take-off is
affecting global capital flows. The developing countries accounted for
over half of global FDI inflows during 2010 and 29% of outflows. Their
foreign exchange reserves have grown to almost $7 trillion compared to
$3.4 trillion in the developed countries.


Almost one-fifth of companies on the Fortune 500 list now come from
developing countries compared to only 7% in 2005. China ranks second
with 73 companies compared to 132 in the US and 68 in Japan. There are
also eight companies in Brazil, eight in India, and seven in Russia. In
2005 there were only sixteen Chinese companies on the Fortune 500 list
as well as five from India, three from Brazil, and three from Russia.
The emerging market countries are also home to 437 of the world's 1,226
billionaires. There are ninety-six billionaires in Russia, ninety-five
in China, forty-eight in India, thirty-six in Brazil, and thirty-four in
Turkey. The wealthiest is a Mexican.


MEDIAN AGE OF DEVELOPING COUNTRIES WILL RISE IN COMING YEARS


Population trends are likely to magnify the growth differentials with
the developed countries in the future. During the next forty years the
population of Europe will decline from 738 million to 719 million. The
population of Japan will shrink from 127 million to 109 million. The
population of China will fall from 1.341 billion to 1.295 billion. The
population of Taiwan and Korea will also decline.


Elsewhere in the developing world population will increase. Latin
America will rise from 548 million to 704 million. India will expand
from 1.224 billion to 1.7 billion and become the largest in the world.
Asia excluding India and China will rise from 1.6 billion to 2.2
billion. Africa will rise from 1.0 billion to 2.2 billion. The US
population will increase from 310 million to 403 million.


The developed countries will also become much older by 2050. The median
age in Japan will rise to 52.3 years from 44.7 years today. Germany's
median age will rise to 49.2 years from 44.3 years today. China's median
age will increase to 48.7 years from 34.5 years today. India's median
will go from 25.4 years to 37.2 years. The youngest countries will be
African. Zambia's median age will be 17.9 years while Malawi will come
second at 19.6 years.


In 1950 the population of working age people in the developed countries
stood at 494 million out of a global total of 1.5 billion. Their share
was 34.3%. In 2000 the working age population of people in the developed
countries rose to 801 million out of a global total of 3.85 billion.
Their share fell to 20.8%. In 2050 the UN projects the working age
population of the developed countries will shrink to 756 million
compared to a global total of 5.9 billion. Their share will be only
12.8%.


These population trends will restrain the growth of Europe and Japan
while boosting growth in Africa, India, and Latin America.


EMERGING MARKETS COMPRISING GROWING SHARE OF MARKET CAP


The rise of the emerging market economies has greatly increased their
share of global stock market capitalization. It has expanded at a
volatile rate during the past quarter century because of financial
crises in Mexico during 1975, East Asia during 1997-98, Russia in 1998,
Brazil in 1999, and Argentina in 2002. In 1990 the developing countries
had a stock market capitalization of $311 billion, or 3% of the global
total of $8.9 trillion. This rose to $1.3 trillion, or 7% of the global
total, in 1996. The East Asian financial crisis reduced it to $765
billion, or 3% of the global total, in 1998. It then expanded back to
$1.6 trillion, or 7% of the global total, by 2002. It expanded steadily
to $12.41 trillion, or 20% of the global total, in 2007. The global
financial crisis resulting from the US mortgage lending debacle then
shrank the capitalization to only $5.3 trillion in late 2008, or 17% of
the global total. Markets recovered after the crisis and the developing
countries' stock market capitalization rebounded to $14.2 trillion in
late 2010, or 27% of the global total. There was a correction in 2011 as
many developing countries pursued tighter monetary policies to restrain
inflation. Their market capitalization fell back to $12.8 trillion by
March 2012, but remained at 24% of the global total.


There are now approximately twenty-one markets classified as emerging
and a further thirty-six classified as frontier because they are newer
and have less liquidity. One former emerging market, Argentina, has been
reclassified as frontier because of policies hostile to business after
the 2002 financial crisis. The emerging market countries have a GDP of
$21 trillion compared to $3.7 trillion for the frontier countries.


CHINESE INFLUENCE IS NOW TRULY WORLDWIDE


The rise of China has played a major role in driving the expansion of
the emerging market share of global output. China now has a GDP of over
$7.3 trillion compared to $728 billion in 1995. China displaced Germany
to become the world's largest exporter of tradable goods in 2010. It
displaced Japan to become the world's second largest economy shortly
thereafter. Its investment share of GDP is 48%, or the highest in the
world. It now consumes 35-40% of base metal output compared to 10-15% in
2000. It has had a huge expansion of trade with developing countries.
Sino-African trade has grown from $10 billion in 2000 to $168 billion
last year. Latin America has grown from $13 billion in 2000 to $182
billion last year. China has also emerged as an important investor in
the developing countries. It has invested $67 billion in Sub-Saharan
Africa, $73 billion in Latin America and the Caribbean, $44 billion in
the Middle East, $59 billion in East Asia, and $56 billion in west Asia,
including Russia. China has made large investments in the natural
resource sector to satisfy its need for commodities. The China
Development Bank has reinforced this process by offering infrastructure
loans or loans secured by rising oil output. China's Iron and Steel
Association has said that it hopes to obtain half of China's iron
imports in 2015 from Chinese-owned mines compared to only 10% today.


There is great concern about the rise of China as a major economic power
because the country is not yet democratic. There is far more political
debate than existed in Mao's time, but the Communist Party still makes
all decisions. Other Asian countries were also ruled by dictators during
their early years of economic take-off and then became more democratic
as a rising middle class sought freedom. China's rising level of income
could at some point set the stage for a similar transition. China's per
capita income is now $5,414. There are ninety-one countries with a
higher per capita income than China. Freedom House classifies
sixty-eight as full democracies, ten as partly free, and thirteen as not
free. These thirteen countries are all oil producers with the exception
of Belarus. There is no way to predict when China's rising middle class
will seek to change the country's political system and achieve more
democracy. The Communist Party could follow the example of Singapore or
Mexico before 2000 by allowing some opposition while remaining firmly in
control or it could attempt to suppress any opposition. The party is
currently controlled by hard liners who are unprepared to accept any
formal opposition. At current growth rates, China's per capita income
could double during the next ten years and reach levels exceeding
$10,000. It is difficult to imagine China's political system remaining
totally rigid if it creates a large and confident middle class.


ASIA IS SET TO RESUME ROLE AS LARGEST ECONOMIC REGION


The economic rise of the developing countries could create a new
distribution of global output similar to that which prevailed before the
British industrial revolution. In 1700 Asia accounted for 61.9% of
global output and Europe 21.8%. In 1950 Asia's share was only 18.6%
while Europe was 26.2% and European offshoots in North America and
Australia accounted for 30.7%. In 2003 Asia's share of global output
rebounded to 40.3%, Europe slipped to 19.2%, and European offshoots
declined to 23.8%. In 2050 Asia could again account for over half of
global output with Europe and its offshoots accounting for less than
40%.


POLITICAL INFLUENCE OF EMERGING MARKETS IS ALSO SET TO GROW


These changes in the mix of global output will have important
geopolitical consequences. The developing countries will want to play a
greater role in the process of global governance. The US took an
important step in this direction by organizing the first ever G-20 heads
of government meeting in Washington during November 2008. The Canadians
had launched a G-20 forum for finance ministers after the East Asian
financial crisis. The Bush administration was the first to elevate it
into a summit for heads of government. The countries in the G-20 group
are so diverse that it is difficult to achieve a consensus on many
issues. The high point in policy coordination was the London summit in
April 2009. It agreed to significantly expand the capital of the IMF and
encourage more stimulative fiscal policies. There has been less
consensus at subsequent summits because the world economy became
desynchronized after 2009. The US enjoyed three years of steady growth
while Europe slipped back into recession. The developing countries
enjoyed robust growth after 2009, but had to tighten monetary policy to
restrain inflation in 2011.


One obvious target for reform will be the IMF. Since its creation the
leadership has always been European while Americans have run the World
Bank. The IMF also has voting quotas which reflect the world two
generations ago. The US has the largest quota at 16.75% followed by
Japan at 6.23%, Germany at 5.81%, the UK and France at 4.29%, and Italy
at 3.16%. The largest quotas for the developing countries are China at
3.81%, Saudi Arabia at 2.8%, Russia at 2.39%, India at 2.34%, and Brazil
at 1.72%. The developed countries have 58% of the votes while the
developing countries have 42%. If the quotas reflected the new world
economy, China would have a larger quota than Japan while Brazil would
have a larger quota than Italy. The IMF has been gradually adjusting the
quotas, but the Europeans are reluctant to give up their long standing
dominance of the IMF while the US wants to retain control of the World
Bank. In the battle to succeed Dominique Strauss-Kahn last year, the
developing countries fielded a candidate in Agustin Carstens, the
Mexican central bank governor and former IMF official, but the Europeans
were anxious to retain the job because of the growing role the IMF was
playing in Europe. The IMF now has over 80% of its loans in Europe and
has played a critical role propping up Greece. When the term of
Christine Lagarde ends, there should be a more serious effort to find a
leadership candidate from the developing countries.


BRIC COUNTRIES WILL SEE GROWTH DECELERATION IN 2012


The so-called BRIC countries have also begun to have summits to discuss
global issues. The term BRIC was invented by Jim O'Neill of Goldman
Sachs ten years ago and refers to Brazil, Russia, India, and China. The
four countries recently invited South Africa to join. Their combined GDP
is just over $14 trillion in nominal terms and over $21 trillion in PPP
terms. They accounted for 15.5% of global trade in 2010 compared to 6.1%
in 1994. The heads of government have held four summits, with the most
recent being held in New Delhi. They have discussed issues such as
reforming the IMF and promoting a greater role for their currencies in
financing trade. They also agreed in New Delhi to create a new
development bank. The BRICS are so diverse there is a limit to how much
they can work together, but they have created a new forum to promote
greater awareness of the concerns of the developing countries.


There has recently been a loss of momentum in the growth rate of many
developing countries because of tighter monetary policy to restrain
inflation and the European recession dampening exports. China's growth
rate has slowed to 7.6%. Indian growth has dipped to 5.3%, or a
nine-year low. Brazil's growth rate has fallen to less than 3% from 7.5%
in 2010. The growth rates of many small countries in East Asia and Latin
America have slowed as well. The most resilient region is Sub-Saharan
Africa, where a resource boom is producing growth rates in the 5-6%
range. China has the potential to stimulate growth by easing monetary
policy and accelerating various infrastructure projects. India is
crippled by political paralysis because of corruption scandals and the
poor performance of the Congress Party in recent state elections. Brazil
is reducing interest rates to revive growth, but the economy is
constrained by a low savings rate and heavy tax burden. The Russian
economy will suffer if oil prices decline sharply. The major emerging
market countries had a healthy recovery from the 2008-09 recession, but
they must now confront a variety of structural challenges. China's labor
force growth will soon slow to zero. India's recent threat to impose
punitive taxes on multinational companies could dampen foreign direct
investment. Brazil will soon spend heavily on infrastructure to prepare
for the Olympics, but its long-term potential growth rate is probably
less than 4% because of its low savings rate. Russia's growth rate will
depend upon commodity prices. The emerging market countries will have
growth rates above the old industrial countries, but the gap will not be
as large as it was during the 2010 recovery.


A MULTI-POLAR WORLD IS NOW AN INEVITABILITY


The rise of the emerging market countries means that we are heading for
a truly multi-polar world. The US will continue to have the world's
largest economy for ten more years and will probably have the largest
defense budget for even longer, but there will be many new regional
powers all over the world. China will be the dominant economic power in
East Asia, India in South Asia, Brazil in Latin America, and Nigeria in
West Africa. Russia will be a resource power because of its oil and gas
exports.


There are few good precedents for how this new multi-polar world will
function. The US has been the dominant Western power since 1945 and the
leading global power since 1991. There was competition among European
states before 1914 as they colonized much of the world. Their rivalry
set the stage for the First World War. The new world order will be the
first in which there will be potentially important powers on every
continent. They will expect to play a dominant role in their region
while playing a larger role on the global stage. They will help to
determine the openness of the global economy, the military balance of
power, and the role of international institutions such as the IMF and
the G-20. There will be tensions over issues such as the role of
state-owned companies in the emerging market countries, the protection
of intellectual property, and government procurement policies. Some
countries, such as China and Russia, would also like to reduce the role
of the dollar in the global financial system. They have talked about
expanding the role of SDRs while China itself has been aggressively
promoting a wider global role for the renminbi.


The US has been generally supportive of the rise of the emerging market
countries because it views them as an export opportunity while only
China has had the potential to challenge American supremacy. The US is
adjusting to the rise of China by pursuing a strategic dialogue on both
economic and security issues. Senior officials now meet on a regular
basis to hold discussions. They cannot avoid tensions over arms sales to
Taiwan, China's exchange rate policy, or human rights, but they are
committed to making the relationship work. As China has the potential to
become a larger economy than the US within ten years, it is likely to
remain a focal point for US policy indefinitely. The US has also
announced plans to put a greater priority on Asia in its defense policy
in order to reassure other countries in the region that coming cuts in
the defense budget will not jeopardize their security.


The global financial crisis of 2008-09 was a major turning point in the
evolution of global geopolitics. There was a severe recession in the old
industrial countries which dampened the growth rates of the emerging
market countries, but did not threaten their financial systems. China
also pursued an aggressive macro economic stimulus program which revived
its economy very quickly and gave a boost to other emerging market
countries through increased trade and rising commodity prices. The US
convened the first ever G-20 heads of government meeting to address the
crisis and encourage more stimulative economic policies in a variety of
countries. The London summit then led to a large expansion of the IMF's
capital. The new role of the G-20 represents the first attempt by the
old industrial countries to adjust to the rising economic power of the
emerging market countries. The diversity of the countries will inhibit
the ability to achieve a consensus, but the very fact that they are
holding a summit reflects the changing balance of power in the world.
The challenge for policy makers will be to pursue other innovations to
promote more convergence between the industrial countries and the
developing countries on trade, climate change, financial regulation, and
other issues of common interest. The complexity of the new economic
order will make this a daunting task, but there will be no alternative
if we want to achieve a prosperous and resilient global economy.

©2012 David Hale Global Economics, Inc.

All rights reserved. This document may not be quoted, forwarded,
disseminated, distributed, or published without the express written
consent of David Hale Global Economics, Inc.


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