The pandemic threat to emerging markets
Under the extreme strain of pandemic lockdowns, the tectonic plates of the global economy are shifting. It is impossible to say where those pressures will erupt, or what the landscape will look like when they end. But it is hard to see how there can be any return to the old order.
Emerging markets are likely to bear the brunt of the downturn, which of course has direct implications for Asia, Africa and Latin America. The end of the three-decade trend toward globalization has direct and obvious implications for economies in those areas. But it also threatens the economic well-being of the West and the Middle East.
Globalization — which despite its critics brought relative prosperity to hundreds of millions of people — is under threat mainly because of the decline in world trade sparked by the fallout between China and the US. If the two biggest players in the global economy no longer want to do business with each other, as increasingly seems the case, the game is up.
But just as significant is the contrasting policy response from governments in the “developed” economies compared with the emerging markets.
While Europe, North America and, to a lesser extent Japan and South Korea, have deployed a barrage of fiscal measures to mitigate the economic effects of pandemic lockdowns, such action is largely not an option for the rest of the world. (Leave aside China for a moment, because it is a very special case.)
New York, London, Frankfurt and Brussels have adopted the logic of what one commentator has called the “god of magic money.” Governments in those countries can effectively print money, as we have seen in the Federal Reserve’s multitrillion-dollar “bazooka,” the UK’s growing “furlough” bill, and the European authorities’ huge fiscal support packages.
They can do that because they have strong currencies and asset bases to sustain such lavish support. The measures they have put in place may come back to bite them later, with inflation or unsustainable levels of public debt, but the strategy is that by then they will have ridden out the pandemic recession/depression.
Countries such as Brazil, Russia, India and Mexico, as well as significant global economies such as Nigeria and Turkey, do not have that strategic option. They have big populations, vulnerable currencies and less flexible fiscal systems.
There is also the suspicion that they have not yet experienced the full ravages of the pandemic, and that it will be more severe when it does arrive because of inadequate health care systems.
For these countries, the fourth-quarter V-shaped recovery — increasingly disparaged by most economics analysis anyway — looks completely out of the question.
China is in a different position. Of sufficient economic gravity to make a real difference, it has all-but eliminated the disease, and could be the dynamo to pull the rest of the world out of the recession, as it was in 2009.
But there is little sign that China wants to play the role of world savior again. The recent National People’s Congress avoided any talk of big economic stimulus, and instead added to the uncertainty with its stance on Hong Kong.
There is the real possibility that by next year there is a two-speed global economic system, neither running fast enough to prevent depression, with the emerging markets languishing and developed economies on fiscal life support. That would be very bad for the global economy.
It would also be bad for the Middle East. The region has promoted itself for the past decade as the pivot between Europe, Africa and Asia. What would its role be if that pivot ceased to function?
There is also the matter of the energy industry, the dominant earnings generator in many regional economies. There is no sign that demand for oil will be approaching the 100-million-barrels-a-day level any time soon, and much less so in a world where trade and investment between developed and emerging markets has dried to a trickle.
The West can hope to spend its way out of recession; the rest of the world will not be able to do so. The results will not be pleasant for either camp to endure.
• Frank Kane is an award-winning business journalist based in Dubai.