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Is emerging markets’ growth shift discounted?

Is emerging markets’ growth shift discounted?
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First Published: Tue, Apr 27 2010. 11 17 PM IST

Updated: Tue, Apr 27 2010. 11 17 PM IST
The International Monetary Fund’s (IMF) latest World Economic Outlook database has an importantstatistic—in four years, emerging and developing economies will, for the first time, account for more than half the world’s gross domestic product (GDP), computed in purchasing power parity (PPP) terms.
According to IMF’s April database, emerging and developing economies will have a 50.84% share of the world economy in 2014 in PPP terms. GDP in PPP terms is just GDP adjusted for the different costs in different countries. So while the difference in income between India and the US in dollar terms is huge, the actual difference may not be that much in terms of purchasing power, as things cost more in the US.
It’s a telling sign of the increasing importance of emerging markets. It’s odd, though, that the rise of emerging markets hasn’t been a slow and steady progression. IMF data shows that as early as 1980, the share of emerging and developing economies was 36.2% of world GDP in PPP terms. By 1990, it was more or less the same, at 35.97%. By 2000, it had moved up a bit, to 37.03%. But look at the chart since then —the share of emerging economies has increased rapidly. And the financial crisis, which has affected the developed countries the most, is perhaps the last nail in their coffin.
Why did the emerging economies suddenly start to gain share in the 2000s? Could it be a result of the bubble that saw money flowing to emerging markets? Or was it due to more fundamental factors, such as the spurt in Indian growth rates? A look at the savings and investment rates in emerging economies offers some clues.
Graphic: Ahmed Raza Khan / Mint
IMF data shows the savings rate in emerging economies was 27.65% of their GDP in 1980. In 1990, this was 24.16%. In 2000, it was 25.34%. But it started to move up thereafter, going up to 33.59% in 2008 before falling a bit because of the crisis. The investment rate showed a similar acceleration in the 2000s.
At the same time, there’s little doubt that foreign investment also contributed to the spurt in savings and investment rates in what used to be known as the Third World. Here are some numbers: in 1980, the amount of foreign direct investment in emerging economies was just $6.3 billion (Rs28,035 crore today). By 1990, that had gone up to $21.4 billion. In 2000, it was $149 billion and in 2008, it was as high as $439.9 billion, before falling off to $274 billion in 2009 because of the crisis. If you want to consider the extent of globalization in the last 20 years, these numbers tell the story. Portfolio investment to emerging markets, on the other hand, has been much smaller and far more volatile.
The mirror image of the emerging economies is the submerging major developed economies, or the Group of Seven (G-7). The share of these countries in world GDP in PPP terms declined from 50.97% in 1990 to 49.1% in 2000, but fell rapidly thereafter to 40.9% in 2009, the crisis delivering the coup de grace.
IMF predicts that G-7’s share will fall further to 37.1% by 2014, the year in which the share of emerging economies goes up above 50%. Despite the bubble, GDP growth rates in G-7 countries in the 2000s were lower than what they were in the middle and late 1980s and in the late 1990s. The noughties will be seen as a watershed, a period in which the baton passed into the hands of the emerging economies. The question for the markets, though, is: how much of this shift has been discounted? For the markets, what counts is not PPP, but current dollars. Brazil’s GDP in current US dollars, for instance, went up from 1.6% of world GDP (expressed in current US dollars) in 2004 to 2.7% in 2009. For China, the move was from 4.6% of world GDP in 2004 to 8.5% in 2009. And for India, its share went up from 1.6% to 2.1% over the same period, according to IMF.
Now, over the same period, India’s share of market capitalization to world market capitalization, according to the data made available by the World Federation of Exchanges, went up from 1% in 2004 to 2.7% in 2009. So India now has a higher share of global market cap than of global GDP.
Indeed, according to IMF projections, India’s share of world GDP in current dollars will be 2.4% even in 2012, lower than its share of market cap in 2009. It suggests that the country’s spurt in growth has already been discounted and that’s not good news for the domestic market.
Manas Chakravarty takes a weekly look at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com
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First Published: Tue, Apr 27 2010. 11 17 PM IST