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Opinion

Overshooting in Emerging Markets

By A. Michael Spence

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The adjustment now underway requires launching real reforms and replacing low-cost external capital with domestically financed investment.

Until relatively recently, countries’ so-called middle-income transitions were largely ignored – in part because what was supposed to be a transition often became a trap. A few economies in Asia – particularly Japan, South Korea, and Taiwan – sailed through to high-income status with relatively high growth rates. But the vast majority of economies slowed down or stopped growing altogether in per capita terms after entering the middle-income range.

Today, investors, policymakers, and businesses have several reasons to devote much more attention to these transitions. For starters, with a GDP that is as large as the combined total of the other BRICS countries (Brazil, Russia, India, and South Africa) plus Indonesia and Mexico, China has raised the stakes considerably. Sustained Chinese growth, or its absence, will have a significant effect on all other developing countries – and on the advanced economies as well.

Second, the developed economies are out of balance and growing well below potential, with varying but limited prospects for faster growth on a five-year time horizon. By contrast, emerging economies, with their higher growth potential, increasingly represent large potential markets to tap.

Read full article as published in Project Syndicate

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Michael Spence is the William R. Berkley Professor in Economics & Business.