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05 September 2009

Emerging market competitiveness amid economic crisis

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This is a (politically correct) article to be published in various newspapers when we present the Global Competitiveness Report next week in China. It discusses some of the findings of this year's report regarding the BRICs.

The global economy continues to weather the most difficult climate in generations, with governments around the world taking an active stance in addressing the crisis. Yet while urgent actions have been taken in many countries to support demand and head off a prolonged recession, this should not diminish their focus on long-term competitiveness fundamentals, and the potential impact that present actions will have on future growth.

Competitive economies are those that have in place factors driving the productivity enhancements on which their present and future prosperity is built. For the past three decades, the World Economic Forum’s annual competitiveness reports have examined the many factors enabling national economies to achieve sustained productivity and economic growth. These range from good governance and macroeconomic stability to the efficiency of factor markets, technological adoption and innovation potential, among others. Thus, while the present economic crisis is shorter-term in nature and primarily related to the business cycle, competitiveness is very much about a country’s development potential over the medium to long term. Indeed, countries that have competitive strengths in a variety of areas can be expected to exit the crisis faster and to rebound much more strongly.

While the developing world at first seemed to be spared from the fallout of the present crisis, many countries are now facing slumping demand for their export products coupled with lower commodity prices, and significant reductions in foreign investment and remittances. Yet some emerging economies have been showing a higher resilience and even managing to enhance their competitiveness in the midst of the global downturn.

The comparative performance of the large emerging BRIC economies is illustrative. Three of the BRICs, namely China, India and Brazil, have confronted the crisis from a reinforced competitiveness footing compared with where they were just a few years ago. This has been achieved most notably through a combination of enhanced macroeconomic stability, and improvements to the functioning of goods, labor and financial markets. Indeed, in the most recent global competitiveness rankings these three countries improved their performances, in line with expert assessments of their longer-term growth prospects.

Yet not all economies have been putting into place the elements needed for enhanced productivity with the same zeal. Improvements in Brazil, China and India contrast with other emerging economies such as Russia, the fourth of the BRICs. Russia is the lowest ranked of the four economies in the Forum’s Global Competitiveness Index, falling 12 places this year, attributable to a deterioration in the efficiency of its goods and financial markets, combined with concerns about governance more generally. Improvements in these areas would strengthen the country’s competitiveness going forward.

Not surprisingly, the economic outlook for India, China and Brazil looks somewhat rosier. China and India have already started to recover rapidly (with the IMF expecting growth rates of 7.5 and 5.4 percent in 2009, respectively), and with Brazil contracting slightly (by - 1.3 percent). By contrast, Russia is experiencing a significant contraction this year (by -6.5 percent). This trend is expected to continue through 2010, with all four countries returning to growth, but Brazil, China and India continuing as the strongest performers.

There is also a more general lesson about the present situation for emerging markets. Under-regulation of the financial sector in the advanced economies has been blamed for the economic crisis. In response, governments all over the world are now tempted to intervene more strongly in other aspects of the economy, notably in the markets for goods and services. Yet the need for more financial regulation in a few highly unregulated economies does not mean that already highly regulated economies should further increase government intervention elsewhere. Indeed, countries with efficient markets will be those that emerge most rapidly from the present crisis and that will be best equipped to weather the next one.

Jennifer Blanke is Head of the World Economic Forum’s Global Competitiveness Network and Xavier Sala-i-Martin is Professor of Economics at Columbia University.

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Starting January 30, 2012, I decided to put the random (economic) thoughts that I was posting on Facebook, in a blog. In this site you will be able to read all Facebook notes going back to 2008, (without my Friend’s comments, unfortunately), but we will only maintain the new thoughts. If you want to check out the old comments, they are still posted on Facebook. If you want to comment on them, you have two options (1) Become a Facebook Subscriber. Since all the posts will also appear in Facebook, you will be able to comment there. (2) Comment on Twitter, as each post will also be announced in Twitter.