The end of the emerging market boom?

For many years the emerging markets were seen as the epitome of high economic growth and hence as an important driver of the world economy. In recent months, however, there has been a flood of bad news: disappointing growth rates, mass demonstrations, political unrest and then the surge in capital outflows since late May. So are we witnessing the end of the protracted emerging market boom and is the global economy set to lose its leading growth driver? Our answer is “no”. Looking at the next 10 to 20 years, the emerging markets will still provide a key boost to the global economy.

They will continue to clearly outpace the advanced economies in terms of growth. This is because the income gap between the industrial and emerging market economies is still very pronounced and even a rapid catch-up process extending over several decades would likely not be enough to close the gap in full. The emerging markets will continue to shape the division of labor and international specialization patterns; they have considerable reserves of available labor force and diverse investment opportunities at their fingertips. The range of products offered in those emerging markets that have been successful for some time now will become more and more sophisticated. Having said that, new locations for basic, labor-intensive production will emerge elsewhere, too. The transfer of capital will become less and less of a one-way street leading to the emerging markets. Rather, these countries will increasingly start to provide capital to other emerging markets, and also to the industrialized countries themselves. In other words, the emerging markets will become ever more closely entwined with the global economy – a process which, as the numerous emerging market crises, particularly in the 1980s and 1990s, have shown, is obviously still an accident-prone one. 

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