The End of the Emerging-Market Party

In some countries, such as China, Thailand, South Korea, and Vietnam, nominal GDP growth was driven to a large extent by real growth. Moreover, according to the soon-to-be-published , these economies began producing more complex products, a harbinger of sustainable growth. Angola, Ethiopia, Ghana, and Nigeria also had very significant real growth, but nominal GDP was boosted by very large terms-of-trade effects and real appreciation.

For most emerging-market countries, however, nominal GDP growth in the 2003-2011 period was caused by terms-of-trade improvements, capital inflows, and real appreciation. These mean-reverting processes are, well, reverting, implying that the buoyant performance of the recent past is unlikely to return any time soon.

In most countries, the US dollar value of GDP growth handsomely exceeded what would be expected from real growth and a reasonable allowance for the accompanying Balassa-Samuelson effect. The same dynamics that inflated the dollar value of GDP growth in the good years for these countries will now work in the opposite direction: stable or lower export prices will reduce real growth and cause their currencies to stop appreciating or even weaken in real terms. No wonder the party is over.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is a professor of economics at Harvard University, where he is also Director of the Center for International Development.

Copyright: Project Syndicate, 2013.

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