(Part 1)
Arecent Leader (Editorial) in the prestigious economic weekly publication The Economist (July 31) provokes some very important questions about our long-term economic future. Is the Philippines among the emerging markets who are doomed to fail in attaining high-income status in the coming decades? Have our failed responses to the pandemic sealed our fate of forever being a lower or even upper-middle income country? Are we among those developing economies to which the opening paragraph of the Leader refers: “At the start of the century, developing economies were a source of unbounded optimism and fierce ambition. Today South Africa is reeling from an insurrection, Colombia has suffered violent protests and Tunisia faces a constitutional crisis. Illiberal government is in fashion. Peru has just sworn in a Marxist as its president and independent institutions are under attack in Brazil, India and Mexico.”
The optimism about the emerging markets was especially aroused at the beginning of the Third Millennium by a thesis proposed by Jim O’Neill, global economist at Goldman Sachs. He coined the acronym BRIC (Brazil, Russia, India, and China) as he forecasted that these four large countries could be the most dominant economies by the year 2050. In 2003, these countries encompassed over 25% of the world’s land coverage and 40% of the world’s population, holding a combined GDP (in Purchasing Power Parity terms) of some $20 trillion. At the beginning of the 21st century, these four countries were among the biggest and fastest-growing emerging markets.
The acronym BRIC became a by-word among economists and business people. All four had changed their political systems to embrace market-oriented policies and global capitalism. Goldman Sachs predicted that China and India, respectively, would become the dominant global suppliers of manufactured goods and services, while Brazil and Russia would become similarly dominant as suppliers of raw materials. The euphoria about emerging markets spilled over to other smaller countries. Goldman Sachs added another 11 emerging markets (called the Next 11) to the list of highly promising economies that can possibly make the leap to at least upper-middle incomes, if not high-income, economies. These were Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam. All these, except South Korea that is already a high-income economy, are today still middle-income countries. The $60-question is whether or not they will ever graduate to high-income status or will they fall into the so-called middle-income trap which we shall discuss later in this series of articles.
It may be noted that among these 11, only Vietnam, Indonesia, and the Philippines (VIP) are included from among the 10 ASEAN countries. A common denominator among these three is their large populations, a distinctive advantage as incomes rise because the domestic market can be the main engine of growth in contrast with small economies that are overly dependent on exports, such as Singapore and Hong Kong. In fact, a major reason why the Philippines will be able to sustain 6-7% growth annually for many years after we recover from the pandemic is that our main engine of growth is the domestic market of 110 million (and rising) consumers whose expenditures account for more than 70% of our GDP. It may also be pointed out that China’s growth today is mainly propelled by domestic consumption rather than by exports.
In 2009, the leaders of the BRIC nations held their first summit and in 2010 BRIC became a formal institution. South Africa began efforts to join the BRIC grouping and, on Dec. 24, 2010, in a meeting in China, it was invited to join BRICS. With the addition of South Africa, BRICS evolved into a political organization as its inclusion was clearly for political correctness. Jim O’Neill, the originator of the BRIC concept, actually did not agree with the inclusion of South Africa because he rightly perceived that South Africa, at a population of under 50 million, was just too small as an economy to join the BRIC ranks. Countries like Mexico, Pakistan, or Indonesia would have been more worthy candidates.
What is happening now, as lamented by the editorial of The Economist cited above, is not the first time that the hopes about emerging markets are being dashed. The dream about BRIC did not last long. Somewhere along the way, Russia and Brazil mismanaged their finances and today are no longer touted as attractive emerging markets. The Russian financial crisis of 2014-2016 was especially severe. It was mainly the result of a sharp devaluation of the Russian ruble beginning in the second half of 2014. The crisis adversely affected the Russian economy, both consumers and business enterprises, as well as the regional financial markets. The Russian stock market, in particular, experienced large declines, with a 30% drop in the RTS index from the beginning of December through Dec. 16, 2014.
During the financial crisis, the Russian State turned once again to socialistic practices by taking over the ownership of private enterprises, with 60% of productive assets ending up in the hands of the government. Something very similar has happened in Brazil. That is why Goldman Sachs, the originator of the BRIC concept, has since quietly closed down its BRIC fund after losing 88% of its asset value since 2010. Now, the Bank is channeling the fund into other emerging markets, especially in Asia. As pointed out by the head of emerging markets for Morgan Stanley Investment Management, Ruchir Sharma, in his book Breakout Nations, it is hard to sustain rapid growth for more than a decade. Can the Philippines return to its trajectory of growing at 6-7% in GDP, a feat it was able to accomplish during close to a decade before the pandemic struck?
From 2010 to 2019, the Philippine GDP was growing at an annual average of 6-7%. Such above-average performance merited for the Philippine economy kudos from a good number of international think tanks, financial institutions, and multilateral organizations. In fact, the World Bank summarized these complimentary assessments by noting in a Report on the Philippines in June 2020 that the Philippines before the pandemic was one of the most dynamic economies of the East Asia Pacific region, having sustained an average annual growth in GDP of 6.4% for a decade before the pandemic.
Will the post-pandemic world be a repeat of the first two decades of this present century when promising emerging markets like Russia, Brazil, and South Africa went from boom to bust? Will the following assessment of The Economist apply to the Philippine economy (despite our special mention as a success story): “This golden age now looks as if it has come to a premature end. In the 2010s the share of countries catching up fell to 59% (from 82%). China has defied many doomsayers and there have been quieter Asian success stories such as Vietnam, the Philippines and Malaysia. But Brazil and Russia have let down the BRICS and, as a whole, Latin America, the Middle East and sub-Saharan Africa are falling further behind the rich world. Even emerging Asia is catching up more slowly than it was.”
As the Philippine economy recovers its 6-7% annual growth of GDP in 2022 and beyond, it will surely graduate from lower-middle income to upper-middle income category. But there is the well-known phenomenon of the “middle income trap.” Is it inevitable that because of our weaknesses, we will fall into this trap and, like all Latin American countries that attained middle-income status in the last century, be forever caught in this trap and fail to transition to a high-income economy as South Korea and the other tiger economies of East Asia did in the last century? We shall try to answer these questions in the future parts of this series.
To be continued.
Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is Professor Emeritus at the University of Asia and the Pacific, and a Visiting Professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.