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10/9/14

Global Economy: For Poor Countries, China Is No Model - by Dambisa Moyo

The world's emerging economies face an emerging crisis. Such states are home to 90% of the world's population, and on average, 70% of their people are less than 25 years old. Those young citizens dream of a better, freer life with greater opportunity and are increasingly taking to the streets, from South Africa to Thailand, Brazil to Ukraine. 

But too many governments in the developing world are moving backward, not forward—responding to popular discontent by following some version of what they see as the "China model." The results could be dire for the global economy. The sheer size of the emerging economies—a list that starts but hardly ends with the so-called BRICs (Brazil, Russia, India, China)—means that their actions can jolt equity and bond markets, shift foreign exchange rates, bump commodity prices, alter global trade and shape corporate investment decisions. 

These countries have hugely varied politics and cultures, but the primary driver of unrest in all of them is a strikingly similar set of entrenched economic woes: low growth, stubborn poverty, stagnant wages and intractable unemployment rates that cut off millions from work and any real prospects of progress for themselves and their families. 

A growth rate of 7% is the minimum required to double per capita incomes in a generation and thus make a meaningful dent in poverty. But for most of the emerging world, growth rates won't reach half that anytime soon. In Brazil, Thailand and Russia, growth will stay below 3% through 2014, say recent International Monetary Fund forecasts. 

Protectionist tendencies—in India, Brazil and elsewhere—are producing choke points in cross-border capital flows. The movement of money through the financial system has been stagnant over the past decade: In dollar terms, cross-border capital inflows among the G-20 economies have fallen nearly 70% since mid-2007.

Meanwhile, the state's role in emerging economies is expanding. The world's top 13 energy producers are government-owned, mainly in the developing world. And nine of the 10 largest sovereign-wealth funds by assets are in emerging markets. 

Other rising powers are eager to emulate China's success and pursue statist policies that can quickly deliver a short-term jolt. Under state capitalism, China has delivered phenomenal growth, brought hundreds of millions out of poverty, bulked up infrastructure and delivered social services.

Moreover, as autocratic China has surged, democracy and capitalism have suffered a series of setbacks that make them less tempting options. These range from high levels of income inequality in the U.S. to the rise of governments in Russia, Venezuela and elsewhere that are nominally democratic but sharply limit free speech and the rule of law.

Read more: For Poor Countries, China Is No Model - WSJ

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