WARNING: Emerging economies can go backwards, too

WARNING: Emerging economies can go backwards, too

Emerging economies have made great strides, helped by sounder policies and unusually high commodity prices. But progress is not inevitable. Regression will bring the crises of the past says Ian Campbell.

May 6, 2012 2:47 by kippreport

Economic regression may be clearest in Latin America, but there are bad policies elsewhere. The Russian government depends more and more on the maintenance of an unusually high global oil price. In India, the momentum of reforms has stalled. Emerging economies have made great strides, helped by sounder policies and unusually high commodity prices. But progress is not inevitable. Regression will bring the crises of the past.

Bolivia’s May Day nationalisation of Red Electrica’s local unit is a triumph – but for political meddling, not economic good sense. In seizing Spanish-owned assets, President Evo Morales is taking advantage of an old populist principle: foreigners are the easiest target. The Argentine government just showed the same instinct, announcing the nationalisation of Spanish-controlled oil producer YPF. The seizures are huge setbacks for each country, making it harder to attract needed expertise and the foreign capital that can spur growth.

There are other self-defeating populist economic strategies, such as destructive meddling with central banks. Hungary’s government threatened to do so, but was blocked by the EU and the International Monetary Fund. Argentina has not been so lucky. In 2010 the government encouraged the departure of the central bank’s respected boss. Last week it said it will borrow $5.67 billion from the central bank’s international reserves to pay government creditors. Official inflation statistics are no longer trusted. Independent analysts put the rate at close to 30 percent. The risk that Argentina returns to the very high inflation of the past is growing.

Over time the damage of populist meddling is evident. Bolivia’s real GDP has barely advanced. From $878 per capita in 1970 in 2005 dollar terms, it had risen by only 37 percent to just $1,200 in 2010. Over the same period China’s GDP per capita has risen 20-fold.

Argentina is another long-term poor performer. In 1970 Chile was its much poorer trans-Andean neighbour. But Chile, where policymaking has been more stable and rational, has almost tripled its GDP per capita in real terms in the past 40 years, while Argentina’s GDP per capita has risen by little more than a half and is now well behind its neighbour’s. A country that was once one of the world’s wealthiest has spent a century going backwards. President Cristina Fernandez looks keen to keep that record up.

By Ian Campbell