Business and Financial Needs

What would have been your reaction, circa 2006, to someone peddling the following forecast? There would soon erupt the worst, synchronised global financial crisis in 80 years, or possibly ever. World trade would start to collapse as fast as in 1929-31. Many developed markets (DMs) would experience deep recessions, the costliest banking crisis ever and would stagger toward fiscal calamity. But – guess what! – emerging markets (EMs), after a brief panic, would sail on unscathed. They would have no significant crises: currencies, banks and fiscal positions would retain stability. A two-track recovery would take EM growth on to a trajectory away from a troubling slump in the DM world.

Anyone cognisant of the fragility of “high beta” EMs in past episodes of global macroeconomic distress (the 1980s, the 1930s, or back to the 1870s) would have dismissed such thinking as wildly implausible. Yet this is precisely how things turned out, a remarkable turn of events that prompts some to ask if EMs are the new DMs.

Can the idea that EMs are “graduating” to DM status have merit – now or over the longer term? And, if so, what are the implications? At Morgan Stanley, we examined the macroeconomic characteristics of the EM-DM groups and their socio-political and institutional fundamentals. We find evidence that today’s EM economies may not have fully closed the gap, but they are in a stronger position than in previous moments of short-lived euphoria. …

… As history shows, economic development “graduation” follows from consistently passing stern tests of economic and social capability. This once – but hopefully not for the last time – the EMs aced the examination.

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