A diverse group of students from diverse backgrounds engaged in a thought provoking Fireside Chat with Nobel Laureate Professor Michael Spence and Professor Thomas Pugel on October 3.
During the event, which was hosted by the Emerging Markets Association, Spence shared the 2001 Nobel Memorial Prize in Economic Sciences for his work on the dynamics of information flows and market mechanisms.
Currently, Spence is a William R. Berkeley Professor of Economics & Business at Stern, while Pugel is a Professor of Economics and Global Business whose research focuses on international industrial competition, with an emphasis on market structure, strategy, and performance, and on government policies toward international trade and industry.
After reminiscing about their time together at Harvard as Ph.D. students, Spence shared his views on the current upside trends and challenges facing key emerging markets. While emerging markets weathered the first few years of the financial downturn relatively well, they have begun experiencing trouble in recent years. While some economies, such as India, are still experiencing large growth, many emerging economies today are squarely sitting in the middle.
Both professors made sure to caveat that while not all emerging markets are the same, and pressures facing these economies have shifted towards a few major trends.
Now more than ever, the transition of global economies is heavily dependent on two main drivers: technology and shifting policies. For emerging markets stuck in the middle of the growth curve, and especially for those without a wealth of natural resources to fall back on, this is advantageous. Both professors believe that over time, we will see more micro-clusters of technology businesses, akin to the Silicon Valley, springing up in these markets.
The growth of these micro-clusters will be driven by increasingly powerful digital technologies what will impact major industries. In particular, innovative technologies focused on addressing our climate crisis by reducing carbon intensity energy consumption could be a major driver of economic growth in emerging markets. This is despite the fact that, as Spence pointed out, climate change does not weigh heavily on economic indicators of the emerging countries.
A potential confounding factor in the growth potential provided by digital technologies are their increasing prevalence in military applications. Digital technology is increasingly becoming a crucial component of offensive military operations rather than solely being used for defensive, cyber security applications.
Both professors theorize that this will lead to more regulation, which may limit the growth potential as different nations pursue different modes and levels of control. For example, they stated that China will continue to have much more regulation on digital technology than Europe.
Despite its highly regulated tech industry, China is encouraging its digital technology to be the best in the world, with its Made in China 2025 plan. Already, funding within the Chinese technology sector is on par with that in the US and funding for medical innovation in particular has exceeded that of the National Institutes of Health, the largest medical funding body in the world.
Chinese investment has also branched out to other emerging markets, where its foreign direct investment will continue flow as long as global opinion towards China remains strong and policies do not become restrictive. Unsurprisingly, the United States, in particular, wants to fence in China’s growth in the military technology sector.
Technology and the potential regulations it faces are not the only drivers of growth for emerging markets, as changing global policies have the potential to make an even greater impact.
Nationalism has emerged as a dominant narrative in a number of countries, best illustrated by the ongoing US trade conflicts with rivals such as China and even with allies like Canada. It is the competition between the US and China, however, that could shape the future of the world’s economic landscape. It remains to be seen how the two economic behemoths will balance cooperation and competition; the outcome has the potential to make or break a number of emerging markets.
Pugel reasserted that it was not just the US’ policy on China that is of importance to emerging economies, but its policy regarding rising interest rates. Raising interest rates in the U.S. has multiple subsequent effects outside the country. Countries such as Turkey hold large amounts of debt in foreign currencies, and the International Monetary Fund (IMF) has offered Argentina a loan package with conditions that will be difficult to meet regardless of an increase in interest rates.
Spence added that while contagion effects, or the spread of market changes or disturbances from one regional market to another, have declined over the years, raising interest rates may lead Turkey down a similar path as Argentina.
This was recently echoed by Bloomberg, which pointed to the Federal Reserve’s interest rate hikes as a driving force behind the shockwaves hitting emerging markets. Furthermore, Hak Bin Chua, senior economist at Maybank Kim Eng in Hong Kong, stated that “emerging markets that are over-leveraged on U.S. dollar debt and large oil importers are probably the most vulnerable.”
Spence warned that asset managers in particular must be aware of this, as overvalued currencies can be especially dangerous. If certain economies must dip into their reserves to hold up the value of their currency, it would only be a matter of time until the value of the said currency is destroyed by short sellers.
Former US executive director at the IMF and current US chairman of the Official Monetary and Financial Institutions Forum Mark Sobel echoed similar sentiments, warning that “emerging-market risks will likely be confined to idiosyncratic cases, but the potential for contagion is there,” according to Bloomberg.
Both professors concluded the Fireside Chat with their views on emerging economies that they felt were on the path to success and other crucial factors that would help them achieve success.
Indonesia struck a chord with Spence, as he felt the government’s policy agenda balanced regulations with a focus on fostering independence in the market. He also felt that certain markets in Latin America were going to be impacted more by the growth of their larger neighbors (Brazil, Mexico, and Argentina in particular) than by any internal actions the government could take.
Pugel, on the other hand, was emphatic in his belief that education was the most important factor in an emerging economy’s fight for growth.
China and South Africa were the two historical examples he used, as they both were able to surmount the vast education gap amongst their citizens to create impressive growth. On the other hand, Pugel felt that India could do more to bridge the education gap of its citizens, which, in his opinion, would lead to more growth in the future.