Emerging Markets Are Back. Thanks, IMF
(FORTUNE Magazine) – Just two years ago, emerging economies were in heaps of trouble. The light at the end of the financial-crisis tunnel appeared to be a train barreling the other way. Doomsayers like Charles Wolf, an analyst at Rand, claimed that East Asia was suffering the fallout from a "perverse" development model. Economists blasted the International Monetary Fund for being both too lenient and too Scrooge-like. The agency and its ilk could do nothing right.
Yet without major domestic economic reforms or an IMF overhaul, the troubled regions have recovered more dramatically and swiftly than anyone predicted. In the past year, real GDP has grown by 13% in South Korea, 12% in Malaysia, 7% in Thailand, and 8% in Mexico. Of the emerging-market economies most badly hit by the financial crises of the 1990s, only Brazil's and Indonesia's are disappointing, with real economic growth of 3%.
Instead of the usual finger pointing, economists are in the uncustomary position of asking "What went right?" Here are some ideas:
--Economic gains from globalization have been enormous. Even in an economy as prosperous and as developed as South Korea's, real-wage levels are only a third of those in the U.S. This means that the potential for further growth and development is very large. East Asia's fundamentals--a well-educated labor force, good transportation and communications infrastructure, low taxes, and a relatively honest government--make it easier to attain First World levels of productivity.
--Market economies are much more resilient and flexible than pundits believe. Policymakers' expectations are still shaped by the memory of the Great Depression: Panic breaks out, demand falls, unemployment rises, confidence collapses, the economy stagnates, and it doesn't recover. But Great Depressions are rare events--that is why we remember them. A more likely scenario: As long as a nation's economy maintains a banking system that channels savings from households and investors to businesses, it will likely bounce back nicely from a recession; the deeper the recession, the higher the bounce. Emerging economies have strong and resilient enough market systems to make prolonged depressions unlikely.
--Global financial institutions did a much better job of handling the crises than they're given credit for. The recipe for alleviating a financial crisis is more than 100 years old: Show up with a lot of money to restore confidence, lend freely to fundamentally sound organizations that need cash, close down and liquidate failing businesses. This formula restores confidence and channels money from savers and investors to businesses that need capital.
This is exactly what the IMF, the World Bank, the U.S. Treasury, and G-7 did, pouring about $20 billion into Mexico and $60 billion into East Asia. The loans all look as if they'll be repaid with interest now that these crises are over.
Critics blast these agencies for making all sorts of mistakes: The U.S. Treasury for demanding early repayment of its loans to Mexico; the IMF for closing down some but not all of Indonesia's insolvent banks; the IMF (again) for demanding that East Asian economies showing budget surpluses raise taxes, thus shrinking demand and deepening the recession.
These are valid criticisms, but they miss the point: The IMF and company did a number of little things wrong, but they did the big, necessary things right.
What's the surest sign these organizations acted wisely? After the depression of 1929, U.S. unemployment remained well above normal for 12 years. After the 1982 Mexican crisis, it took six years before growth resumed. Eleven years after its crisis, Japan--which hasn't restructured its banking system--is still stagnating. But Mexico's and East Asia's bad recessionary years were followed by the resumption of economic growth in just a year or two.
J. BRADFORD DELONG is a professor of economics at the University of California at Berkeley and co-editor of the Journal of Economic Perspectives. E-mail: delong@ econ.berkeley.edu; Website: www.j-bradford-delong.net.