Business in Emerging Markets
Introduction
The term emerging markets brings to mind the vibrant Asian, African and Latin American economies. China is the leading country towards this end with an impressive growth rate averaging at least 7% per annum since 1980s (Mpoyi, 2012). The emergence of China as an economic powerhouse has prompted many economists to study its trends and predict its future as well as the world’s economic future. The following is a review of Harvard University economists Lant Pritchett and Lawrence Summers who offer their opinions on the issue in an article titled “Asiaphoria meet regression to the mean”.
The central argument of the Asiaphoria by Lant Pritchett and Larry Summers is that China’s economic growth rate, which has been considerably high, is susceptible or vulnerable to a quick decline. China has maintained growth rates of at least 7% per year for the past decade and its speedy growth would have the world believe that the world’s economic future lies in Asia (Li, 2014). Pritchett and Summers term this phenomenon as “Asiaphoria”. They use past experiences to support their claims. The duo cites past- rapid growth of Japan in the 1980s as well as that of Thailand in the 1990s as hyped economic resurgences that failed to live up to their expectations (Pritchett & Summers, 2013).
According to Pritchett and Summers, the best way to evaluate the economic growth prospects of a region should be to look at economies that are in a similar situations. They state that it is misleading to look at the past economic growth trends. The duo’s argument stems from an insight from the research on economic growth: reversion of the mean. This essentially means that speedily growing economies eventually have to fall back to the overall average (National Bureau of Economic Research, 2016). In their argument the current growth rate of the Chinese economy is bound to decline sharply over the long run.
The economists predict that the decline of China’s economic growth shall be swifter than that of similar countries in the past. The reason given for this claim is that China has condoned corruption and it has an authoritarian political system. The absence of the rule of law will come back to haunt the economy of China (Pritchett & Summers, 2013). In their words, the authors assert that there are “plausible scenarios which may disrupt the current political settlement” meaning that they foresee political instability which poses a huge threat to the Chinese economy’s growth rates.
I agree with the argument by Pritchett and Summers. There are several indicators that the economic growth rate of China is on the decline. An article in the economist supports my stance by noting that labour and capital are finite and they can only last so long when relied upon to fuel economic growth (economist.com). The surest way to maintain economic growth rate is improving the productivity in which labour and capital are used.
BRICs thesis states that “by mid 21st century BRIC economies of Brazil, Russia, India and China or the “East’ would be wealthier than today’s seven largest developed economies of the G7 or those from the “West” (Voronkova, 2015). The argument by Pritchett and Summers is compatible with the BRICs argument. This is so because in as much as the economic growth rates of China and Asia will slow down to the average; these countries will still experience growth (Gilpin & Gilpin). The reason for this is that economic power has shown a significant shift from the West to the East fuelled by a huge uptake of technology in the “East” in a greater manner compared to the “West” (Voronkova, 2015). As such, the combined GDP of the BRICs is becoming greater than that of the G7. Moreover, the competitive advantage is less likely to shift from “West” to the “East” because once the BRIC economies reach the income levels of the G7 countries; they shall become as competitive as the G7 economies (Gilpin & Gilpin). The issues of abundant population to provide labour and market for the economies shall also act to fuel the BRIC economies in surpassing their G7 counterparts.
Implications of the Asiaphoria argument for multinationals based in Western Europe
The Chinese Total Factor Productivity (TFP) which is the measure of how efficiently capital and labour are used has been dragging the economic growth of the country since 2007. The TFP has been slowing the economic growth rate by approximately 0.9 percent per year (Cox, 2012). Although the World Bank argues that China’s TFP contributed to the growth of the economy by about 3% per year, these contradicting views show that the factors of economic growth upon which China has anchored its economic growth are shaky (Morgan, 2013). The differences in the difference sectors of the economy have wider differences in labour and capital contributions to the overall economy. As such, issues of political instability can trigger uncontrolled ripple effects on labour and capital thereby affecting economic growth rates in a negative manner (Li, 2014).
The multinationals based in Western Europe are venturing into the Chinese market other areas in Asia. The implications of China’s potential decline to multinationals means that they could potentially lose in terms of slowed down rates of profitability.
The multinationals ought to adjust their operations in China and elsewhere in Western Europe in order to take advantage of falling barriers. The falling barriers to international trade means that the multinationals have an opportunity to do robust business in China while suffering less harm as the economic growth starts to decline. The multinationals should also spread their risks to other countries that are on an upward trend in terms of economic growth.
Conclusion
The recent economic growth of China is bound to slow down at some point according to Pritchett and Summers. The economists have rightly identified the cause of the decline as natural progression coupled with absence of the rule of law and imminent political instability in the country. Although the economic growth of China may decline the overall growth of the BRICs will continue and support the BRICs thesis. However, multinationals need to be wary and take adequate measures to grow their Chinese operations and spread their risks to countries that are experiencing rapid growth in order to cushion themselves.
References
Pritchett, L. & Summers, L. 2013. Asiaphoria meet Regression to the mean. Harvard University.
Voronkova, A. 2015. BRICS Organization: Comparison of the Countries' Economies and Geopolitical Influence. Potential Development. Prague.
Mpoyi, R. 2012. The Impact of the “BRIC Thesis” and the Rise of Emerging Economies on Global Competitive Advantage: Will There Be a Shift from West to East? Journal of Applied Business and Economics vol. 13(3)
Gilpin R. & Gilpin J The Challenge of Global Capitalism. The World Economy in the 21st Century. Princeton University Press.
Cox, M. 2012. Power Shifts, Economic Change and the Decline of the West? International Relations 26(4) 369–388.
Morgan, J. 19 Nov. 2003. Harvard Study: 'Asiaphoria' Foretells Trouble Retrieved 26, Feb. 2016 from http://www.newsmax.com/Finance/Economy/Harvard-study-Asiaphoria-Trouble/2013/11/19/id/537541/
National Bureau of Economic Research. 2016. Asiaphoria meets Regression to the mean. Retrieved 26 Feb 2016 from http://www.nber.org/digest/mar15/w20573.html
Li, X. 2014. The BRICS and beyond: the international political economy of the emergence of a new world order.
Economist. 11 Oct. 2014. Unproductive production: Weakening productivity is casting doubt on the sustainability of China’s growth Retrieved 26 Feb 2016 from: http://www.economist.com/news/finance-and-economics/21623708-weakening-productivity-casting-doubt-sustainability-chinas
