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Back to Fundamentals in Emerging Markets – Project-Syndicate 08-13-15

Salient to Investors:

Dani Rodrik at Harvard said:

  • Emerging markets may be seen to be in deep trouble but do not deserve the doom-and-gloom treatment they are getting. Stronger economic headwinds ahead will make it easier to distinguish countries that have strengthened economic and political fundamentals from those that have relied on false narratives and fickle investor sentiment.
  • The 3 key growth fundamentals of developing economies are acquisition of worker skills and education, improvement of institutions and governance, and structural transformation from low-productivity to high-productivity activities. Countries that rely on steady, economy-wide accumulation of skills and improved governance may grow less fast but they are more stable and more likely to converge with advanced countries eventually.
  • China grew by filling factories with uneducated peasants, and so generated an instant boost in productivity. China’s political and institutional challenges are much greater than those of democratic India so offers much higher uncertainty for long-term investors.
  • India’s medium-term growth potential is well below that of China in recent decades because skill-intensive services absorb only a tiny portion of India’s largely unskilled labor force, so it will take many decades for overall productivity to rise significantly.
  • Brazil’s political crisis demonstrates democratic maturity as prosecutors are able to probe the highest ranks of Brazilian society and government without political interference – a sign of strength more than weakness.
  • Turkey’s corruption has gone untouched and so will cause greater long-term damage.

 

Read the full article at https://www.project-syndicate.org/commentary/emerging-market-growth-by-dani-rodrik-2015-08

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