In the opening weeks of 2014, a huge wave of capital fled the assets of the major emerging markets. In January, a total of $12.2 billion poured out of equities and $4.6 billion out of bonds. An additional $6.4 billion in equities and $1.95 billion in bonds decamped in the first week of February. Currency crises threatened Turkey, Argentina, and Ukraine; other key countries that rely on foreign financing — India, Brasil, Indonesia, South Africa — also seemed in danger.
Yet a few soothing words from the new Fed chair Janet Yellen stanched the panic among investors. A few days later, emerging market stocks further recovered with word that China’s banks are shrugging off the government’s efforts to rein in their creation of ever-higher levels of credit. Global investors now expect robust Chinese demand for raw materials to buoy the poor countries, drawing in their exports with the further inflation of the Chinese property bubble.
This was the second near-crisis sell-off in the emerging markets in less than half a year, but this time the outflows eclipsed the sales for all of 2013 in the space of a few weeks. Like last summer, the looming collapse was reversed on the strength of few well-timed remarks by central bankers, with no sign of repentance of the economic sins that supposedly called down investor anger.
Once again, last year’s claim is born out: “growing volatility is not a result of external forces acting upon the economy but what has become the defining output of the global economy itself.” The flows of capital being pushed through the global economy by the world’s major central banks are artificially oxygenating the decomposing body of neoliberal society. As the connection between the investors bearing this capital and the productive economy grows more and more tenuous, economic indicators and investor behavior become increasingly erratic. Even mainstream commentators recognize that the emerging markets crisis is merely in abeyance, though their interpretation of why that is so remains trapped in ideology.
One financial analyst counsels stoicism: economic crisis is the natural state of the emerging markets, so no need for undue concern. This is too glib — if an emerging market sell-off ran out of control, it could undo the illusions that keep the entire global system running. Because neoliberalism is living on borrowed time, maintaining investor “confidence” assumes an inordinately large role in forestalling global crisis.
For the moment, however, turmoil in these economies is unlikely to cause a general crisis. The poor countries just aren’t very important economically — despite holding two-thirds of the world’s people, they produce only one-fourth of the world’s value. US exports to the “fragile eight” countries represent just 0.7 percent of its gdp. Moreover, investors apparently still see the poor countries and rich countries (except Japan) as two separate destinations for investment rather than an interrelated unity, so money fleeing the emerging markets might simply inflate new bubbles in the developed economies. Reification to the rescue!
The risk posed by serial crises in the emerging markets is not so much the prospect of imminent collapse. The real danger is more long-term in nature: endemic uncertainty threatens our last best hope to put the global economy back on a sustainable foundation without facing some sort of catastrophe first.
The fundamental reason that economic instability and stagnation has afflicted the whole world since 2008 is that investors are leaving their capital sitting idle or putting it into speculation rather than devoting it to productive investment. As I’ve argued in more detail for the US case, that is related to the global shortfall in consumer demand resulting from thirty years of wage repression. But just as significant is the declining returns on productive investment: as the rate of productivity growth in the so-called real economy has tailed off, the search for yield via financial bubbles has become more and more attractive.
The two essential transformations necessary for economic recovery, then, are significant wage increases around the world (or some other redistribution of the wealth created by the global economy), and a long-term increase in the rate of productivity growth.
The mechanisms that could accomplish the first transformation are clear. The second transformation is less obvious, but it centers on the question of how to raise the productivity of people currently toiling in low-productivity occupations.
|Source: The Conference Board Total Economy Database via here and here|
As this graph indicates, most of the potential for raising productivity is concentrated in the emerging markets. Hundreds of millions of people in the Indian countryside, in the slums of Rio de Janeiro and Lagos and Kolkata, spread across Java, Bengal, and North Africa, are essentially excluded from the global economy. They survive off its scraps — often literally, as the alarming number of people who live (and routinely die) in the trash heaps of the poor countries shows. Their lives are economically worthless, which is the only way to make sense of the fact that over 36,000 people have died in the last decade in accidents involving Mumbai’s commuter rail system (an equal number were merely injured). But for this very reason — because those who have no economic value also have the greatest potential to create new value — they are the only hope for rescuing the global economy. Only by investing in these people, turning them from the detritus of global society into its workers and consumers, could the crisis of neoliberalism be resolved before we start hitting some very unpleasant disruptions.
Up to this point, new foreign investment in the emerging markets (two-thirds of the world’s population) remains only a fraction of new investment in the United States alone (one-twentieth of the world’s population). The amount of investment in the poor countries is not the only problem — much of existing investment is transparently speculative, and even that part that is productive remains locked in neoliberal patterns that increase inequality and prevent real development. Yet turmoil in the emerging markets, even if it doesn’t spill over into the main value complexes of the global economy, threatens to sever the one lifeline we have left.