‘The rise of emerging markets is real’, says London School of Economics professor

World Finance interviews Professor Danny Quah, Professor of Economics and International Development at the London School of Economics, about the OECD's latest report on emerging markets

July 11, 2014

Growth in emerging markets has been key to driving living standards in these regions of the world. But a 2014 OECD report suggests the pace of growth has slowed down: a worrying trend for achieving average income levels in these countries by 2050. World Finance speaks to Professor Danny Quah, Professor of Economics and International Development at the London School of Economics, to hear his views on the future of emerging markets.

World Finance: Professor Quah, according to this report China is of course an economic front-runner compared with the other BRICs countries, but in order for China to achieve the 2050 projections that have been laid out, don’t you think that it has to look into its own backyard and consider more seriously what it’s going to do in terms of domestic exports?

Danny Quah: They’re hazards. They’re hazards ahead. China as you say is an economy that’s very heavily trade-dependent, and when you’re trade-dependent in that way, what matters in the world matters to your economy. You can’t just keep growing in a way that’s decoupled from the rest of the world.

But I think China itself has always viewed the reliance on trade as being a device that gives it enough room to develop its own internal consumption capacity. And I think we’re beginning to see evidence on that. That China will have this internal, own domestic engine of growth.

You can’t just keep growing in a way that’s decoupled from the rest of the world

World Finance: But we also know that China has brokered some one-sided deals; whether that be in Asia or Africa. So what does that then do when you’ve got these agreements that don’t necessarily benefit social welfare long-term? I mean, are we looking at short-termism?

Danny Quah: There is a tendency to give the impression that it’s just looking out for itself in a way that screws over the counter-party. That messes them up.

It does not actively seek to do that. It’s not in the role of trying to do down other countries so that it is the leading power.

What it really wants to do is engage in trade, and engage in exchange. And what that means is that if you’re a country that has natural resources, and your government, your civil society, your public infrastructure is not up to exploiting these natural resources in a way that exports to China, what China will do is it will come in and offer to build the bridges and the railroads and the roads that are needed.

Now some of those bridges and roads that it builds might not last the duration. They might last six months, a year or so? They’re something that’s just fit for that purpose. And that does give the impression that it’s after one-sided advantage.

It’s difficult to interpret what they want to do in an alternative way, which is that they’re single-minded in pursuing economic prosperity.

World Finance: But then, going back to my original question about short-termism, does the burden then lie with governments to restrain how much access, and the sort of deals that are taking place? If we not only want to see China develop but other emerging markets too?

Danny Quah: Absolutely, I think all of these other economies that are dealing with China need to build their political systems, need to build their civil society, so that the growth that they get to experience is not short-lived, does not have its benefits accrued to just a narrow elite.

But China’s own view on this is that’s a problem that you the counter-party need to fix. And they’re right.

It’s not our job to tell other countries how to run their systems. They need to do that.

World Finance: Do you think that it’s unfair Professor Quah, this prevailing attitude that China is somehow engaging in industrial espionage? If you want to call it that.

It’s not our job to tell other countries how to run their systems

Danny Quah: It’s fair in the sense that there is almost surely a lot of what in the western system we would understand to be theft of intellectual property rights.

We should also note however that, you know, most recently China has imprisoned the perpetrators of 40 infringers of copyright law. So it is doing its best on preserving an intellectual property rights system.

Economists are actually divided on this, because intellectual property rights – yes, they encourage investment in research and development, they encourage innovation – but at the same time they are a restriction on trade. And any economist who believes that free markets are a good thing, in some ways has got to be against strong intellectual property rights systems.

So there’s a theoretical ambiguity in how we assess China in this.

Then the final point to make is that pretty much every country that has grown to be a successful country has engaged in some form of theft of intellectual property rights.
100-150 years ago, the worst violator in the world was the US! Before that, Germany and the United Kingdom were involved in theft of intellectual property on behalf of their own industrialists against the other side!

World Finance: Why don’t we spread the analysis across some of the other BRICs nations, and we look at free trade agreements. If we are to see the other BRICs players meet those 2050 targets, for instance: are we going to have to see more entrenchment in terms of agreements taking place with regional players?

Danny Quah: Yeah, this is a very tricky point that you make. On trade agreements within the BRICs, and from the BRICs against the rest of the world.

And you and I know that in the last 10-15 years since the development of this acronym, it’s actually China that’s been pushing the frontier on economic development for the BRICs.

So right now this concept might be seeing a little bit of tension from the deep diversity across them.

Some of the membership of the BRICs are manufacturing intensive, export-oriented. They deal a lot with trade, they want the greater degree of trade liberalisation. Some other parts of the BRICs are much more focused on developing natural resources, exploiting natural resources. Until very recently, a number of them were actually quite closed, and very much into developing their own industry, rather than looking out at the rest of the world.

So how this unfolds is going to be really interesting. And it might be that in a year or two we will realise that the BRIC age has seen its time. That we need to move on to a different kind of grouping.

World Finance: I just wanted to touch on that. Do you think that the premise of any report nowadays, being a comparative analysis of BRICs nations. Is it even a fair assessment, given how far China has come? Leaps and bounds ahead of the other nations?

Danny Quah: That’s a really good point, should we be thinking about the world of emerging markets and advanced economies in terms of these standard categories? We take the advanced economies and put them to one side. We take emerging markets and put them to one side. Then we pull a bunch of them out and call them the BRICs economies?

Perhaps it’s better to think about the world as being seamless. That there’s simply a range of gradations.

And any economist who believes that free markets are a good thing, in some ways has got to be against strong intellectual property rights systems

As we look around the world, different economies will be doing things differently. And there’s a lot to be said for a view of the world that even looking at countries might be the wrong category.

When we think about global value chains: our iPhones are designed in California, but they’re put together in China. And along the way they’ve picked up components from Kentucky, chips from Germany, technology from England, programming from Israel…

The end result is a world product. And it’s really corporations, with their global value chains, moving value across national boundaries, that we need to be focusing on. And thinking about development as simply what happens to specific nation-states might be the wrong vision.

But having said that of course, nation-states still do undertake trade policy, tariff policy, monetary policy. They have their nation’s population to look out for. So it’s a complicated world that we’re moving into, and this juncture between what happens in economic value, and what happens to the wellbeing of people is going to be something that we need to pay a great deal of attention to.

At the same time that we realise the rise of emerging markets is real. The rise of the east is real. The world’s centre of gravity has shifted to the far east. And that will happen regardless of whether we think about the world in terms of these value chains, or in terms of these nation-states. And I think it is that that we really need to be looking ahead on.

World Finance: A sobering final thought, thank you so much Professor Quah.

Danny Quah: Thank you very much.

Bonus clip 1: Will China grow old before it becomes rich?

Bonus clip 2: Are India and Brazil the BRICs outliers?