Countries Poised for Economic Supremacy?

Developing countries like Brazil and South Korea – which were economic basket cases as recently as the late 1990s – will lead the world in growth for the next several years. The traditional economic powers – Western Europe, Japan, the United States – are in for stagnation or worse.

That's the forecast of Nenad Pacek, regarded as one of the world's leading authorities on emerging markets. He spoke at an event March 3 at the University of Notre Dame's Chicago Commons.

Pacek, former research head at The Economist Group (publisher of The Economist magazine), is founder and president of Global Success Advisors Ltd., based in Vienna. He served as principal speaker at Emerging Strategies for Emerging Markets, a professional-development event for Chicago-area alumni and friends of Notre Dame's Mendoza College of Business.

Pacek offered Notre Dame alumni a long list of suggestions for doing business in emerging markets in Asia, Latin America, Eastern Europe and other areas. But first he compared the economic fundamentals facing different parts of the world.

A "tectonic shift" in power is under way, he said.

Western Europe, Japan and the United States, which together account for almost 70 percent of the world's gross domestic product (GDP), are in for slow growth as they continue to recover from what he called the "largest credit bubble in history," 2003-07, and subsequent economic crisis.

Pacek said countries in which public debt amounts to 60 percent or more of GDP are inevitably forced into "deleveraging" by raising taxes and cutting government spending. That depresses economic activity.

The average public debt among the European Union countries, he said, is almost 90 percent of GPD with the only bright spots being in Scandinavia. In the United States, public debt amounts to about 70 percent of GDP, he said.
In Japan it's 240 percent.

"The only countries worse are Zimbabwe and St. Kitts and Nevis."

By contrast, the aggregate rate for emerging markets in Asia is about 33 percent, he said, which is one reason why he expects Asia to outperform "just about any region" going forward.

"You might be wondering, ‘Well, we've seen this before. Remember 1990? Everything was great – Asian tigers, nothing can go wrong.' In 1997, of course, everything crashed except China."

That's unlikely to happen this time, he said, because the fundamentals have changed so much. Besides reducing their debt dramatically, the Asian economies collectively hold over $500 trillion in foreign-exchange reserves. That's compared to about $500 billion in 2000, a tenfold increase.

The "tigers" also addressed their problem with indebtedness to foreign countries. Pacek said a country is considered to be at risk for defaulting when its foreign debt reaches 69 percent of GDP. In Asia today, the aggregate rate is 17 percent, he said.

Like Asia, Latin America went through its own economic crises in the 1990s. Mexico's economy collapsed in 1994 and Brazil's in 1999. Today, Pacek said, most Latin American countries' fundamentals are so strong they could qualify for admission to the European Union. Among current EU members, only Luxembourg and Finland can say the same, he said.

That role reversal can be traced back to the credit-bubble years, Pacek explained. While developed countries like the United States were borrowing and spending like mad in the past decade, the developing world was saving and growing out of its debt.

"So in both Asia and Latin America they don't have a need to deleverage, they don't have a need for taxation or to cut spending. It's all about growth in many of those economies."

Pacek predicted emerging markets will outperform the developed world by a ratio of 3- or 4-to-1 on average for the next several years. The consultant to more than 200 of the world's largest companies also said a "very strong corporate consensus" has emerged that developing markets offer the best prospects. Some companies expect "75 to 85 percent of their growth" will come from emerging markets, he said.

Not only are most countries in the developed world facing a disadvantage in terms of public debt and foreign-exchange reserves, but they can expect increasingly fierce competition from developing countries. And not just on price. Quality is also rapidly improving.

"It's not just counterfeit Louis Vuitton bags and Rolex watches, he said. Companies in the developing world are making inroads into markets for sophisticated products like pharmaceuticals, earth-moving equipment and health-care devices, he said.

"People were laughing at Samsung (electronics, Korea) 10, 15, 20 years ago. Nobody's laughing anymore."

One of the panel discussions following Pacek's talk included Shephard "Shep" Hill, president of Boeing International and vice president of business development strategy for The Boeing Company. Pacek asked Hill if, besides China, he saw competitors in Brazil, Russia or any other countries coming after the aircraft manufacturer's business in the next decade.

"They're all coming," he answered without missing a beat, drawing a chorus of laughter.

"They're all coming for the same reason we're in it: large markets, skills, good jobs…. So we see China, because they have a huge market themselves that they can sell into, they've made it a national priority. They have a lot of money and a skilled populace, so they can get into it. They launched humans into space in about half the time we anticipated, so it's ‘game on' there.

"The Brazilians are already … building very, very capable regional jets. You all fly on them everywhere…. Now they'll eke up into the 737 class, and that's a business strategy – do you partner, do you co-op? You have to do something because they're coming.

"And the Russians certainly have the skills and the capability to do it. They don't quite have the domestic market to give them that impetus yet, but they'll be there, and other people will be there, too."

The Emerging Strategies for Emerging Markets event was hosted by the Mendoza College of Business and sponsored by Aurora Investment Management and Equity International.

Other discussion panelists included Carolyn Woo, dean of Mendoza; Gary Garrabrant, chief executive officer, Equity International; Scott Malpass, Notre Dame vice president and chief investment officer; James Diemer, managing director, Pace Global Energy Services; Dan Keegan, global head of electronic execution sales, Citi; and Anne Fiero, founder and principal, The Fiero Group.