Advanced economies still have global sway

The latest Fund Strategy has a comment by me on the current popularity of developing countries among investors.

Everyone seems to be interested in emerging markets. People who a few years ago would not know Bhutan from Bolivia seem ready to invest in exotic places.

It is not hard to explain the growing popularity of emerging markets. Developing economies are growing far more rapidly than those of the West and their stockmarkets are generally performing well.

Moreover the recent bout of market volatility generally affected emerging markets less than those of the west. It should also be remembered that the credit crunch started in America, the world’s largest economy and arguably its most developed nation. It is a long way from 1997-8 when the global financial crisis was centred on Asia.

The growing importance of developing economies is underlined in the latest World Economic Outlook from the International Monetary Fund (IMF). It points out that, for the first time ever, China was the largest contributor to global growth in the first half of 2007. America was relegated to second place by the Asian giant. In addition, over half of global growth was accounted for by China, India and Russia combined.

Such changes are transforming the world. What was previously known as the third world is becoming an increasingly substantial part of the global economy. The key developing economies are no longer primarily agricultural producers (although many people still live in the countryside). They are often large manufacturers and many are highly urbanised.

However, it would be wrong to write off the developed world. The bulk of economic activity, and indeed manufacturing, is still located in the West.

Statistics for GDP at purchasing power parity, widely quoted nowadays, exaggerate the importance of developing economies. If GDP is measured at market exchange rates, which is better basis for comparison, the West is still larger.

It is also important to recognise that the recent growth of developing economies is not as autonomous as it seems. It is true, for example, that East Asia is becoming more integrated as a region. There are growing trade and investment links within the area. However, many of its final products end up in the developed world and America in particular. An American slowdown would not be a disaster but it would have a significant effect on developing countries.

Developing economies are becoming an increasingly important part of the world. But it would be premature to downplay the remaining influence of the advanced economies.