LatinFinance - May/June 2014 - 48

parting
shot
The region's policymakers have much to do if they are to
consolidate the gains of the past decade, and prosper, as
the US recovers and China slows. By Jim O'Neill

Beyond Brics
the so-called emerging markets must consider the following
questions: was their improved economic performance over the past
decade primarily a consequence of good policy interventions at
home? or was it a result of the remarkably benign monetary policy
in the US and rest of the developed world and/or a booming china
and its apparent insatiable demand for commodities?
no one knows the answers to these questions. But it is likely to
be tempting for local policymakers to claim that economic success
was all down to their own actions. But they must consider that
conclusion carefully: if they are wrong, the next decade might
be trickier than they realize. of course, for an economy that has
struggled over the past decade, the answer is easier: policymakers
know that more needs to be done to achieve a better economic
future.
there are two big external forces facing global markets today: US
interest rates and china.
as the US recovery starts to gather pace, the fed has embarked
tentatively on the beginning of the end of its super-easy monetary
policy. if the US recovery continues, or accelerates, then a less
accommodative US monetary policy is inevitable.
Policymakers at the federal Reserve are attempting to guide
markets to expect higher short-term interest rates by 2016, if not
2015. But until the world moves away from a dollar denominated
monetary system, higher US interest rates will have consequences
for the rest of the world's financial markets and, in all likelihood,
knock-on consequences for economic growth.
it won't matter if a country is pigeonholed as a so-called emerging
economy or a developed one: if it is running a persistently large
current account deficit and is not pursuing smart policies, life will
become more difficult in terms of attracting foreign financing,
especially the fast money.
the second change is in china. Hopefully, what will emerge from
the shift in its growth model is a stronger, more balanced and higher
quality economy - even if it is one that grows at 6% to 7% instead
of the 10% plus of the previous three decades. But there remains a
notable risk that china's economy becomes a much weaker one that
cannot adjust, although this is not my base case.
in any event, the days of china as a low value-added exporter
growing at 10% and gobbling up the world's commodities are behind
us. those countries and companies that were the winners as a result
of that china will not be the winners of tomorrow. this is partly why

48 l atinfina nce.com - May/June 2014

a number of so-called emerging
economies have struggled over
the past couple of years.
countries like mexico, which
find themselves much more
competitive as a result of years
of rising chinese wages and
appreciating currency, will
be winners of this new china.
examples of likely losers -
Brazil and Russia among them
- are not hard to find.
Being more competitive
versus china is not sufficient.
mexico suffered for years
from a weak US economy and
chinese competition. But for
it to be a clear winner from
the new reality, it will need to
successfully execute its broad
economic reform agenda,
especially in the energy sector.
mexico, for all the hope of the
shifting environment, grew
by less than the disappointing
growth rates of Brazil in 2013.
for the rest of latin america,
scrutinizing what drove the
region's success over the
past decade will be key. With
the exception of argentina
and Venezuela, much of the
continent seems transformed compared to 20 or 30 years ago, with
great progress in chile, colombia, Peru, as well as Brazil, despite its
recent disappointment. But close to a decade of rising commodity
prices made that apparent success easier for many to achieve. it is
now up to these countries and their policymakers to turn the gains of
recent years into something more lasting - and in doing so, to boost
the welfare of their ambitious peoples. LF

"SCrUTinizing
whaT drove
The region'S
SUCCeSS over
The paST
deCade will
be key"

Jim O'Neill is the former chairman of Goldman Sachs Asset Management
http://www.latinfinance.com
LatinFinance - May/June 2014

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