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A visitor to any boardroom of a consumer product multinational during the past decade would hear a droning policy consensus that growth was over in Europe, America and Japan; future business expansion would depend on aggressive investment in emerging markets in Asia and Latin America. This was the policy view that drove companies, such as Unilever and Diageo to direct billions of dollars of marketing investment south and east rather than north and west. The geographic focus has not changed, but the image at the end of the policy telescope has become a little less sharp. Some investors are wondering whether the world could again be about to turn turtle.
Unilever gave a signal in July when it reported a slowdown in the rate of growth of its Indian business, Hindustan Unilever, and the company gave warning of a weakening in the expansion its emerging market businesses. Meanwhile Diageo, the drinks combine, reported that weakness in its Asian and African businesses was being compensated for by a renewed enthusiasm for Scotch whisky in America. This slowdown may not be just a blip; according to Capital Economics, a recent analysis of PMI data from emerging markets shows the lowest rate of expansion since 2009. Their economists reckon that the BRIC growth phenomenon peaked in 2010, and that the rate of growth of the emerging economies is down from 9 per cent to an annualised rate of 4 per cent. It's not just the credit squeeze in China but slower growth in Brazil, India and Russia, markets that were once touted as potential drivers of the future global economy.
If this is true, a lot of mindsets need to change in boardrooms. The Wall Street Journal reports that Bridgewater, a major private equity house, reckons that the old developed world of the U.S., Japan and Europe is now contributing 60 per cent of the extra dollars that will make up a $2.4-trillion (U.S.) global economic expansion anticipated by Bridgewater this year. American and Japanese recoveries are making the difference, along with a tentative shift towards growth in Europe. The question is whether the beginnings of recovery in the older economies will prevent a slump in the emerging world.
That depends on a great many structural and political changes happening very quickly in what are still fragile societies. Do we believe that China will easily shift from a manufacturing, export-driven economy to a sophisticated consumer and service-oriented economy, and can that happen without major political reform? Will India be able to build the energy and transport infrastructure it needs for continued economic expansion, and can Brazil satisfy the aspirations of its expanding population without a return to hyperinflation and slump?
The answers to these questions all point to structural reform and the ability of governments to resist the temptation to pander to the kleptocratic elites that dominate emerging economies. They will have to focus on efficient administrations, the rule of law and the empowerment of the middle classes. It is the political stuff that made the economic expansion of the West possible, and which we still wait to see in the East and the South.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights .