JIM O'NEILL: It's A Mistake To Think The Fed Has A Major Impact On The Emerging Markets

Many who play the financial markets are confusing two things: the consequences of the beginning of the end of the Federal Reserve Board’s easy monetary policy; and the policies and issues which drive long-term sustainable growth in many economies.

It should be no surprise that, as markets start to believe that the Fed’s degree of accommodation is turning, there will be consequences for all financial markets, especially ones sensitive to interest rates. That includes markets in the emerging world. Indeed, economies which have been indirectly benefiting from a period of sustained easy money in the US – covering up their own shortfalls, including balance of payments, current account imbalances and domestic savings shortfalls – are likely to see trickier times.

In the emerging world, this is probably relevant to two of the four BRIC economies, Brazil and India, as well as a number of others, perhaps including Turkey. This should not be confused with their own long-term economic outlook or financial markets. Ultimately, their growth will depend on what they do in terms of their demographics and productivity; the Fed’s monetary policy will have very little impact.

It is close to 12 years since I created the BRIC acronym and nearly a decade since my colleagues and I began examining what the world would look like by 2050. These long-term projections were driven over five yearly intervals by their likely demographic trends and assumptions we made about their productivity.

We made no assumptions about any financial market developments or monetary policies, although it was quite clear to us that there would be profound consequences for the world markets from the emergence of the BRIC and so-called Next 11 economies: the group of the 11 next largest economies by population after the four BRIC countries.

In the first decade of BRIC life their actual growth was much stronger than we had anticipated, as I showed in my book, The Growth Map. In a forthcoming book, I will show that in this decade, 2011-2020, the growth of the BRIC economies will probably be slower than in the last, but growth in the N11 economies is likely to be stronger.

The world economy could grow by more than in the past three decades, even with the BRIC countries growing by less – not least because their impact, especially that of China, will be much larger. As I have said in previous columns, if China grows by 7.5pc, this will be effectively the same impact as if the US grew by 4pc.

A fortnight ago I made a very short visit to the state of Gujarat at the invitation of its chief minister, Narendra Modi, and was asked to give my thoughts on India’s long-term potential. I referred to a 2008 paper on 10 key things India must do to fulfil its potential; it is striking how few of those things have been done. That could be interpreted as showing that India will never reach its potential, but it could also mean that, if it moves in the right direction, it can still achieve much stronger growth – stronger even than the 7pc to 8pc I am assuming for this decade.

I returned home thinking that it might do so and plan to update that paper with input from some of the world’s top experts, presenting specific targets for Indian policymakers. Around half of them are pretty applicable to much of the emerging world, and if progress is made in these areas, then the world’s future will be much healthier, regardless of what happens to US monetary policy.

The first task is perhaps the toughest and that is its governance. I heard Mr Modi’s great slogan: “More governance, less government.” In some ways, this may be at the heart of the protests in Brazil and even Turkey. Their citizens don’t want bigger governments that squander public resources; they simply want their governments to provide an environment for a better life. Many of these countries need to improve their leadership in terms of deliverability and accountability.

A second requirement is for better educational outcomes, at both the most basic and more sophisticated levels. In an age of information technology, there is no excuse for any of our children not to be given access to a basic education. All major emerging economies should set themselves a 10 to 20-year target of having the number of top-class, internationally recognised universities that their share of global GDP would imply.

In terms of macroeconomic policy, many of these countries are in better shape than India and don’t have much to learn from the rest of us about targeting low, stable inflation and low, sustainable public finances. Some of them need to boost their share of global trade and most are trying to do this.

A third goal is to boost their infrastructure, both physical and in terms of modern technology. Many people ask: what is the purpose of the BRICS Development Bank? One answer should be to concentrate on targeted infrastructure improvements in all their economies, targets that can be assessed by their people and have a dramatic impact on their efficiency.

I am sure there are many other things each of the major emerging economies also need to do, but if targeted progress could be achieved in each of these areas, then I suspect the great era of emerging economic growth is not ending, but just beginning.

South Korea is an example to many in the emerging world about how to move beyond the middle-income trap. This is especially applicable to the likes of Brazil and Turkey at the moment. One day we may look back on this turbulence as a mere stepping stone on their paths to future greatness.

Jim O’Neill is former chairman of Goldman Sachs Asset Management and chairman of education charity Shine (wwwshinetrust.org.uk)

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