Emerged Economies

In the post-recession era, developing countries have come out on top. And they're going to stay there.

This week's G-20 summit, which begins today in Seoul, will have to acknowledge that the old conventional wisdom no longer holds true -- in the post-recession era, developing countries will steer the global economy, while the developed world takes the economic back seat. It's a major shift in the world's balance of economic power, and managing it is going to demand some deft policy moves from countries not known for their technocratic prowess.

The rise of the rest is not likely to be a temporary blip, a product only of the financial crisis. We are in fact at a major historical inflection point. Five long-term trends explain why.

First, over the last decade, emerging economies have generally put their balance sheets in order. This will make them magnets for some of the new, massive savings that advanced economies will be forced to accumulate. But whereas the massive southbound capital flows of the early 1980s precipitated a series of debt crises, this time the money won't go to bankrolling bloated fiscal deficits in emerging economies. Governments in many of these countries are sitting on surpluses, after all. Instead, the money will pay for productivity-enhancing infrastructure investments, much of it initiated by private companies.

Second, it's becoming cheaper for emerging economies to acquire, adapt, and adopt industrial technologies. These countries can now enter the industrial supply chain, if at a relatively lower rung. Take cars: For now, Japan makes the "electronically controlled, continuously variable transmission," China stamps the steel, while Vietnam makes the tires, and all countries benefit.

Third, the new middle classes of the emerging economies are teeming. China's grew by 400 million in the past 30 years. Soon Brazil's and India's middle classes will match that rate of exponential growth. This won't just be about larger demand for TVs, cars, and apartments. As is already happening in many Latin American countries, it will also shift the political game toward the center, limiting the risk of sudden changes in policy course.

Fourth, emerging economies are increasingly seeking to trade with one another. A free trade agreement with the United States or Europe is no longer seen as a sure-shot ticket to faster development. You also need entry into China, India, and other up-and-coming markets. South-south trade is powering new economies of scale and scope.

And, fifth, natural resources have finally proved themselves to be more blessing than curse: Professional central bankers and more stringent independent watchdogs are ensuring that the influx of money isn't feeding government corruption or otherwise going to waste. NGOs are helping to ensure that the environment isn't sacrificed in the search for more natural resources.

Meanwhile, G-7 countries face a horizon of high unemployment, depleted house values, timid consumers, heavy public debt, stagnant growth, limited international coordination, and almost no policy levers left to pull.

So while advanced economies are in a state of quasi-terminal lethargy, the developing world has been given a shot of adrenaline. But it's an open question what they'll make of it. The old playbook no longer applies: Policymakers in emerging economies will have to develop and pursue a new economic orthodoxy. No longer can they take their cues from their colleagues in the so-called First World.

Imagine, for instance, that you are a finance minister in a developing country. While your peers in London, Paris, and Washington desperately need more revenue and less expenditure, your country probably came out of the crisis with a relatively strong fiscal position, especially if it is commodity-rich. They worry about the pain they are causing with austerity; you worry how to use your plentiful cash. Their priority is quantity; yours is quality.

Slowly but surely, developing countries are learning to save for hard times by putting in place smart, countercyclical policies. Politicians have finally converted into true believers. Leaders are learning that their popularity soars if they save enough money during good times to spend it when things go south. (Chile's former president, Michelle Bachelet, is the prime example of this: She dramatically turned around her declining approval rating by cushioning the initial impact of global economic turmoil with funds accumulated previously.)

Free trade orthodoxy has also been turned on its head. The 2008-2009 crisis proved that free markets are more volatile than once thought. In two years, the volume of world trade fell by a third. International production networks carried the recession contagion at staggering speed from country to country.

Naturally, calls for assertive trade policy have since gotten louder. The question is: What kind of intervention will it be? Public policy will, in most developing countries, take an enlightened path. Call it "export-led growth 2.0." A giant premium will be put on diversification, not only of partners but also of products, as an insurance against volatility. "Innovation" will be the new buzzword in global trade. To maintain the sustainability of their export-led growth models, emerging economies will push internal reforms that promote new industries, including incentives from research and development to increased investments in higher education.

Poverty-reduction policies demand the most change in the years ahead. There is a budding consensus -- amply corroborated by the crisis -- on what reduces poverty: fast and sustained growth (more jobs), stable consumer prices (no inflation), and targeted redistribution (subsidies only to the poor). Poverty fighters in the developing world will focus on all three, but most of all on providing for better jobs. Not just any jobs will do: What matters in reducing poverty is not just the number of jobs, but their productivity. This, of course, points toward a broader agenda of reforms to make their economies more competitive.

Developing countries are also experimenting with more finely tuned social programs. Over the last 10 years, 30 developing countries have set up mechanisms to transfer cash directly to the poor via their cell phones. They now know their poor by name. This kind of state-citizen relationship proved a blessing to cushion the impact of the global crisis -- forestalling social unrest in Mexico, for example. It will also continue to make social expenditures more efficient, with smarter design and less duplication.

In sum, if they further develop these sensible, new policies, many developing countries will break out of their "developing" status entirely. Such hopes should be tempered, though. Before the Great Recession, the developed world -- as well as the economics profession -- was confident it had laid a permanent foundation for never-ending prosperity. Now, those countries will have to depend on the developing world to pull them out of crisis. That's a smart strategy for now, but what works today will not necessarily work tomorrow.


The Indonesia Opportunity

Why this Southeast Asian country is Obama's best hope for relations with the Muslim world.

After three previous cancellations, U.S. President Barack Obama has finally made his long-overdue visit to Indonesia, where he lived for four years as a child. The trip provides the perfect venue to use his personal history to reset an engagement strategy with international Muslim communities that has proved strikingly deficient.

Indonesia is not only the fourth-most populous country in the world, it is also the nation with the largest Muslim population -- larger than Egypt, Iran, Iraq, Saudi Arabia, and Syria combined. Indonesians have traditionally practiced a moderate form of Islam while, more recently, also committing to modern democracy. Indonesia's strong economy quickly shrugged off the global recession and is forecast to grow 6.3 percent next year, according to the Asian Development Bank. Indonesians are proud of Obama's personal ties to their country and remember the compassionate American response to 2004's devastating tsunami. Indonesians continue to give high favorability and confidence ratings to the United States (59 percent) and Muslim Indonesians to Obama personally (65 percent), according to the Pew Research Center.

In other Muslim countries, however, disappointment with Obama reigns. His speech last year at Cairo University promised a new beginning between the United States and Muslims around the world, one based on mutual interest and mutual respect. The implication was that George W. Bush's offending policies would be set right and a more sensitive nomenclature deployed. Gone were such phrases as war on terror, war of ideas, and violent Islamic extremism.

Nevertheless, only a year after the speech, Pew found that U.S. favorability in Egypt, the largest Arab country by far, had dropped from 27 percent to 17 percent -- five points lower than it was during Bush's final year in office. In Jordan, it dipped from 25 percent to 21 percent. The proportion of Muslims who felt confident in Obama fell in all seven countries polled by Pew.

A survey by Zogby International, released by the Brookings Institution in August, was even worse. In April and May 2009, 51 percent of the respondents in the six Arab countries polled expressed optimism about U.S. policy in the Middle East. A year later, the figure had dropped to 16 percent. Clearly, Arabs especially have been disillusioned by Obama's inability to make headway toward peace between Israelis and Palestinians, and by what they perceive as continuity between Bush's policies in Iraq and Afghanistan and those of the current White House.

None of these developments should have come as a surprise. Perhaps people in the Middle East, like many Americans, feel disappointed because they were oversold on Obama's abilities or simply saw him as a blank slate on which they could write their own hopes.

Much of the blame, however, rests with Obama's strategy. His main point in Cairo was that he was breaking with the past, with no concrete admission that U.S. interests would persist and no attempt to advocate for the importance of America's presence and values in the world. His expectation was that increased popularity would translate into policy breakthroughs.

Unfortunately, the breakthroughs did not materialize, and Obama has achieved little. His biggest mistake was a failure to reframe the corrosive narrative of the West being at war with Islam that continues to threaten Americans and keeps Muslim communities from achieving great potential. In a September PBS interview, former British Prime Minister Tony Blair said that the powerful narrative that Islam is under oppression from the West, that the West is hostile, has become embedded in the Muslim imagination -- not just among a violent minority but among a peaceful but hostile majority.

More importantly, the president has not challenged Muslims to confront the pervasive narrative that the West is trying to destroy Islam. The real story is that Islam is being rent by two internal struggles. The first and most obvious is the attempt by a ruthless, intolerant group of violent extremists to impose its version of Islam on other Muslims. The second struggle is political -- a desire for freedom, democracy, and women's rights -- that is being thwarted by both violent extremists and authoritarian regimes.

The United States has a vital stake in the outcomes of both these struggles. Obama should not merely describe and promote them as a way to deflect the pernicious power of the dominant narrative. He should also say clearly that, while these are conflicts within Muslim communities, America is on the just side in both cases. And moreover, the United States will support Muslims and governments that join these battles -- standing up forcefully against violent extremists and defending individuals' rights and freedoms, including by pressuring America's nondemocratic allies for meaningful political change.

This is why Indonesia proves so important now. As a modern democracy that has taken strong and smart counterterrorism steps against violent Islamist extremists in its midst, Indonesia has proved that Islam and democracy can coexist and that modernity and moderation are possible in the world's most populous Muslim country.

These are the shared values that the United States should laud, support, and defend. Favorable poll ratings should not be an end of foreign policy but a means. Even if people don't like the United States, we can all share, in Obama's words, mutual interest and mutual respect. The mutual interest, in this case, is that tolerant Islam prevails over a bloodthirsty minority and that freedom prevails over oppression.

The mutual respect is on display in Indonesia, and it is refreshing to see a U.S. president welcomed warmly in Jakarta. We hope that Obama will use his popularity to send a clear and consistent message to the Muslims of Indonesia and around the world -- challenging them to engage in the internal struggles that affect them most directly, and committing the United States to being their steadfast ally.