As the economic crisis fades in the rearview mirror, some analysts on Wall Street and in Washington expect the world economy to enter a supercycle, a prolonged global growth spurt powered by the emerging markets. This isn't just some fringe theory: The "Super-Cycle Report" by Standard Chartered Bank posits that world GDP will double in the next two decade as a result of "industrialization and urbanization of emerging markets and global trade." The sentiment was widely shared among the attendees of the latest World Economic Forum in Davos, Switzerland, and among such heavyweights as Goldman Sachs and PricewaterhouseCoopers. Emerging markets, rising to make up half the world economy by 2017, are expected to pull the sluggish, debt-laden advanced economies -- United States, Europe, and Japan -- along. In this bifurcated world, the emerging juggernauts such as China, South Korea, and India will decouple from the advanced nations, relegating the mantra "when the U.S. economy sneezes, the world catches a cold" to the ash heap of history.
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But last week's IMF governors' spring meetings and the G-20 finance ministerial in Washington tell a very different story. Rather than celebrating a global liftoff, countries are wrestling with familiar global letdowns, from deepening global imbalances to China's currency manipulation and soaring U.S. public deficits. The depressingly familiar policy agenda belies the supercycle hype. Rather, it suggests that emerging economies remain unsafe from flu in America and unable to power the world economy on their own.
Granted, emerging markets are due to grow almost thrice as fast as the advanced economies in 2011, according to IMF forecasts. They seem light-years away from the massive debts, currency crashes, and hyperinflation of the 1980s and 1990s. Now armed with historic reserves and led by pragmatists rather than populists, they appear stable and sound. Their corporations are globalizing; their financial markets are growing sophisticated; and with a few exceptions, their politics look orderly, with regular transitions of power instead of the coups and chaos of past decades. For all the gripes about the "Washington Consensus," developing countries have more or less followed its prescriptions and gained dramatic health benefits.
But the idea of a supercycle driven by emerging economies is tenuous. The American consumer is still the pivot of the world economy. IMF research shows that consumer demand in emerging economies is too limited to offset dips in U.S. consumption. At about half of GDP, China's savings rate is among the world's highest. Beijing's glossy new five-year plan promises to expand household spending power, but consumption, now at some 36 percent of GDP, will in the best of scenarios rise to only 45 to 50 percent of GDP between now and 2025, well below that of advanced nations and such emerging economies as Brazil and Mexico. Similar trends hold across emerging East Asia. No wonder regional governments stick to their export-led growth models and keep their currencies artificially devalued, paying lip service to the G-20 rebalancing agenda.
Add to this rising oil and commodity prices, and global imbalances are heading toward their pre-crisis levels, risking trade protectionism and a new global economic crash. No one would escape such a debacle; rather than diverging, the fortunes of the emerging and advanced economies are converging. Their trade and financial ties are deepening, and their business cycles have only become more coupled: The correlation of advanced- and emerging-market outputs has tripled over the past decade. Emerging markets weathered the crisis not because they were decoupled from the advanced nations but because of their reserve buffers and improved macroeconomic fundamentals.
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