Saturday, January 16, 2010

Nevermind the BRICs, Here Come the MAVINS

What does being an emerging market mean? The definition seems amorphous. When Jim O'Neill coined the term BRICs back in 2001, he had in mind demographic and financial blocs in developing or transitional economies that were vast and growing. This definition was relaxed to include countries that had "caught up" with advanced economies such as South Korea and Gulf Cooperation Council members.

As the Great Recession turns into the Great Recovery, the converging economies seem to be compensating for the somewhat stagnant growth experienced by most of the developed world. Market analysts at Bloomberg have now coined a new term, MAVINS, referring to Mexico, Australia, Vietnam, Indonesia, Nigeria and South Africa. These six countries are going to be the BRICs of the new decade.

For policy analysts, the question posed by these forecasts is, how durable are these growth narratives? Recently a prominent shortselling market analyst predicted the imminent bursting of the asset bubble in China. It seems that China could repeat the post-dot com folly of the US Federal Reserve in easing monetary policy too long. It was reported this week that China was unwinding much of its stimulus to avoid such a tragedy, but doubts continue to linger.

More fundamental is the question regarding how suitable the institutional frameworks are for some of these emerging economies. China and Vietnam have taken a similar path to development that most of East Asia took from the 1950s to the 70s - a path different from the Anglo-American model built on the institutional building blocs of property rights, rule of law and democratisation.

Some have argued that to take such a quantum leap in such a short span of time (as opposed to centuries which is how long it took in the West) required experimentation using different tools. The impoverished countries of the East could not afford to enforce a system of property rights and the rule of law to foster impersonal contracting, the basis for market-based transactions, so they instead relied on more paternalistic (read: authoritarian) forms of development, i.e. the Development State. Here is a video stating this argument.

This development strategy only takes these countries so far, so the counter argument goes. Unless these emerging economies, China and Vietnam, adopt reforms in their courts and legal system to strengthen contract and property rights, their growth will eventually slow.

So far, it does not seem like the Communist leaders in either country have signalled any intention to go down that path, so I suppose the theory of sustained growth contingent on second stage reforms posited above will be tested soon.

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