The Reality of “Emerging Markets”

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The British Empire was the largest in history. At the end of World War II Britain had to start pulling out. A major part of the reason was, ironically, the economic prosperity that had come through industrialization, massive improvements in transportation, and the advent of telecommunications, ethnic and religious respect, freedom of speech, and other liberties offered by the empire.

After the departure of the British — as well as the French, German, Belgians, and other European colonizers — most of the newly “independent” countries suffered rapid decay in their institutions, stagnant economises, massive social strife, and a fall in standards of living. An age of anti-liberalism and tyranny descended on these ex-colonized countries. They rightly got to be known as third-world countries.

The blame — at least among those on the Right — went mostly to socialism and the rise of dictators. This is not incorrect, but it is a merely proximate cause.

An armchair economist would have assumed that these ex-colonized countries, still very backward and at a very low base compared to Europe, would grow economically at a faster rate. Quite to the contrary, as time passed by, their growth rate stayed lower than that of the West.

The blame — at least among those on the Right — went mostly to socialism and the rise of dictators. This is not incorrect, but it is a merely proximate cause. Clarity might have been reached if people had contemplated the reason why Marxism and socialism grew like weeds in the formerly colonial countries.

According to conventional wisdom, the situation changed after the fall of the socialist ringleader, the USSR, in the late ’80s. Ex-colonized countries started to liberalize their economies and widely accepted democracy, leading to peace, the spread of education and equality, the establishment of liberal, independent institutions, and a massive economic growth sustained during the past three decades. The “third-world” would soon be known as the “emerging markets.”

In some ways, government regulations and repression of businesses in the “emerging markets” have actually gotten much worse.

Alas, this is a faulty narrative. Economic growth did pick up in these poor countries, and the rate of growth did markedly exceed that of the West, but the conventional narrative confuses correlation with causality. It tries to fit events to ideological preferences, which assume that we are all the same, that if Europeans could progress, so should everyone else, and that all that matters is correct incentives and appropriate institutions.

The claimed liberalization in the “emerging markets” after the collapse of the USSR did not really happen. Progress was always one step forward and two steps back. In some ways, government regulations and repression of businesses in the “emerging markets” have actually gotten much worse. Financed by increased taxes, governments have grown by leaps and bounds — not for the benefit of society but for that of the ruling class — and are now addicted to their own growth.

The ultimate underpinnings of the so-called emerging markets haven’t changed. Their rapid economic progress during the past three decades — a one-off event — happened for reasons completely different from those assumed by most economists. The question is: once the effect of the one-off event has worn off, will the so-called emerging markets revert to the stagnation, institutional degradation, and tyranny that they had leaped into soon after the European colonizers left?

In the “emerging markets” (except for China) synchronized favorable economic changes were an anomaly. They resulted in large part from the new, extremely cheap telephony that came into existence (a result of massive cabling of the planet done in the ’80s) and the subsequent advent of the new technology of the internet. The internet enabled instantaneous transfer of technology from the West and, by consequence, an unprecedented economic growth in the “emerging markets.”

Those who hold China in contempt for copying Western technology don’t understand that if copying were so easy, the rest of the world would have done the same.

Meanwhile, a real cultural, political, and economic renaissance started in China. It was an event so momentous that it changed the economic structure not just of China but of the whole world. Because China is seen as a communist dictatorship, it fails to be fully appreciated and respected by intellectuals who are obsessed with the institution of democracy. But now that the low-hanging fruit from the emergence of the internet and of China (which continues to progress) have been plucked, the “emerging markets” (except, again, for China) are regressing to the normal: decay in their institutions, stagnant economies, and social strife. They should still be called the “third world.”

There are those who hold China in contempt for copying Western technology, but they don’t understand that if copying were so easy, Africa, the Middle East, Latin America, and South Asia would have done the same. They were, after all, prepared for progress by their colonial history. European colonizers brought in the rule of law and significantly reduced the tribal warfare that had been a daily routine in many of the colonies — in the Americas, Africa, the Middle East, and Asia. Britain and other European nations set up institutional structures that allowed for accumulation of intellectual and financial capital. Western-style education and democracy were initiated. But this was helpful in a very marginal way.

For those who have not travelled and immersed themselves in formerly colonized countries, it is hard to understand that although there was piping for water and sewage in Roman days, it still does not exist for a very large segment of the world’s population. The wheel has been in existence for more than 5,000 years, but a very large number of people still carry water pots on their heads.

It is not the absence of technology or money that is stopping these people from starting to use some basic forms of technology. It is something else.

A remark often attributed to Churchill, although unverified, has more than passed the test of time: “If Independence is granted to India, power will go to the hands of rascals, rogues, freebooters; all Indian leaders will be of low calibre and men of straw. They will have sweet tongues and silly hearts. They will fight amongst themselves for power and India will be lost in political squabbles. A day would come when even air and water would be taxed in India.”

The hope that once the correct incentives are in place and institutions have been organized, the third world on a path to perpetual growth, couldn’t be more wrong.

Europeans of that time clearly knew that there was something fundamentally different between the West and the Rest, and that the colonies would not survive without the pillars and cement that European management provided. With the rise of political correctness this wisdom was erased from our common understanding, but it is something that may well return to haunt us in the near future as expectations from the third-world fail and those who immigrate to Europe, Canada, Australia, and the US fail to assimilate.

For now, the hope among those in the World Bank, the IMF, and other armchair intellectuals has been that once the correct incentives are in place and institutions have been organized, imposed structures will put the third world on a path to perpetual growth. They couldn’t be more wrong.

The cart has been put in front of the horse. It is institutions that emerge from the underlying culture, not the other way around. And a cultural change is a millennia-long process, perhaps even longer. As soon as Europeans quitted their colonies, the institutional structures they left started to crumble. Alas, it takes a Ph.D. from an Ivy League college and a quarter of a million dollar salary at the World Bank or IMF not to understand what is the key issue with development economics and institutional failures: the missing ingredient in the third world was the concept of objective, impartial reason, the basis of laws and institutions that protect individual rights. This concept took 2,500 years to develop and get infused into the culture, memes, and genes of Europeans — a difficult process that, even in Europe, has never been completed.

European institutions were at roots a product of this concept. Despite massive effort by missionaries, religious and secular, and of institutions imposed on poor countries, reason failed to get transmitted. Whatever marginal improvement was achieved over 200 to 300 years of colonization is therefore slowly and surely being undone.

Without reason, the concepts of equal law, compassion, and empathy do not operate. Such societies simply cannot have institutions of the rule of law and of fairness. The consequence is that they cannot evolve or even maintain the Western institutions that European colonizers left behind. Any imposed institutions — schools, armies, elections, national executives, banking and taxation systems — must mutate to cater to the underlying irrationalities and tribalisms of the third world.

Alas, it takes a Ph.D. from an Ivy League college and a quarter of a million dollar salary at the World Bank or IMF not to understand what is the key issue with development economics and institutional failures.

In these “emerging markets,” education has become a dogma, not a tool; it floats unassimilated in the minds of people lacking objective reason. It has burdened their minds. Instead of leading to creativity and critical thinking, it is used for propaganda by demagogues. Without impartial reason, democracy is a mere tribal, geographical concept steeped in arrogance. All popular and “educated” rhetoric to the contrary, I can think of no country in the nonwestern world that did well after it took to “democracy.”

The spread of nationalism (which to a rational mind is about the commonality of values) has created crises by unifying people tribally. The most visible example is what is happening in the Middle East, but the basic problem is the same in every South Asian and African country. It is the same problem in most of South America. India, the geographical entity I grew up in, has rapidly been collectivized under the flag and the anthem. It might eventually become the Middle East on steroids, once Hindutava (Hindu nationalism) has become well-rooted.

In Burma, a whiff of democracy does not seem to have inhibited Buddhists’ genocide against the Muslim Rohingya. Thailand (which wasn’t colonized in a strictly political sense) has gone silent, but its crisis hasn’t. Turkey and Malaysia, among the better of these backward societies, have taken paths of rapid regression to their medieval pasts. South Africa, which not too far in the past was seen as a first-world country, got rid of apartheid, but what it now has is even worse. The same happened with Venezuela, which in the recent past was among the richer countries of the world. It is ready to implode, as may Brazil one day. Pakistan, Bangladesh, Nepal, and East Timor are acknowledged to be in a mess, and are getting worse by the day. Indonesia took a breather for a few years and is now again on the footprints of fanaticism. India is the biggest democracy, so its problems are actively ignored by the Western press, but they won’t be for long, as India continues to become a police state.

The spread of nationalism has created crises by unifying people tribally.

Botswana was seen as a country whose growth was among the fastest for the longest. What was ignored was the fact that this rather large country has a very small population, which benefited hugely from diamonds and other natural resources. The top political layer of Botswana is still a leftover from the British. The local culture continues to corrode what was left by them, and there are clear signs that Botswana is past its peak. Papua New Guinea was another country that was doing reasonably well, before the Australians left. It is now rapidly regressing to its tribal, irrational, and extremely violent norm, where for practical purposes a rape is not even a crime.

The world may recognize most of the above, but it sees these countries’ problems as isolated events that can corrected by a further imposition of Western institutions, under the guidance of the UN or some such international (and therefore “noncolonialist”) organization. Amusingly, our intellectual climate — a product of political correctness — is such that the third world is seen as the backbone of humanity’s future economic growth.

Unfortunately, so-called emerging markets are headed for a chaotic future. The likeliest prospect is that these countries will continue catering to irrational forces, particularly tribalism, and that they will consequently cease to exist, disintegrating into much smaller entities. As their tide of economic growth goes out with the final phase of plucking the free gift of internet technology, their problems will surface rapidly, exactly when the last of those who were trained in the colonial system are sent to the history books.




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Comments

Vikram

Only jayant you can write a class article like this one. Congratulations.

Dave

As usual, Jayant Bhandari has produced an interesting article. But I think his claims that "a cultural change is a millennia-long process, perhaps even longer", and "I can think of no country in the nonwestern world that did well after it took to 'democracy.'" may be over-generalized. Consider, for example, the recent history of the Korean peninsula, whose northern and southern regions seem to have evolved politically, economically, and culturally in quite different directions over a span of only several decades of separation. Or Germany and Japan, whose societies are now fairly peaceful, prosperous, and democratic, but have in the not so distant past endured fanatical and militaristic dictatorships supported apparently by significant fractions of their populations.

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