18 Mar 2014 | Tony Leon | Original Publication: BDlive
Indonesia, like South Africa,
has recently fallen out of favour with investors, writes Tony Leon
ABOUT two years ago, the consensus was that vibrant emerging market
economies were "enjoying" a better financial crisis than the
declining old economies in Europe and the US.
And then there was China, the world’s second-largest economy, the tide
that lifted all boats in the resource-exporting world, including our own. It’s
a classic "meme", or a concept or intellectual fad promoted to
prominence by economists, pundits and phrase-makers. And, as with other
examples of conventional wisdom, they usually require revision before long.
Happily or not, we still have some believers in the fading meme, such as Trade
and Industry Minister Rob Davies. Only this past week, he again drew attention
to the rising figures in our trade account with China, Asia’s dragon economy.
But writing this column on a ship cruising Southeast Asia provides a
different perspective. The front page in last Wednesday’s Asian Wall Street
Journal, for example, sounded a wake-up call on what Ruchir Sharma, head of
emerging markets and global macro at Morgan Stanley, calls the
"fundamentally impermanent state of global competition", and the
shifts in the world economy as well.
The article, titled "Stocks drop on anxiety about China",
provides a laundry list of gloomy data softening the dragon’s roar: the
Shanghai composite index recorded its biggest drop since last June, making it
the second-worst performing market in Asia after Japan. This in turn reflected
the price of copper, the commodity most closely tied to the fortunes of the
Chinese economy, falling to an eight-month low. As the Journal put it:
"Global investors are taking a dim view of the recent data about the
world’s second-biggest economy." This includes dramatically slowing
exports, a weakening manufacturing sector and alarm in the country’s financial
sector after a Chinese company recorded the country’s first default on a
corporate bond last week. Even China’s famed export sector recorded a big hit
when last month’s exports fell 18.1% from a year earlier, leaving the country
with a rare trade deficit.
Of course, China has a lot of residual firepower, not least its
megareserves. But the jury is still very much out on how successful it will be,
in such difficult economic circumstances, in retilting its economy from an
export-led growth model to a more consumption-driven internal market one.
My trip between Singapore and Jakarta, Indonesia, was less than 1,000km,
and yet the difference between these two Southeast Asian nations is as vast as
their difference in size. In the first city, you have consumer temples of first
world order, bling and opulence, and in the other, the chaos of traffic-choked
streets, crumbling infrastructure and a human tidal wave of about 10-million.
Indonesia, like South Africa, has recently fallen out of favour with investors.
It has a vast population (250-million) and abundant natural resources. Economic
growth of more than 5% a year on average for more than a decade, and burgeoning
exports, caused it to be hailed as an emerging economic superstar.
But the narrative changed because the economic script did.
From 2011, it followed a course we know only too well at home: its
current account went into deficit, followed by the trade balance and then the
currency: the Indonesian rupiah became the worst-performing currency in Asia in
2012, raising the cost of imports and inflation in a country whose economy is
largely consumption-driven.
Little wonder, then, that South Africa and Indonesia found themselves in
the same bad company in January, when Morgan Stanley bracketed us both in the
"Fragile Five" — nations overdependent on foreign currency inflows to
prop up their accounts and consequently vulnerable to their outflow. Neither is
helped by domestic populist pressures this year, which is an election year for
both.
But Indonesia’s finance minister put his finger on the problem of
political management. Muhammad Chatib Basri explained that "bad times make
for good policies and good times make for bad policies". Productive
reforms usually happen when the economic going is tough. If you think back to
the introduction of the Growth, Employment and Redistribution strategy, for
example, it was a run on the rand that precipitated it.
The insight provided by Sharma, who wrote the book Breakout Nations, is
profound. The trick to escaping the trap of flavour-of-the-month economies, he
notes, is to maintain good policies even when times are good. In other words,
be long-term in your approach and always consistent.
But, he says, only about a dozen countries since the Second World War
have moved from underdeveloped to developed, proving just how difficult a leap
it is. He also notes that the star economies share another trait: "A
charismatic political leader who understands economic reform and has the
popular mandate to get it enacted." Are there any candidates in South
Africa who fit this bill?
• Leon is the author of The Accidental Ambassador
(Pan Macmillan). Follow him on Twitter: @TonyLeonSA OR on Facebook: facebook.com/TonyLeonSA
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