Hot emerging markets? The curious case of the Philippines and Mexico

The Aquino administration has very good press these days—outside the country.  In two major international publications, the Philippines under President Aquino has been the toast and talk of the town.  In early February, Keith Bradsher recently gave a heads up in a much-read New York Times piece where he wrote: “Political analysts say that his administration has fought and reduced the corruption that played a role in holding the Philippines back. In one practical measure of that change, the country has been able to pave more roads per 100 million pesos in spending (about $2.2 million) than before — when funds were lost to corrupt officials and incompetence — finally addressing an impediment to commerce.”

At around the same time, Karen Brooks, writing in January/February issue of Foreign Affairs, claimed that it is no longer Indonesia but the Philippines, “the region’s other archipelago, that is now providing the biggest upside surprise. The Philippine economy expanded by 6.6 percent in 2012, exceeding most economists’ predictions, and was among the fastest-growing economies in the world in the first half of 2013, expanding by 7.6 percent…The Philippine Stock Exchange Index has posted record highs since President Benigno Aquino III came into office in 2010, and approvals for foreign investment have more than doubled in that period. The country’s inflation is low, its foreign exchange reserves are high, and its public debt is steadily declining. As a result, all three of the major credit-rating agencies upgraded Philippine sovereign debt to investment grade in 2013: the first such rating in the country’s history.”

The articles are not uncritical, citing continuing problems of poverty and inequality.  But, for the most part they’re very upbeat and provide an interesting balance to the critical opinions rife in the local media.

To be sure, much of the praise is deserved, especially for the president’s crusade for the much-needed Reproductive Health Law, his leadership on the anti-corruption front, and the country’s enviable political stability owing partly to his seemingly unassailable popularity.

But one wonders if there is not also something else going on, especially when one notes how similar assessments are currently being made of Mexico, a country that had been written off as a hopeless “narco-state,” much like the Philippines had been derided as the “poor man of Asia.”  In the Feb 24 issue of Time, Michael Crowley writes, “Now the alarms are being replaced with applause.  After one year in office, [President Enrique] Pena Nieto has passed the most ambitious package of social, political, and economic reforms in memory.  Global economic forces, too, have shifted in his country’s direction.  Throw in the opening of Mexico’s oil reserves to foreign investment for the first time in 75 years, and smart money has begun to bet on peso power.  ‘In the Wall Street investment community, I’d say that Mexico is by far the favorite nation just now,’ says Ruchir Sharma, head of emerging markets at Morgan Stanley. ‘It’s gone from a country people had sort of given up on to becoming the favorite.’”

These glowing reviews of two economies previously regarded as close to moribund lead one to ask if the judgment of the international business press is something that is based not only on what is actually going in these countries but on what is happening in the global economy.

Three phases of the global economic crisis

The global economy has been in crisis for the last six years.  There have been three phases to the crisis.  In the first phase, 2008 to 2010, Wall Street’s financial implosion dragged the US economy to deep recession that saw unemployment climb to nearly 10 per cent of the work force.  Predictions of sustained recovery have been continually dashed over the last three years, as consumers have preferred not to spend but to save tin order to dig themselves out of the massive debt they accumulated in the years that their unrestricted consumption served engine of the world economy.

The second phase, which began in earnest early in 2010 and intersected with the first phase, was the so-called sovereign debt crisis of the European economies, as international banks panicked at the huge loans they had made to businesses and governments in Southern and Eastern Europe and refused to make further loans until they were paid back.  The ensuing austerity programs that were implemented not only in the highly indebted countries but also in troubled Western European economies like Britain and France, practically eliminated Europe as a motor for global recovery.

During this second phase, there were hopes that the so-called BRICS—the acronym for Brazil, Russia, India, China, and South Africa—would fill the void vacated by Europe and the US.  While these economies stumbled as a result of the Wall Street implosion in 2008 and 2009, they appeared to have recovered their momentum by 2010, propped up in some cases by massive stimulus spending like China’s $585 billion program, which was the world’s biggest stimulus in relation to the size of the economy and which did shore up its fellow BRICS and many developing economies owing to China’s demand for minerals, raw materials, and manufacturing inputs.

Noble Prize laureate Michael Spence was the most prominent voice of a school that saw the BRICS as the savior of globalization. “The major developing economies have displayed remarkable resilience in the crisis and its aftermath,” he wrote in his 2011 book The New Convergence.  “Growth is returning and is already approaching pre-crisis levels in Asia (East and South) and in Latin America, the latter helped in no small measure by the tailwind provided by Asian growth….[T]his growth is sustainable even in the event of slow medium-term growth in the developed countries.  The reason is that the size of the emerging market economies taken together is large and growing.”

Spence concluded: “The persistence of growth in the emerging markets is a major positive for the global economy in terms of overall growth and because of the positive impact it will have on the smaller, poorer developing countries.  In addition, it will lubricate the structural adjustments in the advanced economies.”

From Brics to Civets

Spence’s book was barely out in 2012 when his Brics began to falter, with the growth rate of lead economy China dropping from 11 per cent to 7 per cent.  The plunge in China’s BRICS partners was even more drastic, with Brazil’s growth, at 2.5 per cent in 2013, even lower than sickly Japan’s, as the Economist pointed out.  The problem was that most of the BRICS had not been able to wean themselves out of dependence on the US and Europe for their exports.  Indeed, respected Chinese technocrat Yu Yong Ding saw the trends as indicating that China’s “growth pattern has now almost exhausted its potential.”

For international business, media, and academic establishments that have been socialized into assuming that globalization is positive and irreversible, where crises are only bumps on the road to global prosperity, the prospect of prolonged global stagnation has been deeply troubling and hard to accept.  Thus the search for new “emerging markets.”  Thus economies that would have merely merited a nod at other periods have become “hot” economies.

For finance capital seeking a place to dump and speculate on its massive surpluses, they are possible investment havens.  For technocrats, academics, and the institutional apparatuses of corporate-driven globalization such as the World Bank and Word Trade Organization, these economies may be the new drivers of growth that would lift the global economy from its six long years of stagnation and crisis.

Around two years ago, when it became clear the Brics could not be relied to sustain global growth, investors coined the term Civets (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) to denote what they saw as a dynamic new grouping.  Since then, however, Egypt and Turkey have fallen off the list owing to political instability and Indonesia and Vietnam have excited less enthusiasm owing to rising nationalism and infrastructure bottlenecks in the case of Indonesia and rising wages and a real estate in the case of Vietnam.  Mexico and the Philippines, however, are expected to inject new dynamism to the grouping.

Realities and fantasies

But really, how realistic are the expectations for Mexico and the Philippines of finance capital, which alternates between depression and euphoria and functions with an extremely short time horizon?  Is there something solid there beyond the impressive growth rates?

Some dousing of expectations might be in order.

While having some distinctive problems, the most obvious being Mexico’s drug cartels, the two countries have similar structural obstacles to sustained growth.  Both have had their manufacturing sectors severely damaged by structural adjustment policies and the flight of capital to low-wage economies.

Both are countries that have agricultural sectors that have been devastated by trade liberalization, the Philippines’ by the World Trade Organization’s Agreement on Agriculture, Mexico’s by the North American Free Trade Area (Nafta).  Agrarian reform has stalled in the Philippines and is being reversed in Mexico.

Rent-seeking groups dominate the two economies, with strategic sectors cornered by a few individuals like Carlos Slim, the Mexican telecommunications mogul who was the world’s richest man in 2012, and Manny Pangilinan, the aggressive conglomerate builder who has brought the Philippines’ telecommunications and energy sectors under the control of Indonesia’s Salim family.

What emerge from these harsh realities are countries with severe poverty and inequality.  42 per cent of the population lives below the poverty line in Mexico, and close to 20 per cent in the Philippines.  Both are sure to flunk the prime Millennium Development Goal (MDG) test of halving the percentage of their populations living in poverty by 2015.

In terms of inequality, both have terrible profiles, with Mexico’s gini coefficient—the best measure of income inequality—standing at 48.2 and the Philippines at 43.  With domestic purchasing power becoming critical as the export markets of the North and the BRICS dwindle owing to the prolonged global stagnation, these are not the statistics that would indicate a capacity to build and sustain a dynamic internal market, much less a global recovery.

Undoubtedly, President Aquino and President Pena Nieto–both scions, incidentally, of prominent political families–have made some advances in turning around their countries’ economies, but the Philippines and Mexico have a long way to go before they can qualify as “hot new emerging markets.”  The aura that surrounds them at present reflects less the realities of their economies than the desperate fantasies of international finance capital and the partisans of a failed globalization.

*INQUIRER.net columnist Walden Bello represents Akbayan (Citizens’ Action Party) in the House of Representatives.