(summary by INSEAD Knowledge, live at INSEAD Leadership Summit Middle East 22 Jan 2012)
Five hundred years ago, emerging markets accounted for 79% of the global economy, while advanced countries accounted for just 21%. Thanks to the industrial revolution, in the ensuing 500 years, advanced economies grew extremely quickly and became very rich. Today, the balance is more like 50:50, with new countries making their presence felt.
The growth of per capita income worldwide has progressed accordingly, with the US leading the industrial world for the past century, despite the intervention of economic depression and two world wars. Today, emerging economies are catching up and taking over in terms of economic and income growth.
In order to continue to grow, emerging economies need to converge, but these countries and these markets tend to fail at this stage because of their failure to merge economic reform with deep institutional reform. China and India today are examples of this failure to converge on the economic and institutional platforms. Economic reforms can catapult an economy into the status of an "emerging market," but it takes institutional reforms to go beyond that and to truly "emerge" onto the world stage as an advanced economy.
Will the 2008-2009 "Great Recession" signal the decline of advanced economies? The advanced economies led the world into recession.
This is more than a recession, it is also the end of "convergence" in Europe, and the end of the "American Dream" in the US, with a widening gap between rich and poor. Globally, instability is exascerbated by very large and poorly regulated financial markets. But consumers and governments have not stopped spending! Today, we have spending without income - or spending growing faster than income. People want to live as well as or better than their parents, but rather than actually increasing income (despite periods of increasing wealth on paper), they have been increasing spending.
When some countries as a whole act this way - borrowing to spend - there have to be other countries who are willing to pay for this deficit spending and support countries who are spending more than they are taking in. This is the crux of the debt problem: on an individual and governmental level, over-optimism has led to over-spending, and the combined impact of individuals and governments acting this way has led to the current economic crisis.
How to get out of it? In the next ten years we need:
1. Confidence & risk-taking investment
2. Solid growth in emerging markets
3. Spending to facilitate external rebalancing
4. Political leadership in advanced economies that properly addresses long-term challenges.
5. Some luck!
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A key question for Abu Dhabi and the UAE was posed during the opening presentation: Can emerging economies that have managed to accelerate their growth succeed at the deeper institutional transformation that will allow them to sustain faster growth rates? Antonio Fatas, Portuguese Council Chaired Professor, provided historical data demonstrating that institutional reform is the key to the transformation from emerging to advanced economies. I prefer to avoid using the word reform, although I agree with the challenge as AF summarized it. Thus, a key issue for the UAE and other emerging economies is whether they can succeed in transforming institutions. I am excited to be Academic Director of the INSEAD Abu Dhabi campus as we play an active role in promoting effective institutional transformation.
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