The Yomiuri ShimbunHideshi Aratake / Chief Economist at Mitsubishi UFJ Kokusai Asset Management Co.
Hideshi Aratake, chief economist at Mitsubishi UFJ Kokusai Asset Management Co., spoke about the future growth of emerging countries during an interview with The Yomiuri Shimbun. The following are excerpts from the interview.
Oil, China and the United States
The Yomiuri Shimbun: What do you think is the major reason why emerging countries can sustain their strong economic performance?
Aratake: The global economy is promising enough that it has been referred to as “synchronized global growth,” but emerging countries have been accelerating the economic recovery since 2017, not advanced countries. While Brazil and Russia had two consecutive years of negative growth in 2015 and 2016, there appears to have been a turnaround to positive growth in 2017.
First of all, oil prices have been one of the main reasons for the recovery of emerging countries. Many emerging nations are reliant on resource exports, tying the rate of their economic growth to oil prices.
A coordinated production cut by the Organization of the Petroleum Exporting Countries (OPEC), Russia and other countries played some part in the price increase, but I expect what had a larger effect was the reduced production of shale oil in the United States. The price stagnation that occurred worsened profit margins, and the number of shale oil drilling rigs in operation decreased from approximately 1,600 in October of 2014 to approximately 300 in May of 2016. This solved the oversupply issue.
Second is the rally of the Chinese economy. Prior to the opening of the National Congress of the Communist Party in 2017, there was support for investments in infrastructure such as roads and railways, but there is another place on which to focus, which is the fact that the continuing “selection and concentration” of industry in a manner unique to China is having an effect.
This becomes very clear when the rates of economic growth for each area of China are placed on a map. The north is predominantly stagnating, while the south has high levels of growth.
Within the heavy industries in the north and northeast, such as the cement and steel industries, there are numerous so-called zombie companies burdened with redundant staff and equipment. In contrast, Shenzhen is representative of the IT boom in the southwest, and is on the path to becoming China’s own Silicon Valley.
China is swiftly responding to the tides of the fourth industrial revolution, which makes heavy use of IT, and raising the standard of growth through a steady change in the structure of industry. The swift spread of smartphones and the rapid expansion of online ordering is proof of this.
In addition, the strong recovery of the U.S. economy, at the center of the world economy, is also significant. The three elements of oil, China, and the United States are supporting the emerging economies.
Disparities may widen
Q: What is your forecast for economic growth from 2018?
A: Emerging countries will continue growth in 2018. Despite the global money glut, it is expected investors will be able to profit even while taking on some degree of risk, and investment money will continue to flow into emerging countries.
On the other hand, there are indeed risk factors. There is concern that rising U.S. interest rates and the reduction of monetary relaxation in Europe will have an effect. There is a strong possibility that the rallying Chinese economy of 2017 may slow down slightly.
If the oil prices that are supporting emerging economies continue to rise, the shale oil production in the United States will have a comeback, making it difficult for prices to rise significantly. If the prices of natural resources hit a peak, the positive effect on emerging economies will be reduced.
And among emerging countries, there may be widening disparities between individual nations based on their economic strengths. While Brazil, Russia and India maintain strong economies, there is concern about countries such as Turkey, South Africa and Egypt.
Escape resource dependence
Q: What is necessary for emerging countries to maintain economic growth?
A: A recent characteristic of the recovery of emerging countries is a move toward slower growth. Despite a good economy, advanced nations can find themselves in a state described as a “Goldilocks economy,” with no growth in wages or consumption. Emerging countries are subject to the same phenomenon.
Brazil and Russia are two prime examples. Despite economic growth of 4 percent or more in 2010-11, the IMF predicts that growth will not exceed 2 percent in 2018-19. The potential growth rate, which shows the strength of the economy, is lowering.
If the real interest rate — which takes the rate of inflation out of the nominal interest rate — is high, then investments will not increase. In emerging countries people do not trust their own currency because they worry about the risk of prices dramatically increasing. So such countries tend to try to stabilize the value of the currency by allowing interest rates to rise to a degree.
However, if the real interest rate is high, interest on loans will increase, making it more difficult to invest. Without increasing the nation’s supply capability, the result of tightening supply and demand will make inflation very likely. In addition, increased imports cause the dilemma of a current account deficit.
In Brazil, despite retail sales nearly doubling in the past 15 years, industrial production has been predominantly flat. An increase in consumption was not tied to production.
Emerging countries with a large, young population were expected to have a high rate of economic growth, but this image is now collapsing. It is vital to escape from a structure of industry that is dependent on the export of natural resources, but they could not make good progress on the matter. The question is whether, like China, other emerging countries can also ride the wave of the fourth industrial revolution.
Some countries are making some interesting moves. Visit Russia or Eastern Europe and walk into a fast food restaurant and you will find that both ordering and payment have been fully automated. There are developing countries where smartphone payments are rapidly expanding. The lack of fixed telephone networks in some areas has led to the rapid spread of smartphones, meaning that lagging infrastructure development has actually worked out as a positive factor.
Whether emerging countries will adopt information technology to increase the productivity of the service industry, and at the same time enrich the education and vocational training of citizens, may be a key to their economic development in the future.
(This interview was conducted by Yomiuri Shimbun Senior Writer Tatsuya Sasaki.)
■ Aratake graduated from Keio University and received an MBA at the National University of Singapore. After working as an economist at a securities firm, he took up his current position in April 2017. He specializes in global economic analysis. He is 54.