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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is former head of emerging markets economics at Citi and will soon be a senior research fellow at Chatham House
Among the various terms that have been used to describe the world’s less advanced economies, Global South seems to be trending these days. By contrast, the emerging markets branding has lost some of its buzz.
This might seem like an unremarkable switch from one analytically thin bit of jargon to another. But no, this shift is quietly signalling two trends that investors should view with some alarm. The first is the decline in potential economic growth in many parts of the developing world. And the second is creeping global fragmentation.
Google data suggests that searches for Global South have regularly outnumbered those for emerging markets since early 2022. That might be considered a temporary phenomenon following Russia’s invasion of Ukraine last February. Yet the use of emerging markets as a search term has been in a fairly steady decline for some years now.
That decline is mirrored in real capital flows. One measure of the steady disengagement of international portfolio managers with emerging markets is the fall in foreign investors’ ownership of emerging markets bonds denominated in local currencies.
Back in 2016, international investors owned an average of around 21 per cent of local-currency bonds in emerging markets. Now that figure is just 13 per cent.
In some countries — Indonesia or South Africa, for example — these declines are relative: that is, the amount of bonds owned by foreigners has increased in recent years, but at a slower rate than the country’s overall bond market. But in others — Mexico, say — this decline is absolute: investors have just walked away.
Either way this is a disturbing trend. Emerging economies do best when they can fund themselves in their own currencies, and so foreign investment in local bond markets is a form of external financing that should be welcomed.
The decline in investors’ engagement with emerging economies’ local currency bond markets is best explained as a response to their sense that these countries’ growth potential is diminishing in the aftermath of the commodities boom and what one might call peak globalisation.
Think of it this way: if investors feel less optimistic about a country’s potential growth rate, then it becomes more difficult to count on that nation’s currency gaining value over time. And if that’s true, then the case for investing in local bond markets weakens, especially as US exceptionalism remains a persistent theme in financial markets.
What’s worrying about this is that, for all its imprecision, the term “emerging markets” was designed to serve a function, namely to draw attention to developing countries as a destination for international capital flows. This moniker, in other words, always had a basically commercial objective. But the brand’s commercial value seems to be falling.
Global South, by contrast, is a label that serves not so much a commercial, but rather a political, objective. One of its main uses, it seems, is to draw attention to the perceived unfairness of the global order — the dominance of US-shaped institutions such as the IMF and the World Bank, the outsized role played by the dollar and the vulnerability that creates for developing countries, which can have their access to international capital ebb and flow depending on decisions made by the US Federal Reserve.
It’s no surprise that the Chinese authorities particularly like this term. That said, Beijing has some competition: leaders of both India and Brazil, for example, are also trying to position themselves more or less explicitly as leaders of the Global South.
The sense in which Global South is eclipsing emerging markets, therefore, can be understood as the triumph of politics over economics, reflecting a jostling for influence as the post-cold war period of unchallenged US global dominance has ended.
One should remember, though, that the peak period of US global dominance — the era of the Washington Consensus — was one in which many developing countries had their finest moment in terms of convergence towards advanced-economy levels of per capita gross domestic product. For all its many faults, the Washington Consensus was a reasonably honest effort to define a set of policies and institutions that would promote income convergence.
Maybe there’s a global order in our future that can recreate the conditions of robust world trade growth that small, open economies need in order to thrive. But, for the time being, investors seem to be voting with their feet as politics is in command.