Business: Could COVID Be the End of Emerging Markets?

Emerging markets have been so relevant to the global economy and society that I’d made it a lifelong career goal to support their growth. But if countries like Brazil are anything to go by, their continued path to prosperity is anything but guaranteed. And COVID may just be that day of reckoning, or Brazil moment, for many emerging markets in Asia and globally.

1. Slow reforms made emerging markets vulnerable to the consequences of shocks like COVID.
   You may have heard of the “middle-income trap”, where emerging markets fail to realise their potential and reach developed country status. Often, this happens when rising incomes reduce their cost competitiveness, but capital investment and innovation don’t catch up to make them competitive elsewhere. There’s also often a lack of reform in the institutions needed to facilitate that investment. While there are booming startup sectors in countries such as Indonesia, the Philippines, and Vietnam, bottom-up solutions can only drive growth so much, and they have to be met with effort and willingness from the top. In cases such as Brazil, Malaysia, or South Africa, a scandal can expose the fragility of a lagging politico-economic system, and a disaster can be the shock that causes it to crumble.
   
   COVID lockdowns exposed the dependence of some countries on single sectors, such as tourism in Thailand and outsourcing in the Philippines, whose economy was forecast to shrink by 9% in 2020 — more severe than the economic collapse during the Marcos regime in the 1980s. While such sharp contractions are commonly followed by rebounds, sluggish vaccine rollouts prevent their reintegration into the regional and global economy — and at current levels, some economies may not even reach the benchmark other countries use to safely reopen for 10 years. And, while innovations and entrepreneurship can solve some problems, a solution like a vaccine rollout needs nationwide coordination, and thus strong institutions like governments, to work.
2. COVID exposed weaknesses in emerging markets’ infrastructure — and economic growth agendas.
   Drive to the outskirts of Bangkok, Jakarta, and Manila and you’ll see … that the outskirts keep going farther and farther, while infrastructure isn’t keeping up. While a larger carbon footprint has been a part of prosperity in the past, emerging markets are missing a great opportunity to take lessons that the West is learning from half a century ago — that some concepts, such as the ‘suburban dream’, are simply not sustainable — and leapfrog it in sustainable development. Asian emerging markets have among the fastest-growing CO2 emissions per capita in the world. In Latin America, emissions are falling, but consider that many of its cities already have developed infrastructure such as public transport networks.
   
   What did COVID do to this? In recent years, governments were finally realising their infrastructure deficits and investing in ambitious infrastructure plans. COVID is not only distracting them from these ambitions but exposing how failure to invest earlier has made it more difficult to make lockdowns effective, as supply chains are clogged and work becomes impossible. As someone on the ground in the Philippines told me, ‘it’s the lower-middle income class who aren’t complying, because they’d rather risk probably dying from COVID than certainly dying of starvation (both from not being able to access supermarkets, as well as losing their job and running out of savings to afford food).’
   
   Let’s also not forget that, as of the time of writing, COVID itself, and the Delta variant responsible for a second wave, came from emerging markets. Which would lead the rest of the world to respond accordingly …
3. COVID is cutting off emerging markets from the integration they rely on to grow.
   Travel bubbles or green lanes combine with the slow pace of vaccines to divide developed and emerging markets. Unless a country has passed a critical growth point where its domestic market is large enough to sustain itself, such as China or Indonesia, regional or global interconnectedness is necessary to drive that investment or branch out to those markets that can unlock your prosperity.
   
   While the world has gotten by with videoconferencing, it can only go so far, as especially in Asian cultures that are perceived as “collectivist,” there is plainly no substitute for face-to-face interaction to build the trust necessary for business relationships and investment. And many in emerging markets may not even be able to videoconference, with poor infrastructure inhibiting the bandwidth for such technology.
   
   Worse still, COVID can exacerbate the divide within emerging economies that they need to bridge for growth. A sizeable middle and upper-middle class can spend and invest domestically to pull up poorer regions. But large regional differences exist in vaccine rollouts within countries desperate to reopen, and regions wealthier than their national averages and neighbouring provinces, such as Bali and Phuket, are fast-tracking their re-openings. If things take a turn for the worse, would such regions choose to connect with other, more developed countries, rather than other parts of their own? Could that segregate rich and poor within their borders further? That is an existential question they must face.

I’d always been bullish about the prospects of emerging markets, especially as a Southeast Asian who grew up seeing my region‘s ability to bounce back from the Asian Financial Crisis, and hearing buzzwords such as ‘BRIC’, ‘Asian tiger’ and ‘Next Eleven.’ But cautionary tales and current events remind us that nothing is guaranteed. At the very least, COVID is a stark reality check. At worst, it can trigger domino effects. And it’s up to all forces within economies to get together and pick up the pieces from here.