There is no question that the global economy today would be worse off without dynamic emerging markets.  But the rise of these emerging markets, especially the giants of China and India, is a mixed blessing.  The process of rapid industrialization of two continent-sized economies inevitably comes with disruptive, and often unpredictable, consequences that can be both at odds with, and challenging to, the global economy’s status quo.

The only example that we have in the last 200 years of a continent-sized economy rapidly industrializing is the United States between the end of the Civil War (1865) and the outbreak of the First World War.  Over a half century, the United States changed from a largely agrarian economy to a highly urban and industrialized one—becoming one of the wealthiest and most dynamic economies in the world by 1914.

In this half century of breathtaking economic growth, however, the U.S. economy suffered 13 recessions, seven of them accompanied by financial panic and massive bank failures. Indeed, the U.S. economy was in recession an astonishing 54 percent of this 49-year period.  In four out of the 13 recessions, business and industrial activities contracted by over 30 percent.  In 1890, 2 percent of households earned more than 50 percent of total household income.

In other words, during a period of rapid industrialization and growth, the United States suffered violent market swings characterized by boom-bust cycles, with serious social and economic dislocation inflicted upon the vast majority of Americans. These boom-bust cycles were confined to the American economy in most of the 19^th century. But as soon as the United States started to become more integrated with the global markets in the early 20^th century, its boom-bust cycles began to affect the rest of the world.

Essentially the same is happening today, with one notable difference:  The Chinese, Indian, and Brazilian economies are much more integrated with the global economy than the U.S. economy was in the 19^th century.  Thus, their boom-bust cycles reverberate instantly across the world.  Yes, the global economy is undoubtedly better off with the emerging markets, but paradoxically, it is also more volatile as a result.

Topics: Economic Outlook