You described the past decade as "freaky," as all countries grew. Can you place the progress of the BRIG countries into global perspective?
In the last decade, what we saw was that virtually every single emerging market did well. It was captured in the peak year, 2007, when only three countries recorded a negative GDP growth rate: Fiji, Zimbabwe, and Congo. That was really the peak of the emerging market boom of the past decade.
What caused this exceptional decade was a combination of many factors. The 1990s was a very poor period for emerging markets so there was scope for catch-up. Many emerging markets experienced crises during the 1990s--East Asia, Russia, Mexico--which is why the growth rates of emerging markets in the 1990s were rather low, at only 3 percent or so.
The other reason was that from 2003 onward a liquidity rush started from the United States. We've spoken about how the liquidity led to a housing bubble in the United States and in Europe, but not enough analysis has been given to how the very low cost of capital and high liquidity also led to these exceptionally strong growth rates in emerging markets. The average growth rate of emerging markets from 2003 onwards jumped to more than 7 percent.
These were the exceptional circumstances, but what we are seeing now especially in the last couple of years is that the growth rates of many of these emerging markets are falling back. Brazil has not been able to grow faster than 3 percent. Russia is back to growing at 3 percent. India's growth rate has slipped back to about 6 percent from being at 8 percent. As liquidity becomes tighter in the global market place and people become more risk averse, we are seeing that growth rates of many emerging markets are falling back. And we're going back to the old pattern, which is that there is much greater distinction [between countries]. Just because you're an emerging market doesn't mean that you're destined to grow much faster than the developed world. My entire theme of the book is about differentiation; that you've got to treat emerging markets individually. This term is still too loosely applied.
You have argued that Indonesia approaches economic policy differently--that there is a rare caution in Indonesia, which distinguishes it from other emerging markets.
Based on my travels to Indonesia and elsewhere, Indonesia seems to have used the commodity windfall better compared to the likes of Brazil and Russia. And one big factor is that the investment of the share of GDP in Indonesia has been steadily rising over the last 10 to 15 years--standing now at about 32 percent of the economy. That to me is a fairly positive factor compared to Russia and Brazil, who have not utilized the commodity boom well, and the investment of the share of GDP remains very low at barely 20 percent or so.
Also, some of the banks in Indonesia still remember the '97-'98 crises, which keeps them from doing something that is too out of control. If you look at the credit growth in Brazil, over the last five years it has been rapid; this is causing problems in the banking sector with some of the auto loans going sour and some of the credit quality metrics deteriorating quite significantly. But in the case of Indonesia we've seen that banks have been a bit more cautious.
So do you think Indonesia should not be focusing on increasing commodity exports? Is it really domestic investment that is putting it at an advantage?
Yes that is my view. Indonesia should be looking to increase its exports because exports as a share of GDP is relatively low. Indonesia has to assume that the benefits over the past decade from high commodity prices are over. That's what Indonesia needs to be careful about.
The other breakout nations that you mentioned are South Korea, Poland, and the Philippines. What similarities do you see between these countries and Indonesia? …