There is a popular saying. Make hay when the sun shines. But unfortunately, emerging economies seem to be waking up to this fact rather late. These economies had been basking in the glory of cheap money from the US Federal Reserve's quantitative easing program launched in 2008. In this rush for attracting foreign investment deals, the focus on upgrading their own domestic economies was lost somewhere. This is reflected in the fact that the safety moat of higher economic growth enjoyed by developing economies is diminishing. As per report by Adam Slater of Oxford Economics in London, the differential in gross domestic product (GDP) between advanced and developing economies has contracted to the lowest level since 1999. The growth premium enjoyed by developing economies may turn out to be a mere 1.5% as compared to 4.5% during the period 2000-2014.
Another cause of worry for emerging economies are high levels of inflation and resulting low real interest rates. As per the report, the average real interest rate of 13 major emerging economies was a mere 1% as compared to 3% since 2000. Therefore, the recent round of stimulus measures has marginally benefitted emerging markets. Emerging economies are realizing the hard realty that the party of cheap foreign inflows is finally coming to an end. Even a hike in rate by the Fed in future as the US economy gains momentum can further dampen investment flows.
For emerging economies, the only way out of this financial weakness is to pull up socks and accelerate reforms for boosting domestic growth. This would entail creating the right business environment and putting strong financial systems in place. Sadly all this hard work should have been done when emerging economies enjoyed a place of pride under the sun.