NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News  » Business » Why investors are gloomy about emerging markets

Why investors are gloomy about emerging markets

January 16, 2014 13:57 IST

Investors have another reason to wrinkle their noses at emerging economies - fading labour productivity, says Andy Mukherjee.

Output per worker will expand by 3.6 per cent in developing economies this year, according to the New York-based Conference Board. 

That's slightly faster than the 3.3 per cent increase in 2013, but well below the five to seven per cent annual improvements that were the norm in the previous decade.

Slowing growth in labour productivity could put the brake on wages and domestic consumption, undermining emerging economies' quest to become less reliant on spenders in rich nations. It also helps explain why investors have turned cautious on these formerly booming markets.

Sure, developing countries are still outperforming rich nations. But the gap, which is what matters when investors decide where to place their bets, is shrinking. 

On the Conference Board's projections, mature economies are poised to deliver a 1.5 per cent increase in unit labour output this year, up from 0.9 per cent in 2013.

The two biggest culprits in the developing world are India and China. In India, labour productivity growth this year is expected to be 2.7 per cent - less than half the 6.4 percent average annual increase between 2007 and 2012. 

While China is doing better with projected growth of 6.7 per cent this year, that's still well below the 9.6 percent average over 2007-2012. China has less scope for plugging the country's surplus farm labour into an ever-expanding "world's factory".

Boosting output with a debt-fuelled expansion in equipment and infrastructure is also running out of steam. The country's next growth spurt will require technological innovation.

In India, productivity is in the doldrums because the economy is stuck in a rut. Companies aren't investing in capital assets while the government, struggling with a bloated fiscal deficit, has little money to improve the skills of the workforce. 

If wages rise faster than productivity, the risk is that even small increases in workers' earnings could trigger a wage-price spiral. For now, though, inflation is only really a problem in India. That's one less thing for emerging market investors to worry about. They already have enough on their plates.

© Copyright 2018 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.