Hitting the BRIC Wall

It's been a long time since the farmers left the "farmhouses" of Delhi, but the word now describes the weekend retreats of the upper class, playgrounds on the fringes of this emerging-market city where unmapped dirt lanes wind through poor villages and suddenly open onto lavish mansions with sprawling gardens and outsize water features.

On a foggy night in late 2010, I made my way to a party at one such fabulous home, where the valets were juggling black Bentleys and red Porsches and the hosts invited me to try the Kobe beef they had flown in from Japan, the white truffles from Italy. Over the pulsating techno music, I managed to chat with a 20-something son of the farmhouse demimonde. He was a classic of the type — working for Dad's export business, wearing a tight black shirt, hair spiky with gel. After determining that I was a New York — based investor back in town looking for opportunities, he shrugged. "Well, of course. Where else will the money go?"

I left the party around midnight, well before the main course was served, but the comment stayed with me. It summed up the overconfidence in the big emerging markets after a decade of unprecedented success. Only 10 years earlier, emerging markets were seen as the problem children of the financial world, and some pitchmen were trying to rechristen them the "e-merging" markets, hoping to steal some shine from the tech boom in Silicon Valley. These developing nations were spoofed as an inversion of the 80/20 rule, which states that 80% of your profit comes from the top 20% of your clients. Until recently, emerging markets accounted for 80% of the world's population but only 20% of economic output. As recently as 2002, the big-money investors avoided emerging markets as too small or too dangerous. For many, India was the Wild East.

Since then, private-capital flows into developing countries have surged, rising from $200 billion in 2000 to just under $1 trillion at their peak in 2010. Though the totals have ebbed a bit, they remain at historically high levels. Even now, best-selling books argue that with the West in decline, the money is bound to flow east and south. Everyone is thinking big about the coming convergence, when average incomes in all poor nations will supposedly catch up to those in rich ones.

The idea that everyone can win in the global growth game was built on the unique results of one unusual decade. Starting in 2003, a run of unbroken growth that began in China spread across the globe. By 2007, the average GDP growth rate in emerging markets had doubled — from 3.6% in the previous two decades to 7.2% — and almost no developing nation was left behind. That year all but three of the world's 183 national economies grew, and 114 grew by 5% or more, up from an average of just 50 per year in the previous two decades. The only losers were Fiji, Zimbabwe and the Republic of the Congo, basket cases that seemed to prove the optimistic rule. This was the fastest, most all-encompassing growth spurt the world had ever seen — and it came with no downside. Inflation was well in check planetwide. Many observers came to the conclusion that the emerging nations were all Chinas, destined for decades of rapid growth.

That's not likely. Economic development is like a game of snakes and ladders: nations are much more likely to get bitten and fall back than to keep climbing. My research shows that over the course of any given decade since 1950, on average only one-third of emerging markets have been able to grow at an annual rate of 5% or more. Fewer than one-fourth have kept up that pace for two decades, and only one-tenth for three decades. Just six markets — Malaysia, Singapore, South Korea, Taiwan, Thailand and Hong Kong — have maintained this rate of growth for four decades, and only two, South Korea and Taiwan, have done so for five decades. Few front runners stay in the lead for a decade, much less many decades. Identifying those few is an art rather than a science of extrapolation.

Yet analysts are still looking for the past decade's miracle of mass convergence to continue all over the globe. It has become fashionable to cite the forecasts of pundits and historians who look back to the 17th century, when China and India accounted for about half the world economy, as evidence that these nations will re-emerge as dominant powers by 2030 or 2050. The reasoning seems to be that 17th century performance offers some guarantee of future results. The old rule of forecasting was to make as many forecasts as possible and publicize the ones you got right. The new rule is to forecast so far into the future that no one will know you got it wrong.