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The author is president of Rockefeller International
Emerging world powers such as India and Indonesia have faced the turbulence of recent years in solid form and are widely recognized for their success. Now many of the emerging world's most troubled economies are reforming their way toward recovery, and markets are beginning to reward them.
The most prominent of them include Turkey, Argentina, Egypt, Nigeria and Kenya, and they carry some weight. All five of these reforming countries are among the 40 largest emerging economies, so their best practices are also strengthening the global economic recovery.
Buoyed by high inflation, debt and deficits, their foreign exchange coffers were emptying when global interest rates rose sharply in 2022. High borrowing costs have pushed their loans deeper into misery, leaving them with no choice but to switch. Their leaders – newly elected with a mandate for reform in Argentina, Kenya and Nigeria – are not saying it out loud, but their plans are drawn from the pages of the old and much maligned Washington Consensus. Budgetary discipline and heeding market forces are the only policy choices that work when a nation runs out of money.
Five reform countries are still widely underrated. A year ago, they were running a deficit of more than 5 percent of GDP. Their inflation rates averaged in the high double digits, and in Argentina exceeded 200 percent. Investors demanded a huge premium to hold their sovereign bonds, pushing yields to 15 percentage points above U.S. bonds, or shunning them. If emerging market monikers were still in vogue, these economies would have been labeled the „weak five” of the decade.
Their foreign exchange reserves hit new lows, registering maximum declines of over a third on average as capital fled. At first, governments resisted these pressures, trying to stabilize currencies through restrictions. That pushed investors into black markets, where the five currencies traded on average 45 percent below the official exchange rate.
Then came the turn. Crisis countries began to bow to market realities, most recently in Egypt under Abdel Fattah al-Sisi. After a decade in power, he announced his latest reforms last month. His regime took steps to cut the deficit and cut spending on new mega projects. It moved to stabilize the pound, raising interest rates to beat inflation and allowing its value to float freely, giving no excuse to black marketers.
If this sounds like Washington Consensus orthodoxy, it is. Egypt is reforming in part to meet conditions for bailout from consensus winners, including the IMF and World Bank. Kenya and Argentina were sunk deeper than the other four by several measures: Buenos Aires had to pay a higher premium on its bonds, and faced a huge black market discount for its currency.
In response, Argentina became a more radical reformer. Last November, a new president was elected – Javier Millay, a populist who vowed to „chainsaw” his country's dysfunction. He has devalued the peso by more than half, halved nine government departments, slashed public wages and eliminated private jets and other official perks while selling off hundreds of state-owned enterprises. In January, the country had a budget surplus for all but 10 years since 1900.
Even cases that did not receive international relief – Turkey and Nigeria – were forced to reconsider. Turkey under Recep Tayyip Erdogan, once an unlikely candidate for reform, has employed radical technocrats who have raised interest rates above 35 percentage points and reined in excessive credit growth.
Now capital is beginning to return to the five reformers. For them, FDI, globally weakened, is unusually resilient. Bond premiums are down at least 40 percent from their peak. Argentine stocks rose sharply in anticipation of Miley's presidency, and the dollar has risen another 60 percent since he took office. Black market currency discounting has disappeared in Nigeria and has disappeared in Egypt. Financial life starts to look normal.
It does not seal a bright future. Countries often reform in crises and return to old ways when the storms pass. Surviving this cycle requires leadership that recognizes the need to avoid relapses and engages in continuous reform. It is too early to say that any recovering countries are on that path. But they are in good shape for now, and that makes the global economy feel weak.