CAN EMERGING MARKETS SAVE THE WEST ? / THE WALL STREET JOURNAL

Heard on the Street

Can Emerging Markets Save the West?

West Might Not Be Able to Count on Emerging Markets’ Savings Much Longer

So far, savings in emerging markets such as Indonesia have compensated for a relative lack thereof in developed markets, but it may not last. So far, savings in emerging markets such as Indonesia have compensated for a relative lack thereof in developed markets, but it may not last. Agence France-Presse/Getty Images

By Richard Barley

Nov. 2, 2014 1:18 p.m. ET
 

                            

The usual worry about capital flows is that hot money moving from developed economies to emerging markets suddenly reverses, prompting a crisis. But it is worth thinking about this the other way round amid two fundamental shifts: the retirement of the West’s baby boomers and the increasing clout of emerging markets.

One curiosity of the global economy is that developed markets, despite aging workforces, haven’t seen as much saving as one might expect. So far, savings in emerging markets have compensated for this, notes HSBC ’s Karen Ward. Based on changes in the balance of workers and retirees in the U.S. from 1990 to 2010, the savings rate might have been expected to rise by 1.2 percentage points, HSBC says. In fact, it fell by 5.2 points, World Bank data show. But in China, the savings rate has risen by 13.1 points, much more than an expected 7.7-point gain.

Capital has flowed to developed economies in part because savers in emerging nations haven’t had deep markets at home to target. That has buoyed asset prices in developed markets and perhaps reduced the apparent need to save there. But HSBC argues savings have been misallocated: Too much has gone into government bonds and housing, and not enough into more productive investment.

Looking ahead, as the West’s baby boomers retire, they will need to cash in their assets. But who will buy them and at what price? Younger workers in the West, indebted and employed in lower-growth economies, may not pay up.

Can the increasing pool of savers in emerging markets step in again? That is far from clear. Financial systems in emerging markets are deepening, which could provide investors there with more domestic options. Prospective returns at home also may be better, particularly in bonds.

Politics may well prove decisive. Savers will want to invest where property rights and the rule of law are strong. This favors the West for now. But that could easily change. Younger Westerners may object to the sale of assets to emerging-markets investors; think of first-time buyers priced out of London’s cosmopolitan property market, for example.

Markets, having, grown used to free-flowing capital, may be on the cusp of a generational change.