The International Monetary Fund issues a twice-yearly review of the world economy with periodic updates in between. They produce several reports using data collected from government, central banks, and industry, including the Fiscal Monitor, which is essentially an economy wide balance sheet assessment, and the Financial Stability Report which, as its name implies, is designed to flag up areas of potential financial distress. As we know from long experience, financial stability is a precondition for the steady accretion of wealth through economic growth.

However, the major and widely anticipated release is the World Economic Outlook which provides as up to date an assessment and forecast of the state of the world economy as it is possible to have.

It is clear from recent releases that high growth is both hard to find and is in increasingly exotic parts of the world.
For investors, this raises the paradox of the relationship between “opportunity” and “governance.” There is typically an inverse relationship between fast growing small economies and the capacity to enforce the commercial and property rights that we take for granted in the West.

The obvious example here is Russia which until recently had been something of an investment darling in financial circles but where the crude use of force has rendered the capacity to enforce cross-border property rights nugatory. It is no exaggeration to say that the stampede into Russia as the iron curtain was raised has been replaced with an equally rapid stampede in the other direction as the curtain appears to be closing once more.

The Chinese economy is moving in a similarly authoritarian direction under Xi Xinping, who is likely to secure a third term as the General Secretary of the Chinese Communist Party next year. Third terms were abolished by Deng Xiaoping, Xi’s predecessor, but as in Russia that “democratic” rule is now honoured only in the breach.

Nonetheless, whilst Russia is firmly in the bottom quartile of “growers” in the forecast period to 2027, China, despite slowing sharply from the double-digit heyday of the late 1990s, is still equally firmly in the top quartile of growers.

This tension between “growth and opportunity” on the one hand with “governance and security” on the other is likely to drive a further wedge between Western investors (individual and corporate) and high growth but centrally planned economies.

It is no accident that the US is the repository for the bulk of the world’s savings outside authoritarian regimes and in times of stress, as now, inflows into the world’s “safest” economy drive up the value of the US dollar.

There is thus a cost to those economies that do not wish to “play by the rules;” Russia has essentially said goodbye to foreign direct investment for a generation, but this is also a trade-off for investors who seek growth, since expected returns will rise in less open economies relative to safer economies to attract foreign capital; financial, human, and technical.

These problems shouldn’t mean that we stop looking beyond our own front door, but investors need to keep their eyes open. The reason to look further afield is simply that the growth prospects for economies that we know well, Spain, Germany, Switzerland, Italy, Japan, and the UK are relatively poor.

Each one of the above are in the bottom quartile of the 200 or so economies surveyed by the IMF each year for near-term growth.

Interestingly, the US, Australia, Canada, and Thailand join Korea, Sri Lanka, Hong Kong, Kuwait, and Norway in the third quartile for forecast annual real growth of between 1.56% and 2.5% to 2027.

Where then do we find the possibility for better than average growth prospects with reasonably robust frameworks covering law and governance?

The four major economies in the top quartile for growth are India, Ireland, China, and Indonesia who are joined by Niger, Bangladesh, Mozambique, Ethiopia, and Rwanda at the top of the growth tree.

Ireland, though small, is in an interesting place. So interesting that some of the architects of Brexit moved their businesses there to benefit from the single market. But the real opportunity in terms of scale must lie in India, the world’s largest, albeit flawed, democracy and Indonesia which is regarded as “partly free” and democratic by Freedom House with a population of just under 300 million and is part of the G20 group of nations.

The behaviour of Russia and China on the world stage will reshape the flow of international capital in ways that are unlikely to benefit their respective economies.

In the first instance the US will “benefit” from large risk-averse inflows but as the fog of war clears other major economies have the opportunity to claim a bigger portion of international capital to the benefit of their populations and investors alike.