2012.06.27 20:43:30 Emerging Markets' Export-Driven Growth Model 'Broken' -Morgan Stanley

--Emerging market export-led growth model is broken, bank analysts say

--These economies must shift to more balanced sources of growth, Morgan Stanley says

       By Erin McCarthy    

Emerging markets' export-reliant growth model is broken, but these countries have made little progress in rebalancing their economies to focus more on domestic demand, Morgan Stanley said in a research note Wednesday.

Emerging-market economies need to take policy steps to transition to more balanced economies and support domestic demand, particularly as export-related growth faces increased headwinds, Morgan Stanley analysts said in a research note. So far, however, many emerging-market countries have neglected sources of domestic demand for the sake of developing their export sectors, they added. Such imbalances left unchecked could put both emerging market and global growth at risk, the bank's analysts said.

"The [emerging market] export-led growth model is now broken and the transition to a new model isn't going anywhere," Morgan Stanley said.

The uncertain external backdrop has been a particular force in the breakdown of the export-driven growth model in emerging markets. Weaker developed market consumption will likely dent emerging market exports, while emerging market competitiveness has deteriorated, resulting in some manufacturing moving back to developed markets, the bank's analysts said. In addition, the euro-zone debt crisis and European banks' deleveraging have made external funding for developing economies more uncertain as well, they added.

But it isn't guaranteed that domestic growth can offset the decline in exports, particularly since these counties have continued to focus on exports rather than domestic consumption, Morgan Stanley said.

"In China, the export sector has been prioritised at the expense of a better social safety net, leading households there to prioritise saving over consumption," bank analysts said.

In addition, in India, private investment is "still lacking" while in commodity-exporting countries, "the ascendancy of the commodity sector has come at the expense of non-commodity manufacturers," they added.

Policy measures can help, but broad-based easing would likely only be a short-term Band-aid, the bank said. Instead, the developing world's transition to a more balanced growth model will occur slowly, as key issues--like infrastructure needs, domestic consumption and competitiveness for non-commodity producers--will take years to be addressed, it added. Policy makers' action over the next six months will be key indicators of the progress made toward new growth models, but they must take measures to support more sustainable domestic demand, Morgan Stanley said.

Write to Erin McCarthy at erin.mccarthy@dowjones.com

(END) Dow Jones Newswires

June 27, 2012 14:43 ET (18:43 GMT)