The Blog of Changes - Duncan Freeman

Last week S&P Dow Jones Indices, which provides data to financial institutions, announced that it no longer considers Greece a developed market, reclassifying it as an emerging market. The downgrading is not the first of this kind, both MSCI and Russell Indexes did the same thing earlier this year.

After years of financial and economic crisis we are used to Greece being downgraded. The ratings by S&P Dow Jones Indices, MSCI and Russell Indexes are all about risk, rather than the level the economic development of an economy. The terminology used by these companies no doubt owes more to the need to sell products to clients than it does to analytical rigour. S&P Dow Jones Indices, MSCI and Russell Indexes designate markets as developed, emerging and frontier. Developed, emerging and frontier markets sound much more positive when you are trying to sell a product than calling them low risk, medium risk and high risk.

Despite the superficiality of the terms used, the downgrading of Greece prompts an interesting question. In many cases the positive view of emerging markets has in recent years been accurate enough. Many emerging markets have emerged through real development, and continue to do so, although their path of some recently has perhaps become less certain than in the past. But Greece, on the other hand, has endured many years of falling GDP, with little hope of emerging from mire any time in the near future. Yet in the perverse world of finance it is now an emerging market. Greece is obviously not emerging, it is submerging. The positive direction suggested by being designated as emerging is the reverse of its reality.

Several economies, like Spain, Portugal and even Ireland, that have not suffered the fate of being downgraded in the same way are in a similar situation. They have gone beyond recession, or even depression. They are not just enduring a temporary period of poor economic growth and high unemployment.

There is a disjuncture between the language of marketing financial services and the reality of economic development. This is demonstrated in the following chart which shows the recent trend for the Human Development Index (HDI) of several EU member states. The HDI published by the United Nations Development Programme (UNDP) attempts to measure development more broadly than mere GDP growth. In addition to income, based on Gross National Income per capita, the index includes health, based on life expectancy at birth, and education, based on years of schooling. As the chart shows, the HDI for Greece has been falling in recent years. The index for Ireland is also below the pre-crisis peak. That for Spain, Portugal and Italy has plateaued. Development, as measured by the HDI, for these countries has halted or gone into reverse. However, apparently it is not just the periphery where this is happening. The HDI for core countries such as France, Belgium and the Netherlands, and even the UK, which while it may not be considered core is certainly a major EU economy, showed no increase in 2012 over 2011. The same occurred in both Denmark and Finland. Human development as defined by the UNDP has come to a halt across much of the EU.

Chart 1: HDI of Selected Countries Source: UNDP

For the moment, the primary cause for this has been directly related to the falling income component of the index, as incomes have stagnated and declined. But as has been shown, the populations of countries in the EU are beginning to suffer real effects other ways, including their health. Studies have shown that the crisis is having negative effects on health and eventually this may show up in life expectancy statistics. Access to education is also likely to suffer as austerity cuts into provision of educational opportunities. It may take some time for the full impacts to emerge in these areas, but it seems inevitable that they will as budgets are cut.

A number of countries in the EU are not emerging, nor are they developing. What then are they? Perhaps the best term is “de-developing”. As austerity compounds economic contraction, the process of de-development is likely to spread further in the EU, and not just in the so-called periphery.

The contrast with much of the real developing world is clear. China, most notably, continues to experience improvements in its HDI measures, in which it has made huge gains in recent decades. As the chart shows, the gains continue, although they has been some deceleration in the last couple of years. In terms of its level of economic development China remains a developing economy, and is often referred to as the largest developing economy in the world. The EU lays claim to being the largest economy in the world, but it has started to travel in the opposite direction. It is in danger of becoming the largest de-developing economy in the world.

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