My LIUC Industrial Goods Manufacturing by renata.vivien


									Lecture 2:

Emerging Markets and Elements
  of Country Risk Analysis.
      World Trading System:
           Four Phases
¡   1952-1972: Development
¡   1972-1980: Transition and
¡   1980-1990: Macro Adjustment,
    Trade Reform and shift in
    Development Strategies;
¡   1990-2007: New Globalisation
    Wave and WTO.
            Development Strategies

¡   Industrialisation in LDC:
    Ø   Import substitution industrialisation (ISI).

¡   Ideology: socialist versus capitalist
    Ø   Role of Government and private sector;
    Ø   Role of Planning.

¡   Early shift to Export Led Growth (ELG) on
    Ø   Asian miracle: Korea, Taiwan, HK and Singapore;
    Ø   Role of Global Markets;
    Ø   Role of Government.
                World Trade

¡   Developing Countries dependent on
    OECD markets:
    Ø   Export of primary commodities;
    Ø   Import industrial goods.
¡   Trade Blocks:
    Ø   North-South trade;
    Ø   Little South-South trade.
¡   Emergence of East and South East Asia
    Trade Block;
¡   Growth of Trade in mfg in developing
    Ø   Success in ELG development strategy (also
        during oil crises 1975-1978).
¡   Failure of socialist development model:
    Ø   Increase role of markets: capitalist model;
    Ø   Concern with price distortions.
Adjustment and Development

¡   Financial and Macro Crises:
    Ø   Inflation;
    Ø   Financial capital flows and shocks;
¡   Continued global trade
¡   Spread of ELG development
Lessons (1)
¡   Failure of socialist development
    Ø   No productivity growth;
    Ø   Enormous distortions, rent seeking, and
        misallocation of resources.

¡   Failure of ISI development strategy
    Ø   Bias against agriculture;
    Ø   Autarchy and ISI failed to insulate domestic
         • Macro shock:
         • Protection and rent seeking: high cost.
Lessons (2)
¡   ELG Strategy:
    Ø   Comparative Advantage: labour-intensive mfg
    Ø   Better performance for poverty alleviation and
        income distribution;
¡   Importance of mfg trade in ELG
    Ø   Value added chains;
    Ø   Declining importance of primary commodities
        à Terms of Trade Problem
¡   Reforms as a reaction to a crisis:
    Ø   First VS second generation reforms;
    Ø   It’s not a good strategy for development.
        New Globalisation Wave
¡   Expanded role of International Governance:
    Ø   Entry of Developing Countries in WTO;
¡   Expanded role of trade:
    Ø   Trade in services;
    Ø   Fragmentation of Production
        •   Value chains;
        •   Productivity gains;
¡   Continued Evolution of Global Trade Blocks:
    Ø   LAC, Africa, East and South East Asia;
    Ø   Asian Drivers: China and India.
¡   Trade Policy and reforms slow down.
Why is CRA linked to Development
Issues? (1)
¡   Emerging Markets: DEF!
    l   1980s by International Finance Corporation;
    l   Middle-to-higher income developing countries;
         ¡   in transition to developed status;
         ¡   undergoing rapid growth and industrialisation;
         ¡   Stock markets are increasing in size, activity and
         ¡   CUT OFF point: GDP per capita = 25,000 USD
¡   24 Countries; the most dynamic are:
    Ø Asia (China! India! Indonesia!);
    Ø Latin America (Brazil!);
    Ø Africa (South Africa!);
    Ø East Europe and Russia.
    = BRIICS
Why is CRA linked to Development
Issues? (2)
¡   How important are Emerging Markets?
    l   70% of world’s population (5 times that of
        developed markets);
    l   46% of land mass (2 times that of developed
    l   31% of GDP (1/2 that of developed markets).
    l   Forbes’ 2009 ranking of top global companies:
        3 over 5 with the largest mkt capitalisation are
        from EM!
    l   11 of the top 100 are from China (only USA
        has more companies listed!)
¡   Strengths and Opportunities;
¡   Weaknesses and Threats.
Strengths and Opportunities
Strengths and Opportunities: Economic
Growth and Income Convergence
Strengths and Opportunities: Share in
World Output
Strengths and Opportunities: Industrial
Strengths and Opportunities: Export
Export and Import Growth
Share of Industrial Countries in world
Share of Developing Countries in world
GDP, Export and Imports
Developed and Emerging Market
GDPs, 1950-2050
Weaknesses and Threats: volatility of
per capital income growth rates
Weaknesses and Threats: Exchange
Rate Instability
Weaknesses and Threats: Default and
Weaknesses and Threats: not only
economic aspects

¡   NOT only economy features but also
    Socio-Political Elements!
    Ø   Weak Infrastructure;
    Ø   Lack of specialised intermediaries;
    Ø   Weak regulatory system;
    Ø   Weak contract-enforcing mechanisms;

    Ø   Instable political system
Invest or not Invest?

¡   YES!
    Ø   Growing economies;
    Ø   Increasing investment opportunities;
    Ø   High revenues.
¡   NO!
    Ø   Default risk;
    Ø   Volatility and Instability.
Further Reforms could decrease risk?
¡   YES: Second Generation Wave of
    l   Complex domestic regulation; service
        regulation; technical standards; IPR,
        administration and competition rules;
    l   Improve the business-climate!
¡   Link between trade policy and domestic
    economic policy and institutional reforms;
¡   Less dependent on trade negotiation and
    international organisation foreign-policy
¡   More transparent!
Developing Countries and The
Financial Crisis (1)

¡   Financial sector
    l   Decrease in the capital inflow;
    l   Risk of capital outflow;
    l   Increase in the risk ratio of these countries;
    l   Devaluation of exchange rate;
    à   Negative feed-backs on real investment!
¡   Real Economy:
    l   Decrease in the demand for export;
    l   Decrease in FDI inflows;
    l   Lower commodity prices (+ and -)
    Developing Countries and The
    Financial Crisis (2)
¡   Central and Eastern Europe are being the most
    adversely affected
    l   Large current account (fiscal and external) deficit;
¡   Latin America:
    l   tight financial condition and weaker external demand;
    l   Brazil and Mexico more hurtled from the world crisis;
¡   Emerging Asia:
    l   Reliance on manufacturing exports;
    l   BUT domestic demand and strong policy stimulate the
¡   Africa and Middle East:
    l   Lower GDP decrease than other regions
    l   Commodity exporters;
    l   Lower remittances;
    l   FDI and aid flows reduction.
Russia Federation and Brazil
China and India
The Role of EM ‘post’ the crisis.
¡   Expected rise in EM (CHINA!)
    consumes as a necessary condition
    for a stronger world economy;
    l   ‘One-child-generation’;
    l   Rural Reforms.
¡   EM increasing role in the
    international financial architecture ;
¡   Reduction in the global imbalances:
    ↓US trade deficit + US savings!
Does CRA regard only
Developing Countries?
¡   NO! The recent Financial Crisis!
Global GDP Contraction
What’s behind the crisis in the real
The Financial Crisis
The consequences for the private
The impact on the macroeconomics
indicators (1).
The impact on the macroeconomics
indicators (2).
The Causes of the Financial Crisis

¡   Deregulation in the Financial Sector:
    l   Debt/Capital ratio: from 1:15 to 1:40;
    l   Decrease the weight of mortgages in
        the capital formation of banks;
    l   Off-balance sheet activity (Basel II) à
        securitisation in the IB!
¡   “American Dream”: zero equity
Macroeconomic Policies
¡   Fiscal Policy measures:
    l   Stabilize the financial sector;
    l   Support demand and improve confidence;
    l   BUT risk of increasing public deficit!
¡   Monetary Policy:
    l   Accommodative policy (decrease i –not in
        developing countries!);
¡   Cross-Border Coordination/Consistency in
    the financial sector policies to avoid
Is the Financial Crisis over?
¡   No a second Depression thanks to
    government stimulus package and low
    interest rates;
¡   The recovery in Europe (and USA) is
    l   Economy still dependent on government
    l   an ‘exit’ strategy is needed but BE CAREFUL!
    l   Average unemployment across the OECD =
    l   Weak domestic demand;
    l   Risk of Sovereign Default (Greece and the
¡   Credit Suisse (2010): “Global Investment Returns
    Yearbook 2010”; Research Institute, February 2010.
¡   Credit Suisse (2009): “The World post the Crisis”;
    Research Institute, September 2009.
¡   Razeen Sally (2009): “Globalisation and the Political
    Economy of Trade Liberalisationin the BRIICS”,
    chapter 4 in Lattimore and Safadi (2009):
    Globalisation and Emerging Economies”, OECD.
¡   IMF (2009): ”Global Economic Policies and Prospects”,
    G20, London 13-14 March 2009.
¡   Will, M. (2001): “Trade policy, developing Countries
    and Globalisation”, World Bank, Development
    Research Group.

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