Lecture 2: Emerging Markets and Elements of Country Risk Analysis. World Trading System: Four Phases ¡ 1952-1972: Development Strategies; ¡ 1972-1980: Transition and Reorientation; ¡ 1980-1990: Macro Adjustment, Trade Reform and shift in Development Strategies; ¡ 1990-2007: New Globalisation Wave and WTO. 1952-1972 Development Strategies ¡ Industrialisation in LDC: Ø Import substitution industrialisation (ISI). ¡ Ideology: socialist versus capitalist development Ø Role of Government and private sector; Ø Role of Planning. ¡ Early shift to Export Led Growth (ELG) on mfg: Ø Asian miracle: Korea, Taiwan, HK and Singapore; Ø Role of Global Markets; Ø Role of Government. 1952-1972 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. 1972-1980 Transition ¡ Emergence of East and South East Asia Trade Block; ¡ Growth of Trade in mfg in developing countries: 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. 1980s Adjustment and Development ¡ Financial and Macro Crises: Ø Inflation; Ø Financial capital flows and shocks; ¡ Continued global trade liberalisation; ¡ Spread of ELG development strategy. Lessons (1) ¡ Failure of socialist development model 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 economy: • Macro shock: • Protection and rent seeking: high cost. Lessons (2) ¡ ELG Strategy: Ø Comparative Advantage: labour-intensive mfg exports; 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. 1990-2007 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 quality. ¡ 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 markets); 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 Production Strengths and Opportunities: Export Share Export and Import Growth Share of Industrial Countries in world export Share of Developing Countries in world export 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 Crisis 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 Reforms: 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 agenda; ¡ 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 economy! ¡ 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 economy? The Financial Crisis The consequences for the private sector 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 mortgages 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 distortions. 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 fragile: l Economy still dependent on government support; l an ‘exit’ strategy is needed but BE CAREFUL! l Average unemployment across the OECD = 9%; l Weak domestic demand; l Risk of Sovereign Default (Greece and the PIIGS) PIIGS References ¡ 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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