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: Import substitution industrialisation (ISI).

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

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

1952-1972World Trade

Developing Countries dependent on OECD markets: Export of primary commodities; Import industrial goods.

Trade Blocks: North-South trade; Little South-South trade.

1972-1980Transition

Emergence of East and South East Asia Trade Block;

Growth of Trade in mfg in developing countries: Success in ELG development strategy (also

during oil crises 1975-1978). Failure of socialist development model:

Increase role of markets: capitalist model; Concern with price distortions.

1980sAdjustment and Development

Financial and Macro Crises: Inflation; Financial capital flows and shocks;

Continued global trade liberalisation;

Spread of ELG development strategy.

Lessons (1)

Failure of socialist development model No productivity growth; Enormous distortions, rent seeking, and

misallocation of resources.

Failure of ISI development strategy Bias against agriculture; Autarchy and ISI failed to insulate domestic

economy:•Macro shock:•Protection and rent seeking: high cost.

Lessons (2)

ELG Strategy: Comparative Advantage: labour-intensive mfg

exports; Better performance for poverty alleviation and

income distribution; Importance of mfg trade in ELG

Value added chains; Declining importance of primary commodities

Terms of Trade Problem Reforms as a reaction to a crisis:

First VS second generation reforms; It’s not a good strategy for development.

1990-2007New Globalisation Wave

Expanded role of International Governance: Entry of Developing Countries in WTO;

Expanded role of trade: Trade in services; Fragmentation of Production

• Value chains;• Productivity gains;

Continued Evolution of Global Trade Blocks: LAC, Africa, East and South East Asia; Asian Drivers: China and India.

Trade Policy and reforms slow down.

Why is CRA linked to Development Issues? (1) Emerging Markets: DEF!

1980s by International Finance Corporation; 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: Asia (China! India! Indonesia!); Latin America (Brazil!); Africa (South Africa!); East Europe and Russia.= BRIICS

How important are Emerging Markets? 70% of world’s population (5 times that of

developed markets); 46% of land mass (2 times that of developed

markets); 31% of GDP (1/2 that of developed markets). Forbes’ 2009 ranking of top global companies:

3 over 5 with the largest mkt capitalisation are from EM!

11 of the top 100 are from China (only USA has more companies listed!)

Strengths and Opportunities; Weaknesses and Threats.

Why is CRA linked to Development Issues? (2)

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! Weak Infrastructure; Lack of specialised intermediaries; Weak regulatory system; Weak contract-enforcing mechanisms;

Instable political system

Invest or not Invest?

YES! Growing economies; Increasing investment opportunities; High revenues.

NO! Default risk; Volatility and Instability.

Further Reforms could decrease risk?

YES: Second Generation Wave of Reforms: Complex domestic regulation; service

regulation; technical standards; IPR, administration and competition rules;

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 Decrease in the capital inflow; Risk of capital outflow; Increase in the risk ratio of these countries; Devaluation of exchange rate; Negative feed-backs on real investment!

Real Economy: Decrease in the demand for export; Decrease in FDI inflows; Lower commodity prices (+ and -)

Developing Countries and The Financial Crisis (2)

Central and Eastern Europe are being the most adversely affected Large current account (fiscal and external) deficit;

Latin America: tight financial condition and weaker external demand; Brazil and Mexico more hurtled from the world crisis;

Emerging Asia: Reliance on manufacturing exports; BUT domestic demand and strong policy stimulate the

economy! Africa and Middle East:

Lower GDP decrease than other regions Commodity exporters; Lower remittances; 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; ‘One-child-generation’; 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: Debt/Capital ratio: from 1:15 to 1:40; Decrease the weight of mortgages in

the capital formation of banks; Off-balance sheet activity (Basel II)

securitisation in the IB! “American Dream”: zero equity

mortgages

Macroeconomic Policies

Fiscal Policy measures: Stabilize the financial sector; Support demand and improve confidence; BUT risk of increasing public deficit!

Monetary Policy: 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: Economy still dependent on government

support; an ‘exit’ strategy is needed but BE CAREFUL! Average unemployment across the OECD =

9%; Weak domestic demand; 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.