Lecture 3:

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.

Emerging Markets?!?!?

Countries: Asia (China! India! Indonesia!); Latin America (Brazil!); Africa (South Africa!); East Europe and Russia.= BRIICS

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

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

References

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.

Bergsten, C.F. (1999): “The Global Trading System and the Developing Countries in 2000”, WP 99-6, Institute for International Economics.

Balassa (1990): “Trade Between Developed and developing countries: a decade ahead”

Will, M. (2001): “Trade policy, developing Countries and Globalisation”, World Bank, Development Research Group.