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Perspectives on Emerging Economies Growth
Vincenzo D’Apice
Observatory on Emerging Economies, Luiss 22-Feb-2011
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
1. A framework for Boom & Bust Cycles: The Minsky
Model
2. Perspectives on Emerging Market Economies Growth
Agenda
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Starting Point:-Low inflation
-Low unemployment
Positive Shocks:-Deregulation
-Financial innovation-Capital inflows
Banking Sector:-Demand for credit rises-Risk underestimation-Supply of credit rises
Financial Markets:-Asset prices rise
(shares & real estate)-Wealth increases-Debt increases
Real Economy:-Consumption rises-Investment raises
-Lower savings-Rising current account deficit
Boom:-Economy overheats
-Real and/or financial imbalances grow-Financial structure becomes fragile
Politicians & economiststheorize the beginning
of a new Era(e.g. New Economy)
Balance sheet channelLending channel
Financial accelerator(Bernanke-Gertler,’95)
Animal spirits(Keynes 1937) Global Imbalances
(Bernanke ’07)
-Covered-Speculative
-Ponzi
The Great Moderation(Bernanke ’04)
The Minsky model Boom stage
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
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Starting Point:-Rising interest rates
-Sudden change in expectations
Negative Shocks:-Capital flows away from more
speculative investment
Banking Sector:-Pessimistic evaluation of risk
-Demand for credit falls-Supply of credit falls (crunch)
Financial Markets:-Asset prices fall
-Wealth falls-Debt deflation
-Real debt increases
Real Economy:-Consumption falls-Investment falls-Rising savings
-Lower current account deficit
Bust:-Banking crisis (bank runs)
-Recession
Debt Spiral a la Fisher 1933 Deflationary Spiral
-Central Bank-Government-Regulation
Default of Ponzi units
Minsky model Bust stage
Vincenzo D’ApiceObservatory on Emerging
Economies,Luiss, 22 Febbraio 2011
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The outlook is:
• U-shaped recovery in advanced economies
• V-shaped recovery in emerging-market countries
Output Growth (%) 2010 2011 2012World 5.0 4.4 4.5Advanced Economies 3.0 2.5 2.5Emerging Economies 7.1 6.5 6.5
What is the Outlook for the Global Economy?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The role of EEs will be even stronger in the next decade (BRICs + N-11):
$37t
$27t
$10t
45%
30%30%
What Will Be the Role of Emerging Economies?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•One of the more striking story will be the rise of the new BRICs middle
class:
Import of low value added goods
Import of high value added goods (car, technology)
2010 middle-class consumers purchasing power $7 trillion
2020 middle-class consumers
purchasing power $20 trillion*
What Will Be the Role of Emerging Economies?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The first risk is further financial contagion in Europe:
Spread over German 10y-bunds
Jan-2010 (A)
Jan-2011 (B)
Diff.(B-A)
Greece 2.1% 8.0% 5.9%Ireland 1.3% 6.0% 4.7%Portugal 0.8% 4.0% 3.2%Spain 0.8% 2.2% 1.4%Italy 0.8% 1.8% 1.0%
What Are the Downside Risks in This Scenario?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The second risk is the negative effects of Fed QE:
• FED QE* is subjecting the emerging economies to a flood of capital,
rising commodity prices, inflation, and (possibly) asset bubbles:
Aug-2007 Feb-20110.9 2.5 1.6 178%
Memo US GDP 14.6 trillion
Fed Total Assets (trillion)
Stock Growth
What Are the Downside Risks in This Scenario?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The third risk is that capital inflows to emerging markets will be
mismanaged, thus fueling credit and asset bubbles:
Capital Flows to Emerging Markets (% of world GDP)
Capital Flows to Emerging Markets
(% of world GDP)
2006 2008 2010
Net liabilities 6,5% 1% 4%
• Drivers:• Asset allocations• Carry trades
What Are the Downside Risks in This Scenario?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• Flows into debt and equity mutual funds have been strong:
• Risk of asset price bubbles
• So, back to the twin crises of 90s? Yes & No
• Yes, b/c the bust of the bubble can trigger a banking crisis
• No, b/c the risk of currency crisis is low thanks to the accumulation of intl. reserves
Annual Retail Flows to Emerging Market Debt and Equity Mutual Funds
($ billion)
What Are the Downside Risks in This Scenario?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The fourth risk is inflation in emerging markets:
What Are the Downside Risks in This Scenario?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The fifth risk is currency tensions (currency war):
• Global imbalances will remain large
• Deficit countries need a currency depreciation
• But, surplus countries don’t want to accept a currency appreciation
Global Imbalances (% of world GDP)
• Deflation in deficit countries
• Higher risk of debt default (via Fisher spiral)
What Are the Downside Risks in This Scenario?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The sixth risk is geopolitical (Korea, Pakistan, Tunisia, Egypt, Libya).
• This risk is putting pressure on the price of commodities:
• This, in turn, will put further pressure on inflation
What Are the Downside Risks in This Scenario?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• For example, the shadow banking system is still “shadow”:
$16t
$13t
By the Way, Don’t Forget the Causes of the Recent Crisis
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
EEs Strong Growth
Rising Middle-Class
EU DebtCrisis
Fed QE
Capital Inflows
Inflation
Global Imbalances
Geo-Political
EmergingBanking System
Why Do We Need Monitoring the Emerging Banking Systems?
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Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
Thank You
Contacts:
Vincenzo D’Apice