Lecture 3: Emerging Markets and Elements of Country Risk Analysis.
World Trading System: Four Phases : Development Strategies; : Transition and Reorientation; : Macro Adjustment, Trade Reform and shift in Development Strategies; : New Globalisation Wave and WTO.
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.
World Trade Developing Countries dependent on OECD markets: Export of primary commodities; Import industrial goods. Trade Blocks: North-South trade; Little South-South trade.
Transition 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 ). Failure of socialist development model: Increase role of markets: capitalist model; Concern with price distortions.
1980s Adjustment 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.
New 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 March 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.