Transcript Overview of Emerging Economies

NS4053
Winter Term 2014
Overview: Economic Development
and Emerging Economies
Critical Questions I
The class will address a number of key questions involving the
emerging economies:
• What is the meaning of economic development and
economic growth – how do these two concepts differ?
• How have emerging economies and developing countries
performed economically since the min-twentieth century?
• What are economic institutions, and how do they shape
problems of underdevelopment and prospects for successful
development?
• What are the sources of national economic growth? Who
benefits from such growth and why? Why do some
countries make rapid progress toward development while
many others remain poor?
• What are the most influential theories of development, and
are they compatible? Is underdevelopment an internally
(domestically) or externally (internationally) induced
phenomenon?
2
Critical Questions II
• What constraints most hold back accelerated growth?
• What are the causes of extreme poverty, and
• What policies have been most effective for improving:
• The lives of the poorest of the poor?
• The least effective in this regard?
• Is rapid population growth
• Threatening the economic progress of developing nations? Or
• Is it stimulating growth through providing a “demographic
dividend”
• Why is there so much unemployment and
underemployment in the developing world
• especially in the cities, and
• why do people continue to migrate to the cities from rural areas
even when their chances of finding a conventional job are very 3
slim?
Critical Questions III
• Do educational systems in developing countries really
promote economic development? If not, how might they be
improved
• As more than half the people in developing countries still
reside in rural areas:
• how can agriculture and rural development best be
promoted?
• Bottom up rural development?
• Top down governmental infrastructure programs?
• Encouragement of foreign agro-businesses?
• Higher agricultural prices together with adequate credit programs?
• What is meant by “environmentally sustainable
development”? Are there serious costs of pursuing
sustainable development as opposed to simple output
growth?
4
Critical Questions IV
• Are free markets and economic privatization the answer to
development problems, or do governments in developing
countries still have major roles to play in their economies?
• Is expanded international trade desirable from the point of
view of the development of poor nations?
• Who gains from trade, and how are the advantages distributed among
nations?
• What has been the impact of International Monetary Fund
(IMF) “stabilization programs” and
• World Bank “structural adjustment” lending on the balance
of payments and growth prospects of heavily indebted less
developed countries?
5
Critical Questions V
• What is the impact of foreign economic aid from rich
countries?
• Should developing countries continue to seek such aid?
• If so under what conditions and for what purposes?
• Should developed countries continue to offer such aid, and if so,
under what conditions and for what purposes?
• For the emerging economies, are there any clear
combinations of factors that seem to assure economic
success for countries on the verge of rapid growth?
6
Critical Questions VI
• Suggested topics: Jeremy Fischer
• Economic aspects of US Foreign Policy towards the
developing world (last 30-40 years and currently)
• Effects of US-backed neoliberal economic reforms on the
developing world from an economic perspective
• Contemporary debates among historians, economists,
political scientists, and sociologists over the
consequences and merits of neoliberal reforms in the
developing world
• Role of international institutions in implementing USbacked reforms over the last few decades
• Relationship between economic and value frameworks,
and their role in conditional monetary aid
7
Crisis Has Accelerated Changes in World GDP
8
Decline of the G-8
9
Patterns of Future Pubic Debt
10
Industrial Recovery
11
Current Global Situation I
• Six years after the 2008-09 crisis, economic performance
still disappoints, failing to regain pre-crisis vitality
• Emerging economies far from the dynamic miracles they once
seemed
• Rich countries still grappling with problems exposed by the crisis
• Return to days of buoyant growth seems far away
• Level of dissatisfaction summed up at September 2014 G20 meeting – their summary statement:
• “Growth in the global economy is uneven and remains below the
pace required to adequately generate much needed jobs.”
• Worse -- they saw new threats in financial markets and
deteriorating geopolitics
• Little unity among the member countries who account for
85% of world output
12
Current Global Situation II
13
Current Global Situation III
14
Current Global Situation IV
• Although the global picture is disappointing there are
signs of optimism along with underperformance:
• The growth surge in the in the UK along side economic
weakness in France
• Recent optimism in India together with the disappointing
performance of Russia and Brazil exposing their weaknesses.
• Across the world recovery can not be easily
characterized as V-shaped or L-shaped
• Instead OECD feels there is a “growing degree of divergence
between the major economies”
• U.S. economy appears to be expanding at a moderate pace with
unemployment falling
• U.K and Canada are also growing above their normal rates of
expansion
15
Current Global Situation V
• Most of the current concern is with the Eurozone.
• With inflation falling close to zero, demand in the region
• Appears insufficient to bring down an 11.5% unemployment rate
• May not prevent bloc from sliding into deflation
• The loss in economic momentum may
• Dampen private investment and
• Heightened geopolitical risks – populist governments that have a
further negative impact on business and consumer confidence.
• In Japan early optimism over Abenomics – economic
policies of the prime-minister is now
• Tempered with the fear that rising taxes are a major drag on
growth
• Facing the need for major, but politically unpopular structural
reforms – resulting in questions over whether Japan would
continue on its path
16
Current Global Situation VI
• In today’s global economy
• No longer the advanced world that is most important for global
trends
• Fully 30 percent of global growth in 2014 will occur in China –
about twice the share of the U.S.
• Clearly the success of China’s economy is now vital for
the rest of the world. However there are problems.
• For the medium-term, there is not much evidence that the
Chinese economy has made much progress in its critical
rebalancing efforts
• In the short-term, are fears of a housing crash and bank failures
• Housing prices have dropped 9.3% over the last year with
• Sales registering the deepest contraction since 2008
• Moody’s estimates that a 10% fall in both property transactions and
prices would reduce growth by 1.5% to 2% bringing it to 5 or 6%
17
China: Signs of Economic Slowdown
18
Current Global Situation VII
• At October 2014 Conference, even the IMF showing
increased pessimism
• The IMF feels there are many emerging concerns:
• Geopolitical tensions from the Middle East and Russia could
• “trigger large spillovers of activity in other parts of the world
through a renewed bout of increased risk aversion in global
financial markets.”
• The Fund has just downgraded many of their forecasts
• Big question is why countries are struggling to sustain
decent rates of growth
• Much has to do with remaining hangover from the
financial crisis.
19
Current Global Situation VIII
• Factors continuing to limit the return to growth and job
creation
•
•
•
•
• High levels of public and private debt act as constraints on
• Government fiscal policy and
• Consumer spending
• Work to suppress aggregate demand below levels needed for
steady growth
Increased income inequality also tends to reduce consumer
spending
Policy uncertainty in many countries has resulted in falling
investment rates
Slowing world economy makes export-led growth more
difficult
Situation made worse by signs that productivity growth is
slowing, limiting the potential for sustainable growth revival
20
Current Global Situation IX
21
Current Global Situation IX
22
Current Global Situation IX
• In the emerging economies
• Growth has slowed from 7% per year before the crisis
• To a forecast of 5% between 2014 and 2018
• Moreover the decline is not just due to the slowdown in
China and India
• Growth rates are now lower than pre-crisis average in 70%
of emerging economies.
• The slowdown in emerging economies is due to:
• The prolonged weakness of high income economies,
• Failure to sustain economic reforms and
• The exhaustion of policy induced post-crisis boosts to
domestic demand.
23
Current Global Situation X
• Policy makers are in a bind in many countries
• In the Eurozone and Japan they are still trying to find ways to
stimulate demand
• In the U.S. and U.K interest rates are about to increase, but
there is widespread concern that any movement back to normal
might trigger financial turmoil
• However leaving monetary policy loose will encourage excessive
borrowing which may create bubbles and another financial crash
• In emerging markets the need is to push forward on structural
reforms to labor and product markets as well as education and
social security to enable more secure and rapid growth
• Not easy and mistakes are certain to happen.
• The economic environment in many parts of the world is
thus quite fragile with forecasts increasingly pessimistic.
24
October 2014 Markets Sending Bad Signals: VII
Adding it up:
• Markets aren’t anticipating on a catastrophe yet
• If they were stock prices would be down more
• They are betting that central banks and other policy
makers aren’t going to be able to control global
deflationary forces
• Means world economy could be in for a slow grind in
which both global growth and inflation both stay below
normal levels
• Situation much better than fall of 2008, but much worse
that it should be six years after a crisis.
25
Implications for the Future
• The slowdown will mean
• Weaker growth in world trade
• Lower commodity prices and
• The possibility of unexpected losses in the financial sector
• Increasing burdens on debtors
• With growth in high income economies constrained by
inadequate domestic demand, a risk of feedback effects
exist
• The channels go from
• slowing emerging economies to
• high income economies especially the more export dependent
ones and
• back again
26
IMF Forecasts: October 2014: I
27
IMF Forecasts: October 2014: II
28
IMF Forecasts: October 2014: III
29
Risks and Concerns
• IMF October 2014 Message
• Risks have increased:
• Uneven Fragile growth
• Risks from protracted low inflation
• Financial sector excesses
• Simmering geopolitical tensions
• Emerging markets slowing
• Surprises in monetary policy normalization
30
Assessment of Key Risks
• The current consensus forecasts and scenarios are
sensitive to a series of possible shocks/adverse
developments.
• Adverse developments in one or more areas might result
in increased instability and/or negative linkages leading
to lower growth rates:
1. Emerging Economies Slowdown
2. Eurozone Crisis -Stagnation
3. China Hard Landing
4. Backlash Against Globalization
5. Asian Tensions
6. Declining Defense Expenditures in the West
31
Key Risk I: EM Slowdown I
• Range of factors will confront the emerging economies
• Weak financing, currency overvaluation or policy
missteps will likely have major negative impacts on many
• Considerable differentiation in the emerging world. For
some:
• A policy-induced slowdown after some overheating:
Many Ems tightened monetary policy in 2011
• A lack of full decoupling from hobbled DMs (EZ)
• State capitalism is now distorting economic activity and
leading to a fall in potential growth
• A fallout from the Chinese slowdown: China is negatively
affecting growth across Ems (especially in Southeast
Asia, Latin America, metals exporters
• The end of the commodities supercycle.
32
Key Risk I: EM Slowdown II
• The end of QE and easy money: Will slow, in for reverse,
trillions in EM capital flows
• Increasing frequency of large current account deficits:
many financed in ever-riskier ways
• Rising political risk in many EMs: Busy electoral cycle in
2014 including Brazil, Turkey and South Africa
• Macro and financial fragilities in some EMs: A handful of
EMs have high and unsustainable debt ratios that will
require coercive debt restructurings, particularly if a
sudden stop occurs
• The risk of a middle income trap: Many running out of
easy sources of growth
• In the case of Asia, exports have failed to maintain
sustained growth as they did after previous economic
33
crises.
Key Risk I: EM Slowdown III
34