Is the growth slowdown with tightening financial conditions in advanced economies likely to be disastrous for emerging markets, with landing becoming a hard one in their case? If inflation moderates in the United States, due to reduced fiscal stimulus and fading supply chain restrictions, while growth remains minimally robust, emerging markets could avoid a hard landing. Several factors favor such a scenario.
The decade after the Great Financial Crisis of 2007–09 brought significant changes in the volume and composition of capital flows in the global economy. Portfolio investments and other non-bank financial intermediaries are responsible for an increasing share of foreign capital flows, while banking flows have shrunk in relative terms. This paper considers the implications of such a metamorphosis of finance for capital flows to emerging market economies (EMEs). After examining capital flows from the global financial crisis to the 2020-21 pandemic crisis, we analyze the extent to which a normalization of monetary policies in advanced economies may lead to shocks in those flows, as well as why exchange rate fluctuations between the U.S. dollar and other major currencies can affect capital flows to EMEs. Finally, we assess the range of policy instruments that EME policymakers tend to resort to manage risks derived from capital-flow volatility.
Divergent recoveries are leaving “lasting imprints”, with emerging and developing economies suffering deeper medium-term damage than advanced countries, on average. Most countries are now forecast to have lower GDP in 2024 than projected in January 2020 before the pandemic. This is different from crises associated with industrial or financial cycles common in history because, in those cases, in general, some period of above normal or trend growth will have occurred previously. In the pandemic there has been only the loss side.
With loose money supply and low returns in the developed world, emerging markets have become the destination of choice for investors looking for high yields. However, with much uncertainty remaining and inflation well above the Federal Reserve’s target rate, speculation of Fed tapering and market tantrums are gaining momentum. OMFIF is convening a panel to look at capital flows in emerging markets, addressing what happens when the cycle turns, the likelihood of capital flows reverting and asset and currency markets in the developing world.
Market movements this month have led to renewed fears that changes in US financial and monetary conditions will trigger a painful wave of capital flight from emerging markets, as happened in 2013. But times have changed, and the greatest risks to emerging markets now lie elsewhere.
The contrast between the scarcity of investments in infrastructure – particularly in non-advanced economies – and the excess of savings invested in liquid and low-return assets in the global economy deserves to be confronted. Greening infrastructure in non-advanced economies would benefit from being able to attract greenbacks into the business. Building a bridge between private finance and (green) infrastructure would need the development of pipeline of projects with homogeneous regulations and standards, as well as with minimum mismatch between risks and comfort of private investors to manage them along project stages.
The growth and productivity performance of emerging market and developing economies since the 2008 global financial crisis failed to repeat the achievements of the previous decade. Besides frustrating expectations that they might become the new growth pole in the global economy, their convergence to per capita incomes of advanced economies has suffered a setback. Nonetheless, the path of policies and reforms to be pursued in that direction remains the same. This is something accentuated by the coronavirus pandemic crisis.
The “middle-income trap” has become a broad designation trying to capture the many cases of developing countries that succeeded in evolving from low- to middle-levels of per capita income, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies. We need to approach middle-income countries as being in a complex transition phase between accumulation and innovation-based economies. Individual middle-income country experiences of falling into a “trap” may be approached as cases of lack of or failing performance in footing the bill in terms of appropriate policies and institutions.
Commodity prices go through extended periods during which prices are well above or below their long-term price trend. The upswing phase in super cycles results from a lag between unexpected, persistent, and upward trends in commodity demand, matched with a typically slow-moving supply. Eventually, as adequate supply becomes available and demand growth slows, the cycle enters a downswing phase. The latest super-cycle of commodity prices, starting in the mid-90s, reaching a peak by the time of the global financial crisis, and getting to the bottom by 2015, can be seen as associated to the developments of globalization that we have already dealt with in this series. More recently, some analysts have spoken that we might be on the verge of a new cycle, super-cycle or not.
After peaking in 2007 at around 6% of world GDP, global current-account imbalances declined to 3% of world GDP in the last few years. But they have never left entirely the spotlight, albeit acquiring a different configuration from that which marked the trajectory prior to the global financial crisis (GFC). This is not because they threaten global financial stability, but mainly because they reveal asymmetries in adjustment and post-GFC recovery between surplus and deficit economies, and because of the risk of sparking waves of trade protectionism. They also reveal the sub-par performance of the global economy in terms of foregone product and employment, i.e. a post-crisis global economic recovery below its potential.
Cross-border technological diffusion has contributed to rising domestic productivity levels in advanced and emerging economies and facilitated a partial reshaping of the global innovation landscape. However, there are local requisites to escalate the ladder of innovation capabilities.
The global trend towards increasing globalization since the 1990s seems to have had two different distributional consequences: income inequality between countries has declined, while economic inequality within countries has increased. However, technological progress has made the biggest contribution to rising income inequality over the past two decades. Domestic policies – fiscal policies, social protection - are the locus where inequality is to be tackled.
China’s growth trajectory in the second decade of the century has been one of a rebalancing toward a new growth pattern, one in which domestic consumption is to rise relative to investments and exports, while a drive toward consolidating local insertion up the ladder of value added in global value chains also takes place. Services should also keep rising relative to manufacturing. Declining GDP growth rates from two digits in previous decades to 6% in 2019 - and likely lower ahead – would be the counterpart to rising wages and domestic mass-consumption, and to the transition toward higher weights of services and high tech. We point out two major challenges in the rebalancing. First, the transition toward a less investment- and export-dependent growth model has been taking place from a starting point of exceptionally low consumption-to-GDP ratios. Besides high profit-to-wages ratios, low levels of public social protection and spending lead to high household savings. An additional challenge comes from the lack of progress in rebalancing between private- and state-owned enterprises, something that is taking a toll on productivity.
In the 1990s and 2000s, the world manufacturing production to a substantial extent moved from advanced countries to some developing countries. This was the result of the combination of an increase of the labor supply in the global market economy, trade opening, and technological transformations that allowed for fragmentation of production processes. As a result, foreign trade expanded, and world poverty diminished. Such trade globalization process stabilized in the 2010s and tends to be partially reversed by the new wave of technological changes.
This book approaches the opportunities and challenges faced by developing countries to raise their per capita income levels during the recent phase of globalization. After dealing with the post-global financial crisis economic landscape in advanced economies, it deals with the windows of opportunity opened by trade and financial globalization for developing countries to climb the income ladder. Domestic preconditions for a developing country to benefit from those windows are then pointed out. China, Brazil, and Sub-Saharan Africa are presented as case studies. The book ends with an assessment of the impact of the coronavirus crisis on the global economy.