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The Emerging Economy Challenge: an Optimistic View
Reforming the Bretton Woods Institutions
Danish Institute for International Studies (DIIS), Danish Ministry of Foreign Affairs
Copenhagen, DenmarkSeptember 2009
Aniket BhushanFinance for Growth
The North South Institute
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Outline
• What went wrong this time? • How do we situate ‘Emerging Economies’
(EE)? Where do they stand in relation to advanced?
• Their crisis experience: take-away(s), lessons?
• Preconditions for policy change? • Three loci of change: monetary system (&
IMF role); conditionality; broad policy mix
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What went wrong this time?
• Nothing• Chronicling continuation (long-trend: income polarization,
middle class wage stagnation &debt dependence) • Economy on steroids (2000-07, cumulative household debt
increase by $7tln, mortgage $5tln)
Relationship between Imbalances
0
200
400
600
800
1000
1200
1400
1995 1996 1997 1998 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(US
D,b
illi
on
s)
Change in EE Reserves US Current Account Deficit
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What went wrong this time?
Sharp growth in financial sector profitability – Curious in context of high
competition– Profitability implies = “lads
must be doing something right”
– Dancing till the music plays
Explosive growth in derivatives markets – Leverage, high opacity,
breeding unknown unknowns, unforeseen correlations
– Insurance v. gambling
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What went wrong this time: EE lens(not much new)
• Urgency of reform, already made apparent by Asian (1997)
• Inadequacy of BWI framework • Workaround strategies
% increase in reserves (1997-2000 average vs. 2007)
3314
907 773437 420 310 254 182 150 125 88
0
500
1000
1500
2000
2500
3000
3500
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Situating Emerging Economies • Decoupling?
Size of the Wallet
0
2,000
4,000
6,000
8,000
10,000
12,000
US EU Japan China Brazil Russia India
(priv
ate
co
nsu
mp
tio
n,$
bil
lio
ns)
Structural Decoupling
0
1
2
3
4
5
6
7
1980s avrg 1990s avrg 2000s avrg 2010-14 (projected)
(real
GD
P g
row
th,%
)
00.511.522.533.544.5
Ad
v E
merg
dif
fere
nce
Advanced Emerging (broad) Difference
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Situating Emerging Economies
• Over 35yrs, 20-26% gap down to 4-10%
Catching Up: Share of World GDP (PPP)
0
5
10
15
20
25
30
35
(% o
f w
orl
d G
DP
)
EU United States China India
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Situating Emerging Economies
• Emerging G20 catch-up and crisis experience • Still ways to go on DFD
Emerging G20's Share of Global GDP
05
101520253035
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
GD
P (
PP
P),
Sh
are
of
Wo
rld
G20 Emerging Economies European Union United States
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Situating Emerging Economies: Sharp rise, hard fall
Net Private Capital Flows to Emerging and Developing Economies
180.102
73.536
-190.31 (2009)
-6.46109.263
617.49 (2007)
-300-200-100
0100200
300400500600700
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(US$
, Billi
ons)
BRIC Market Capitalization as % of World Market Capitalization
16.9 (2007)
9.39 (2006)
4.26 (2004)3.08 (2000)
02468
1012141618
2000 2001 2002 2003 2004 2005 2006 2007
(per
cent
)
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Key EE take-away (s)
• Workaround worked, but cannot count on steroids
• Carpe diem: opportunity to play pro-active role • Managing “going out”: stake in external financial
sys increasing rapidly
Stock of Outward FDI
51.920.1 1.8
27.7
129.8
255.2
29.4
95.8
0
100
200
300
Brazil Russia India China
($,b
illi
on
s)
2000 2007
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Take-away, lessons?
Well if EE were better prepared, are there any lessons
• Calibrated liberalization, gradual• Strong ownership of process • Cap a/c lib not same as trade • Asian crisis, cause for pause • State as “absorber” v. “multiplier” of shock• Informal sub-grouping (BRIC Summit)
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BWI Implication
• Bottom-line: – Addressing precautionary r. accumulation (insurance)– Longer-term diversification of global demand (drivers
and composition)
Household Consumption Expenditure
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
YR2000 YR2001 YR2002 YR2003 YR2004 YR2005 YR2006 YR2007
(%G
DP
)
Brazil China India Russian Federation
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Current IMF Vote-share relative to projected Population & Share of GDP(2014)
(% of Total Votes, 2009)
(projected % share of global population, 2014)
(projected % share global GDP,2014)
US 16.77 4.53 18.34
Japan 6.02 1.77 5.48
Germany 5.88 1.14 3.5
UK 4.85 0.92 2.88
France 4.58 0.9 2.73
Italy 3.19 0.86 2.14
Canada 2.88 0.48 1.74
Total (G7) 44.17 10.6 36.81
Netherlands 2.34 0.23 0.85
Belgium 2.09 0.15 0.5
Australia 1.47 0.32 1.09
Spain 1.39 0.66 1.74
Sweden 1.09 0.13 0.47
Total (leading econ, 12) 52.55 12.09 41.46
China 3.66 20.2 15.52
Russia 2.69 1.95 3.44
India 1.89 18.13 5.74
Brazil 1.38 2.9 2.83
Total (BRIC) 9.62 43.18 27.53
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Conditions for policy change
• Structural shifts (and amplifiers) – Economic, Geopolitical
• Political capital – Will, momentum, anti-incumbency, palatable-ness
• Perceived alternatives – i.e. doesn’t have to be “new”; but new mix of old/new
• Windows of opportunities – i.e. vacuum can be window; or crisis can be too short
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Potential loci of Change
• Monetary system and role of IMF
• Conditionality
• Broad policy-mix (countercyclical, industrial)