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

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

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

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

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

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

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

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

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

)

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

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)

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

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

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

Potential loci of Change

• Monetary system and role of IMF

• Conditionality

• Broad policy-mix (countercyclical, industrial)