Lecture 2:
Emerging Markets and Elements
of Country Risk Analysis.
World Trading System:
Four Phases
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1952-1972: Development
Strategies;
1972-1980: Transition and
Reorientation;
1980-1990: Macro Adjustment,
Trade Reform and shift in
Development Strategies;
1990-2007: New Globalisation Wave
and WTO.
1952-1972
Development Strategies

Industrialisation in LDC:
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
Ideology: socialist versus capitalist
development


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Import substitution industrialisation (ISI).
Role of Government and private sector;
Role of Planning.
Early shift to Export Led Growth (ELG) on
mfg:


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Asian miracle: Korea, Taiwan, HK and Singapore;
Role of Global Markets;
Role of Government.
1952-1972
World Trade

Developing Countries dependent on
OECD markets:


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Export of primary commodities;
Import industrial goods.
Trade Blocks:


North-South trade;
Little South-South trade.
1972-1980
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 1975-1978).
Failure of socialist development model:


Increase role of markets: capitalist model;
Concern with price distortions.
1980s
Adjustment and Development

Financial and Macro Crises:


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Inflation;
Financial capital flows and shocks;
Continued global trade
liberalisation;
Spread of ELG development
strategy.
Lessons (1)

Failure of socialist development
model
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

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:



Importance of mfg trade in ELG



Comparative Advantage: labour-intensive mfg
exports;
Better performance for poverty alleviation and
income distribution;
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.
1990-2007
New Globalisation Wave

Expanded role of International Governance:


Expanded role of trade:



Trade in services;
Fragmentation of Production
•
•
Value chains;
Productivity gains;
Continued Evolution of Global Trade Blocks:



Entry of Developing Countries in WTO;
LAC, Africa, East and South East Asia;
Asian Drivers: China and India.
Trade Policy and reforms slow down.
Why is CRA linked to Development
Issues? (1)

Emerging Markets: DEF!


1980s by International Finance Corporation;
Middle-to-higher income developing countries;

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in transition to developed status;
undergoing rapid growth and industrialisation;
Stock markets are increasing in size, activity and
quality.
CUT OFF point: GDP per capita = 25,000 USD
24 Countries; the most dynamic are:
Asia (China! India! Indonesia!);
 Latin America (Brazil!);
 Africa (South Africa!);
 East Europe and Russia.
= BRIICS

Why is CRA linked to Development
Issues? (2)

How important are Emerging Markets?
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70% of world’s population (5 times that of
developed markets);
46% of land mass (2 times that of developed
markets);
31% of GDP (1/2 that of developed markets).
Forbes’ 2009 ranking of top global companies:
3 over 5 with the largest mkt capitalisation are
from EM!
11 of the top 100 are from China (only USA
has more companies listed!)
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
Developed and Emerging Market
GDPs, 1950-2050
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:


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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





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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


Latin America:



tight financial condition and weaker external demand;
Brazil and Mexico more hurtled from the world crisis;
Emerging Asia:



Large current account (fiscal and external) deficit;
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
The Role of EM ‘post’ the crisis.

Expected rise in EM (CHINA!)
consumes as a necessary condition
for a stronger world economy;


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‘One-child-generation’;
Rural Reforms.
EM increasing role in the
international financial architecture ;
Reduction in the global imbalances:
↓US trade deficit +  US savings!
Does CRA regard only
Developing Countries?

NO! The recent Financial Crisis!
Global GDP Contraction
What’s behind the crisis in the real
economy?
The Financial Crisis
The consequences for the private
sector
The impact on the macroeconomics
indicators (1).
The impact on the macroeconomics
indicators (2).
The Causes of the Financial Crisis

Deregulation in the Financial
Sector:




Debt/Capital ratio: from 1:15 to 1:40;
Decrease the weight of mortgages in
the capital formation of banks;
Off-balance sheet activity (Basel II) 
securitisation in the IB!
“American Dream”: zero equity
mortgages
Macroeconomic Policies

Fiscal Policy measures:




Monetary Policy:


Stabilize the financial sector;
Support demand and improve confidence;
BUT risk of increasing public deficit!
Accommodative policy (decrease i –not in
developing countries!);
Cross-Border Coordination/Consistency in
the financial sector policies to avoid
distortions.
Is the Financial Crisis over?


No a second Depression thanks to
government stimulus package and low
interest rates;
The recovery in Europe (and USA) is
fragile:




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Economy still dependent on government
support;
an ‘exit’ strategy is needed but BE CAREFUL!
Average unemployment across the OECD =
9%;
Weak domestic demand;
Risk of Sovereign Default (Greece and the
PIIGS)
PIIGS
References
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Credit Suisse (2010): “Global Investment Returns
Yearbook 2010”; Research Institute, February 2010.
Credit Suisse (2009): “The World post the Crisis”;
Research Institute, September 2009.
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 13-14 March 2009.
Will, M. (2001): “Trade policy, developing Countries
and Globalisation”, World Bank, Development
Research Group.