NS4053

Winter Term 2014Overview: Economic

Development and Emerging Economies

Critical Questions IThe 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 slim?

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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?

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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?

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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?

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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 US-backed reforms over the last few decades

• Relationship between economic and value frameworks, and their role in conditional monetary aid

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Crisis Has Accelerated Changes in World GDP

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Decline of the G-8

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Patterns of Future Pubic Debt

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Industrial Recovery

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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 G-20 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

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Current Global Situation II

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Current Global Situation III

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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

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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

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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%

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China: Signs of Economic Slowdown

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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.

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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 revival20

Current Global Situation IX

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Current Global Situation IX

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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.

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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.

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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.

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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

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IMF Forecasts: October 2014: II

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IMF Forecasts: October 2014: III

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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

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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

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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.

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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 crises.

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Key Risk I: EM Slowdown III

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